Rick Reuben wrote:tmidgett april 2007 wrote:As for subprimes, they make up about 10% of all mortgages. A small fraction of them will ever default--mortgage defaults hinge pretty directly on the unemployment rate, which is not especially high nationally at 5%.
Michigan will have problems, with their unemployment rate at around 7%. Massachusetts and Ohio may have trouble. There aren't any other large states that are in danger of having issues with massive defaults. The big banks don't traffic in subprime loans enough to sustain any major damage from them directly.
It's a subprime panic reaction that is likely to cause problems, not defaults.
I hope we can agree now that it is the defaults, and not some unwarranted panic. All money in circulation is a representation of debt, every penny. Every default ripples through the economy.
We're kind of splitting hairs. If the market reacts strongly to something, then it's important--the end result is, as you say, rippling through the economy.
All I am saying is that the fundamental effect of defaults is not major. It's fear that is driving a reaction to the default rate, not the defaults themselves.
Obviously, defaults are up. But they are up in two areas: states with high unemployment rates, and states where speculation was rampant in the wake of absurdly low interest rates etc.
From the Washington Post, two mos ago, but holds true today wrote:The problems weren't uniformly spread around the country. Doug Duncan, chief economist for the mortgage bankers group, said the rate of new foreclosures would have dropped had it not been for big jumps in California, Florida, Nevada and Arizona. He said high rates in Ohio, Michigan and Indiana also drove up the overall percentage of loans in foreclosure.
California, Florida, Nevada, and Arizona: retirement communities and co-op condominiums. All states were home to massive spec buying during the 'boom.'
Ohio, Michigan, Indiana: high unemployment rates.
I made the point before that defaults track with unemployment rate. This is still true, but I should have extended that to speculation (this registers as purchases of 'second homes,' or third/fourth/fifth homes as the case may be). I was thinking mostly about the people who have to move out when they lose a house.
I mentioned before, page 1 of this thread, that funds would go tits up over this, and some people would lose their bets on the market, however they made them. Happening, no doubt.
But all the craziness right now is due to panic. The panic is real, the reaction is real, the effects are real. But the effect of defaults in and of themselves, in a fundamental sense, not so much. If you are waiting for the downfall of American capitalism, I don't see it.
This could turn into the biggest US economic crisis of our lifetimes, or the central banks may be able to pump enough liquidity into the system to produce a soft landing for the seized-up mortgage security markets, and keep the broader credit markets from unwinding around them.
Bet on the latter. The problem is indeed liquidity, not actual value--that's the definition of a panic reaction. Everyone wants out. It's the run on the bank in It's a Wonderful Life all over again.
Keep one thing in mind re defaults: as high as the default rates are now, they were that low during the boom. Whatever the direct effect of defaults, I think this is a correction, not a collapse. I don't have a horse in the race--if defaults become a fundamental drag on the economy, it's fine with me that I am wrong.
Needless to say, this is a *great* time to buy a house. End of this year should be even better.
P.S. Fuck Jim Cramer. Listen to what he is saying--the Fed needs to step in to bail out people who played the market one way and are now getting screwed b/c of it. He paints himself as some kind of crusader for the little guy right now, b/c he knows he can get mileage out of it.