Be sure to keep the below in mind the next time you read another doom-n-gloom assessment of the housing collapse slowdown that relies at least in part on the notion that all the “nontraditional” mortgages granted recently to “people with less-than-perfect credit” are going to doom us all. (In the trade, they’re called “subprime” mortgages.) The thinking goes that because subprime clients are folks who “shouldn’t have qualified in the first place,” they’re all going to end up in default once their mortgages reset to higher rates they can’t afford, thus placing a huge glut of houses on the market all at once, causing the next Great Depression, etc., etc.
Not so fast, says Louis Alexander, chief economist for Citigroup:
Q. I’m curious where you see the risks to … economic outlook from subprime and nontraditional mortgages?
Louis Alexander: If you look at — you know, the delinquencies on the subprime market have gone up, but overall they’re a very small portion of the overall market. If you look at overall delinquency rates, they’ve hardly budged. Right? So, if the question is, “is there a feedback from that particular sector of the market onto the macroeconomy as a whole” — or even the housing market more broadly — I think it’s hard to get there, for me. Will there be rising defaults? Absolutely. Are there people who are going to lose their homes, are there, you know, particular small players in the mortgage market that could be at risk? Yes. What I have a hard time doing is getting from there to something that’s macroeconomically significant. We’ve looked at, say, for example, the whole issue of mortgage resets. Right? Obviously, there’s been an awful lot of mortgage refinancing — things that are fixed into instruments that are sort of fixed for a while but ultimately reset. If you actually look at the numbers, and look at the magnitude of the interest-rate effects, they’re simply not that large, in aggregate. They will be significant for some people, but when you look at them in terms of the size of the effect — if you simply look at, say, for example, what’s the positive income effect for households that has come from rates going from 1% to 5 1/4%, that dwarfs the mortgage resets — right? — just in terms of the cash-flow effect that comes from there. So, yes, are they [subprime defaults] going to be important in a micro sense? Sure. Is it going to be important in a macro sense? I have a hard time getting there.
— Louis Alexander, Citigroup Chief Economist
19 Dec 06 Address on National Economic Outlook, National Economists’ Club [emphasis and bracketed items mine]
I was lucky enough to run across the closing minutes of his talk at lunch the other day when I turned on C-SPAN. They might rerun it; check C-SPAN’s schedule.
Again I bemoan the lack of meaningful context in today’s pitifully brain-dead MSM. Betcha a nickel the next time we get blaring headlines in 2007 as subprime mortgage delinquency rates go up, there won’t be a word placing ’em in the context of overall mortgage delinquency rates.
Plus, David, there is a voracious market for any foreclosures of properties which have to go back on the block. Real estate investors scramble to find those and snap them up.
Case in point: Portland, OR is a hot real estate market for single-family homes (NOT condos). Prices rose 12 to 20 per cent per annum for 2002, 2003, 2004 and part of 2005. The “slowdown” hit, and slowed down the appreciation of prices to 6-8 per cent last year.
Portlanders don’t have that many more bucks, and there is no huge influx of Californians, dispite what some say.
The hyper-inflation of the market is due almost entirely to out-of-state real estate investors buying ALL classes of homes, KNOWING that they are going to appreciate even more.
Buying single family homes for investment beat the Street by 2 to 1 during that period, and the Street wasn’t doing all that badly.
I agree with your economist, and he wouldn’t even be talking about micro-economic change if he was referring to Portland or Seattle.