johnnymk

I get this newsletter emailed to me frequently:



Welcome to the subprime mortgage newsroom.

Now, I need to make sure you understand the realities of the market in 2007, because I think most of what you're hearing from the gloom-and-doomers is a throwback to how the world worked in the '80s and '90s.

The way the world works today is incredibly different. So let's debunk some of the subprime mythology out there.

The first myth is that the blowup in the U.S. subprime mortgage market is the equivalent of the blowup of Internet stocks in 2000. That's just wrong.

First of all, we all know that, at most, there's going to be maybe 1 million to 2 million homes going to foreclosure during the next couple of years in the United States. Now I know that really sounds horrific -- except for the fact that it probably equals about $200 billion, and the ones who ultimately own that bad paper are the "non-bank banks," i.e., hedge funds and mutual funds.

I'd say that the meltdown in 2000 was worth more like $2 trillion. Now, if you throw $2 trillion out of your car on the money freeway, that'll slow down the economy.

But remember that it slowed down corporate spending, not consumer spending. So let's not confuse the Internet blowup with the subprime situation we have now.

The Housing Recession is Not Over

Now that we've got a handle on that, let's get to the second subprime myth -- that the housing recession is over. We need to understand that we are in, and will continue to be in, an ugly recession in the new-home industry. There's no question about it -- we are not even near the bottom of this.

Remember, when homebuilders make a loan on a home they've built and sold into the marketplace, they guarantee they will buy it back within a certain time frame -- in nine months, one year, sometimes up to two years.

And you know what? They are buying back some of these loans that they made, particularly the subprime, zero-down loans -- and that has not been reflected on their balance sheets.

Furthermore, if you look at the new-home buyer, about 15% to 20% of the people who were able to buy a home in 2006 are not able to buy a home in 2007 due to tightened credit standards. That is a big difference. It really hurts companies like KB Homes and the guys who are in the "move up" market. It will continue to hurt them for the next year or so because we're going to see about a million homes come out of foreclosure.

Most of those are coming from speculators, however, and not from people who actually live in the homes. This means we're getting a much higher foreclosure rate in the subprime market, and it's primarily on empty homes.

So let's come to terms with reality, because the third myth the gloom-and-doomers are spreading is that the capital markets are sitting back and crying, "woe is me," and the whole thing is going to hell in a handbasket.

Do you know what's happening today? There are hundreds of billions of dollars that have been put together in the last couple of months to come in and buy out these loans and these properties.

Years ago, it would have taken years to raise that kind of money. Now it can be raised in 30 days. That's proof the capital markets are working -- the way they work in 2007.

Cleaning Up Like Capitalists

So when you see the bubble burst as we have in the entry-home and new-home businesses, you have to remember that we've got hundreds of billions of dollars out there to clean it up. But they're cleaning it up like capitalists, not like regulators. They're going in, they're getting the stuff at auction and they're buying it wholesale.

It reminds me of when I used to fly around in the early '90s trying to buy savings and loans properties that were blown up. Those companies and those people that went in made billions in profit, and I guarantee you there's going to be billions more made in profits from this debacle.

But to make the leap that this amount of foreclosure rate is going to seep in and start corroding our $13 trillion economy just plain misses the math.

You see, in the United States, the top 10% of Americans essentially own 95% or more of all the wealth. So in essence, the top 10% own just about the whole country. And the top 10% in America are employed at about a 98.4% employment rate.

Even the top 20%, which represents almost 90% of all discretionary income, is doing great -- and discretionary income is where economies live or die. Their unemployment rate is only around 2%.

Now let's put all of this into context. You don't get recessions with 4.5%, 5% or even 6% unemployment rates. What we here have is a recession that's only in the homebuilding market. And you don't want to be cherry picking among the homebuilders. We still have more pain left to endure, and it's probably going to continue through 2008.

But to arrive at the conclusion that this $200 billion to $300 billion loss is going to derail the entire U.S. economy misses the fact that the healthcare industry is going to grow another $150 billion in GDP this year. Plus federal and state governments are going to grow another $200 billion.

From a GDP standpoint, those two areas wipe out the whole issue.

ChangeWave Research
2420A Gehman Lane, Lancaster, PA 17602


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Copyright © 2007 ChangeWave Research. All rights reserved.

YellowCoffee

I agree with many points in the article. However, I find one thing a bit conflicting. Sure $200 billion doesn't compare to $2 trillion, but like the article says, we are definitely not "past" the bottom. The "Housing Recession" is not over. Delinquencies are still occuring, and also mortgage apps are declining. This will ultimately lead that $200 billion estimate to a larger amount.

There was tremendous growth in real estate related jobs over the past couple years and this "Housing Recession" will definitely decrease then amount of employment in this sector. Credit will also be impacted in a big way with so many people going into foreclosure, facing BKs, and defaulting on pmts. Also, bankruptcy guidelines are much more strict than they used to be in '99 - '00.

I'm definitely not yelling recession, but I would definitely not downplay the hit this will have on the economy.

VTGreg

The article came up with $ 200 billion number by estimating that there would be 1 to 2 million foreclosures over the next few years. It isn't saying that the current loss is $200 billion.

It also points out that most of the consumer spending comes from the top 10% to 20% and that group isn't very likely to default on their mortgages.

I do think the housing industry in general will hurt the economy more than the $200 billion noted in the article because as YellowCoffee noted, as home sales dry up, so do the jobs in the real estate and housing industry.

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zippyjuan

Also less buying things to fill up the new house with and less spent at places like Home Depot to fix them up- whether to live in or resell. The speculators (flippers) have slowed and the marginal buyer certainly have but the average person who wants to buy a house still can and will.

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