The mainstream media finally is starting to report on the nascent U.S. real estate collapse. The Los Angeles Times recently reported that perhaps as much as a half trillion dollars worth of adjustable rate mortgages (ARMs) in the U.S. will be “reset” in the coming year. The article mentions: “To head off potential problems, the largest mortgage originator in the United States, Countrywide Home Loans, has begun sending out letters to thousands of borrowers who have been making only the minimum payments on the company’s popular PayOption adjustable-rate mortgages. The letters explain that ‘this is an early message to alert you that, based on your current payment trends and potential future interest rate changes, the monthly payment you will be required to pay may increase significantly.'”
Given the huge number of ARM loans that were issued to anyone with little more than a paycheck and a pulse during the past three years, I shudder to think what the mortgage default rate will be in ’07 , ’08, and ’09. Mortgage defaults will mean lot of houses will be coming back on the market. And consider that the unsold house inventory already burgeoning. Houses prices are bound to just plain collapse in overvalued markets like Phoenix and San Diego. Once people are “upside down” in their mortgages (owing more on the principal of the mortgage than the house’s new market value), I predict that some of them will turn in their keys to the bank and just walk away from their houses. Mark my words.