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Defaults, Foreclosures and Junk Mortgages

19 April 2006 by 3 Comments

Yes, interest rates will rise, and, yes, they will adversely affect real estate activity. The increases in long rates will not be enough by themselves to stall activity. The real issue is the impact even modestly rising rates will have on those American families that have stretched their budgets to fit into large a house as they could in order to cash in on rapidly rising house prices. Now it’s time to pay the piper, and pockets are shallow. Real estate is still appreciating, but not as rapidly. When homeowners are presenterd with an upward adjustment in the payments on their no down payment interest only ARMs, they will find it hard to pay the bill. Even if they do, their ability to spend on others things will be diminished. So, even if the rate of defaults doesn’t rise significantly, consumption spending and thus the growth of GDP will be hurt. But foreclosures will rise. Data for the first quarter of 2006 suggest that delinquency, default and foreclousre rates are up. They will be up in the second quarter as well.

  • jeff jay

    of course rising rates are largly to blam for the crashing housing market. Most of the mortgages writtem are not "junk" as you put it. The Fed needs to have some consistancy with the interest rates. It feels like I am riding a roller coaster with the way they hanle the economy. When rates go down, times seem to be good, and when rates go up several time in a row, everything seems to go into a slump. That is the bottom line.

  • alan greenspan

    "Rising interest rates are not the problem facing the housing market; junk mortgages are"

    don’t you think skyrocketing inventory, collapsing prices and a corrupt system are the problems facing the housing market, more so than these rediculous mortgages (although I do agree they are one of the problems)

  • Don in CA

    just clicked across to realblogging from your site. pretty cool. look forward to reading your blogs. always enjoy your talks. thanks for your insights.