I'm a big believer in the proverb that says, To get the right answers, ask the right questions.
And if you saw the story about real estate on 60 Minutes this past Sunday evening, you already know that the #1 wrong question about the real estate market is to ask,
"Is the worst over?"
The title that 60 Minutes gave the story is in fact the right question, namely: "A Second Mortgage Disaster On The Horizon?"
The short version is that so far, subprime mortgages account for most of the damage in the real estate market (falling home prices, bank failures, bond defaults, etc.). What's more, if subprime loans were the only variety of toxic mortgage, then a worst-is-over scenario might be plausible. Alas, the mortgage loans known as "Alt-A" and "option-ARM" are very closely related to subprime: they begin with payments that borrowers can afford, but eventually "reset" to payments that most borrowers find hopelessly unaffordable.
The major difference between subprime vs. Alt-A and option-ARMs is in the timing of the reset. The chart below is a screen capture from the 60 Minutes broadcast: the orange bars on the left represent the number of subprime resets each month, while the yellow bars on the right represent the number of Alt-A/option-ARM resets each month.
Subprime resets begin to drop sharply in the first half of 2009. But that is exactly when the Alt-A/option-ARM resets begin to climb each month, in a trend that will continue upward through 2011.
The worst is not over. There's every reason to think that the approaching second wave of "resets" will be more damaging than the first wave, because the economy will be far weaker in 2009 (and beyond).
"Will I be ready?" is not only the
right question for investors -- in truth that question has never been more important. We can help with the right answer.
Click here to learn more.