On a more optimistic note, he thinks new home prices, which started to correct much earlier than existing home prices, should bottom out in 2009, although some particularly overbuilt areas will suffer longer. We are actually close to a bottom in new home construction, and he thinks we will be back to 900,000 new homes by 2012. But that is a far cry from the 1.68 million in 2005, but is also a sustainable number.

There is a problem though, and that is the recently enacted housing bill eliminated seller-funded down payments, and this was 17% of new home sales. Watch for a rise in the number of new homes sold in September, as the new law does not take effect until October. Home builders will be telling people to buy now before this ability to help with the down payment goes away. But cheerleaders on TV will be telling us the market has turned. They won’t be saying that in November.

Alt-A is the New Subprime

By now, everyone in the world is aware of how bad the subprime mortgage business was. But now it is time to get ready to hear the same tale, told again, about Alt-A mortgages. Alt-A mortgages are mortgages made to borrowers with better credit scores than subprime borrowers, but could not or decided not to document their income. One estimate is that 70% of Alt-A borrowers may have exaggerated their incomes (Wholesale Access). More than half to those were people who exaggerated their incomes by 50% or more! (Mortgage Asset Research Institute)

How much are we talking about? Around 3 million US borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding. $400 billion of that was sold in 2006. Almost 16% of securitized Alt-A loans issued since January 2006 are at least 60 days late. Many of these loans (around $270 billion) were interest only or with a low teaser rate, and the resets were at 3 and 5 year lengths. These are called Option Arms. That means starting next year we are going to see a wave of mortgages re-setting to new rates. And it is no modest increase. Rates can jump as much as 4-8% or more from teaser rates. Some Option ARMs are re-setting at 12.25%. That can double a payment.

Wachovia (WB) and Washington Mutual (WM) were big sellers of Alt-A loans, and had $122 billion and $53 billion, respectively, on their books at the end of the second quarter. Is it any wonder that their stocks are under pressure? That is why bit is so hard to quantify how much more write-offs there will be. You don’t write down a mortgage until it starts to develop problems. These problems may not show up for a few years. I continue to stress I do not want to own a financial stock that has exposure to mortgage paper. Write downs are going to continue to come for a long time.

This means there will be a steady wave of foreclosures for the next two years in communities all over the US. As long as these homes keep coming onto the market, they are going to exert downward pressure on prices. Foreclosure sales are up by 109 from this time last year.

3.5 million Unemployed and Counting

The number of people receiving unemployment benefits jumped to 3.525 million, the highest level since 2003. My friend and Chief Economist John Silvia at Wachovia forecasts that unemployment will rise to 6.7% in 2009 (from 5.5% today) and above 7% in 2010. Given the inability of US consumers to borrow against their homes, with rising unemployment, is it any wonder that consumer spending data released this morning showed retail sales dropping 0.3% in August, for the second month in a row (July was down 0.5%)? Excluding automobiles, sales dropped 0.7% in August, the most this year.

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