This Crash is Far From Over...

Written By Brian Hicks

Posted December 17, 2009

We’re not overly pessimistic on the economy, but it’s hard to ignore truths when every one else falsely cheers a housing recovery.

So do yourself a favor… when housing bulls, for example, tell you all is fine, ignore them.

Sure, construction of new homes, helped by good weather, rebounded in November. And sure, the gain is a hopeful sign of a housing recovery. And yea, sales have surged in recent months, as homebuyers scrambled to take advantage of the first time home buyer tax credit.

But there’s only one problem with the bullishness. It’s overdone. There is no recovery… the crash is far from over. Even Moody’s doesn’t see any end to the housing meltdown, believing that home prices will soon start moving back down because of coming foreclosures.

Another obstacle for the housing recovery is the number of mortgages that are underwater where borrowers owe more than what the house is worth. This negative equity doesn’t qualify those people for refinancing and even prevents them from selling the home.

But the most devastating of all could be the coming Option ARM resets of 2010 and beyond. It could easily lead to higher unemployment, housing glut, decreased home values, and the death of the cash-strapped consumer. And if you want to make money on this, you simply short housing, housing-related retailers, and the financial community.

What do you think will happen to housing when the resets happen? What do you think will happen when monthly payments on a $400,000 mortgage jumps from $1,287 to $2,593?

We’re not trying to scare you… this is reality. And you have to play it smart.

The Year of Option ARM Resets. . . and Why There’s No Foreseeable Bottom.

Just as 2007 and 2008 were the years of subprime woes, this one will go down as the year of Option ARM resets (or adjustable rate mortgage resets). With billions in Option ARM resets in 2009 and 2010, this crisis is about to unleash a fury no one’s prepared for.

It won’t be as bad as subprime, of course. It’ll be worse.

That’s because lenders created these ARMs with “teaser” features for borrowers, which included making lower minimal payments for the first few years before the loan reset to a higher payment schedule.

And if that weren’t bad enough, there was another feature called “negative amortization,” which meant you weren’t paying back any principal.

In fact, with negative amortization loans your loan balance increased over time. Incredulously, every time you made a payment, you owed the bank even more. These are the loans that allowed consumers to buy houses they couldn’t otherwise afford.

As for speculators, they may use negative amortization loans if they believe prices will increase at a fast pace. But with the opposite happening, they’re out of luck.

And the banks will be left holding the bag.

So do yourself a favor. Ignore the housing bulls… they want to learn the hard way.

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