From the Wall Street Journal:
Housing Slump Could ‘Reset’ Itself Again
By SCOTT PATTERSON
September 25, 2007
In the same way the relentless expansion of the housing sector amazed Wall Street, its downturn is proving more painful and protracted than all but the most bearish expected.
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But one dismal milestone may soon move into the housing market’s rearview mirror, potentially giving rise to hopes for a rebound soon. Homeowners owing $31.8 billion in subprime adjustable-rate mortgages began paying higher interest rates this month, according to Moody’s Economy.com.That is the highest amount of subprime ARMs due to reset over a one-month period in this housing cycle. By December, resetting subprime ARMs are forecast to drop to $25.2 billion. By the end of 2008, they will have fallen to $3.6 billion, because lenders have largely stopped making such loans to borrowers with spotty credit histories.
The tsunami of interest-rate resets has been a big factor in the jump in defaults roiling credit markets this year. In August, foreclosure filings rose 36% from the previous month and were up 115% from last year, according to RealtyTrac. As ARM resets reach a peak, more homeowners will have trouble meeting payments.
That huge pace of resets is one reason why economists expect today’s report on existing-home sales in August to drop by 4.4%. More worrisome, perhaps, may be the supply of houses for sale. Analysts at Bank of America estimate the report will show it would take 9.7 months to sell all of the single-family homes now on the market, near the previous peak set in May 1989.
Optimists might argue that a record supply of homes for sale, combined with a peak in ARM resets, means the housing market is near a bottom. More likely, it means the downturn will get even uglier in the months to come.