Thursday, September 14, 2006

The real estate wildcard.

Why delve into real estate and mortgages on a blog about energy? Because the situation developing in real estate is a wildcard that can't be ignored in trying to figure out what could happen to the economy in the future.

The real estate boom of the past few years was really one for the ages. By various measures, real estate values got significantly above long term trend lines, particularly in hot areas like Florida, California, parts of the Northeast and Washington D.C. areas, and Las Vegas. Additionally, ostensibly to help people afford homes at these valuations, various forms of exotic adjustable and interest only mortgages were peddled and came into much wider use. Which makes you wonder: since fixed rates were so low during most of this period courtesy of the US Fed, why bother using these mortgage timebombs that ensure higher future payments? They were used because they made payments look affordable to people as they mostly focused on the early payments, not the potential for upward adjustments in the future. Now that people are seeing these adjustments upwards, often fairly significantly upwards, many of these mortgages are now causing people much grief, and in some cases pushing people into foreclosure as they find themselves unable to keep up with the payments.

As the articles below indicate, this is a growing issue, and will likely contribute to the cool off in housing. And an accident in housing will likely affect consumer psychology negatively.

Keep an eye on this story.

BusinessWeek: Nightmare Mortgages. Foreclosures spiked in August.

Courtesy of Calculated Risk, a blog I read for housing info:

USA Today: More fall behind on mortgages.