After two years of talk about our mortgage mess, plummeting home prices, bedraggled builders, and foreclosure frenzy, could we still not have hit the bottom for housing? While that's not a pleasant prospect, especially if you live in one of those hard-hit areas where home prices are now just shadows of their former selves, abundant evidence suggests that a real recovery may remain a long way off.
Mortgage foreclosures have thus far been far more common with subprime borrowers than among those with Alt-A or prime loans. But as The New York Times noted just last week, they may be on the verge of spreading. And because banks hold lots more prime and Alt-A loans than they do subprime mortgages, a jump in prime delinquencies could really roil the economy. But delinquencies among prime borrowers -- who make up most of the $12 trillion mortgage market -- have doubled from a year ago, while Alt-A delinquencies have quadrupled.
Dimon's rough talk
Although his company, JPMorgan Chase
Don't get the idea that mortgage difficulties can be neatly categorized. Indeed, when your neighbor's subprime mortgage is foreclosed upon, the effects necessarily spill over to you, even though your credit may be squeaky clean. The obvious two-pronged mechanism there involves inventory and price. With nearly three-quarters of a million households having received foreclosure notices in the second quarter -- up 121% from a year ago -- it becomes harder to whittle away at the bulging inventory of homes on the market. Under that load, prices will continue to slide.
When prices do fall, more borrowers find themselves upside-down on their mortgages. And when that happens, an increasing number throw in the towel and stop making timely payments. It's that old vicious circle thing.
Exacerbating things further are the remnants of some of the fancy-dancy mortgages that borrowers and lenders both found so alluring in years past. For instance, there was the "option-adjustable" mortgage, which permitted borrowers, at their choosing, to pay less than the interest owed on their mortgages in the early years. The unpaid amount was simply added to the loan amount.
Wonderful. But when that happened, at some point those same borrowers had to pay more each month than if they'd just signed on for a conventional 30-year fixed mortgage. Unfortunately, that chain of events is being played out now amid the same sliding house values I told you about. You won't be surprised to learn that more borrowers faced with big hikes in their monthlies -- either through having taken these cutesy mortgages, or from adjustable-rate resets -- are choosing to walk on their loans.
All this clobbers housing in general and prices in particular. One major result is that builders are constantly faced with lowering the value of their land holdings and other assets, leading to continuing large losses of the type just reported by Pulte
Further, there clearly are other forces at work these days in this unpleasant scenario. For instance, unless energy prices decline further -- really decline further -- consumer confidence will likely continue to be nearly subterranean. And forlorn consumers aren't inclined to purchase big-ticket items, like houses and cars. Then there's the role of that dreaded "i" word. With inflation pushing up the prices of all manner of items almost daily, would-be homebuyers are even more inclined to retreat to the sidelines.
Prolific patience needed
Clearly, housing will recover. But if large numbers of prime mortgages begin to rot, the process could take eons. I remain convinced that, when the recovery comes, luxury builder Toll Brothers
But even those two well-positioned builders could take a very long time to return to their prior strength. Fools, stear clear of the builders unless you're really awash in patience.
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Fool contributor David Lee Smith does have a hacienda with a 30-year mortgage and does own shares in Centex, but not in the other companies mentioned. He does welcome your questions or comments. The Fool has a disclosure policy.