, we are seeing the formation of the “perfect economic storm” and we are heading straight for it:
There is hope on the horizon. I have urged those folks to save their money and maintain good credit, because 2007 will be the year of the “perfect economic storm.”
It is the year that $1 trillion of adjustable rate mortgages and interest only mortgage loans come due for conversion to fixed rate mortgages.
The victims will be those who could not have managed to make monthly loan payments on fixed rate loans so they opted for lower rate loans.
How many will be able to afford a loan payment when their interest goes from a 2.7 percent ARM to a 7 percent fixed?
There never has been a number like the $1 trillion to hit our banking system. Never – not even close.
Personal savings are at the lowest rate since the Great Depression. Most people have no backup for emergencies.
During the past five years, 42 percent of the loans in the Coachella Valley have been ARMs or interest only loans. In Orange County, the number is 78 percent.
So when these people attempt to sell those “getaway” places they bought here, the market will be inundated with “For Sale” signs.
Add those whose primary residence is here and who are unable to make their new, higher payments, and prices will fall precipitously. There will be foreclosures and, yes, bank-ruptcy sales. There then will be a lot of affordable housing (“Valley Insights: Affordable Housing,” Dec. 11).
This will present a major opportunity for those who “missed the boat,” and like the real estate recession of the early 1990s, this will prevail for several years.
The bad news for the banking system is that, unlike the collapse of the savings and loans, and the massive government bailout in the name of the Resolution Trust Corporation, there will be no “bailout” this time. The budget deficits have ensured that.
So, yes, be patient and prudent, and an affordable home will be yours.