Housing mess gets even worse

http://biz.yahoo.com/ap/070424/home_sales.html?.v=9

Existing home sales for March dropped 11% year over year. It fell 8.4% compared to february. recall that home sales are supposed to increase not decrease as Spring approaches. Lots of excuses were trotted out (the weather) but the trend is your friend - housing is busting apart and willing it to be different won't make it so.

Meanwhile mortgage defaults are picking up the pace.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aq3flDbwBCbk&refer=home
As you will notice in that article, banks are less exposed than investment houses like Lehman Brothers. That is what I have been saying all along.

Now, the $75B loss that they are predicting needs perspective. While that is about 1% of all property mortgage in the US, it is 7.5% of all mortgages coming due in the next 2 years. If you are a potential investor and the conservative estimates are for a 7.5% default rate, you willl demand greater risk protection via higher returns.

It's the reverse junk bond effect, so to speak. Back in the 80s, Mike Milken observed that junk bonds paid a higher rate for their perceived risk but that the risk of default was a lot lower. Today, the quality mortgage backed securities carry a higher risk than is reflected in their rates. This will reverse.

Housing supply is increasing from slower sales and new inventory (both newly built and returned to the market). At the same time rates are higher. This is a formula for falling prices: more supply and less demand.

The only curve ball is interest rates, and so far the Fed is inclined to keep them up. When the Fed does drop them, will they drop again to 3%? Great question. They understand what happened the last time they did it. Also, I'm not sure that it will trickle down to mortgage rates the way it did last ime.