Edgewood, WA Real Estate Blog

I mentioned in a previous post that it’s paramount for both buyers and sellers to understand what’s coming down the pipe real estate market wise.

I was asked: “Well, what exactly is coming down the pipe?“

As you probably know, many exotic loans were originated during the 2004-2007 period. Exotic loans are characterized by an initial “teaser rate” that is substantially below market (at least for the credit risk) for some initial period. After the initial low rate period ends they “reset” to new higher rates. Here’s what the reset schedule looks like:

(click to enlarge)

As you can see, the peak (at least for subprimes) is occurring over the next several months.

According to a recent Wall Street Journal Article, some 42,000 (21.7% of total) “high rate loans” (what the WSJ is calling subprime loans) were made in the Tacoma Metropolitan Statistical Area (MSA) from 2004 to 2006 (NOTE figures do not include 2007).

Even though our local economy is good (currently 4.5% unemployment) relative to the rest of the country (at least for now), the general consensus is that 16-20% of the exotic mortgages holders will not be able to continue making payments after their rates reset.

If that percentage holds, 7-8,000 units will be forced onto the market as sales, short sales, and/or foreclosures over the next year and a half (time is approximate as a property can take up to 200 days to hit the market after an owner first defaults on payment(s)).

Also keep in mind that a large number of the short sales/foreclosures we’re now seeing are not the result of rate resets. Many of the buyers currently defaulting are simply unable to make payments according to the original (low rate) schedule. Plus, with prices down in Pierce County over last year, you have to wonder how many people who bought zero or near zero down are now upside down (owe more that their house is worth) on their mortgage.

Of course you have to consider various government bailout plans may ameliorate the situation… but I’m not holding my breath.

The numbers may not be exact and it’s difficult to get a handle on the timing (because defaulting buyers may walk away or try to sell before their reset, defaulting buyers may try to work something out with their lender, etc.), but I expect significant downward price pressure and time on market regardless.

If you’re considering buying or selling a home over the next year, it will behoove you (and especially your real estate agent) to not only understand the market, but to also have a viable strategy to deal with it.

Forewarned is forearmed.