2009 Outlook for Housing and Mortgages
I do not believe that the housing market will continue to adjust downward at the same pace as it did in 2008. However, I also do not believe that it will moderate significantly nor start to gain back value on a national basis in 2009. Certain metropolitan areas, and states specifically, may show signs of strength based on depressed valuations, increased inventories and affordable credit (all symbols of a buyer’s market), but this will still not be enough to overcome overly cautious lending, a global recession and a fragile level of consumer confidence. Nor will it be able to overcome the next wave of sub-prime related mortgage issues.
There are two other types of mortgage loan products, similar to sub-prime mortgages, which were part of the housing mania that took place in the mid-2000s. The products are referred to as “Alt-A” and “option ARM” loans, and like sub-prime loans they often were associated with lower credit standards and smaller down payments than traditional or “prime” mortgage loans. Alternative A (“Alt-A”) mortgages, while deemed to be less risky than sub-prime mortgages, still carry less intensive documentation requirements and often have more flexibility around acceptable credit scores than typical prime mortgages. Option Adjustable Rate Mortgages (“option ARM”) can be even more dangerous, to the borrower and lender, in that they often contain low, introductory “teaser” rates with the mortgage rate increasing significantly in later years. When these particular loans reset at the higher interest rates, it will remain to be seen if the borrowers will be able to afford the associated higher mortgage payments. If they cannot, and foreclosures follow, the lenders will now have to try and sell a depressed asset into a weakened market that is already saturated with an over-supply of homes. Sound familiar?
The Sub-prime market was estimated to be approximately $1.3 trillion. How big is the potential Alt-A Mortgage and option ARM problem in comparison? Bigger! According to the CBS News report, “A Second Mortgage Disaster on the Horizon,” investment fund manager Whitney Tilson estimated that the combination of Alt-A Mortgage and option ARM loans totals approximately $1.6 trillion, many of which are due to reset in the next couple of years. With some experts projecting a default rate of anywhere between 50%-70% on these risky mortgages, we suggest that this additional burden put on lenders, and borrowers for that matter, will serve as an anchor to a national housing market trying desperately to find its legs again.