An ARM and a Leg

Although there are a few reports of stability and improvement from around the country, the majority of the news coming in right now about the housing market has not been good. Take this quote from a recent article in the Pioneer Press...

As the housing boom ends, experts worry that rising interest rates and slowing home values will push thousands more Minnesotans out of their houses.

The article then continues to talk about a family that lost their home, and how many others are following suit

But soon, the Schlenners will move on, like the more than 4,200 Twin Cities-area homeowners who have lost their homes to foreclosure so far this year. That's a low figure, compared with other cities, but a steep increase for the seven-county area, which is on pace to double last year's record number of foreclosures.

The trend is clear, foreclosures are on the rise, and the middle to lower middle class is going to be hit hardest. Most of us understand this in individualistic terms. Yes, some people will lose their homes. But, what about the cumulative effect that these kinds of losses can have on a community? What happens when entire swaths of neighborhoods get foreclosed?

The surge of home losses has shocked city and state officials, startling some veteran city planners and foreclosure-prevention pros. Community activists say pockets of foreclosures in the core cities have reached crisis proportions, threatening years of community development. In St. Paul, it's left city code-enforcement workers struggling to keep tabs on a mushrooming crop of empty properties. More than 800 houses in St. Paul are now officially vacant, double last year's list.

This is not going to be a unique experience. In fact, if you plotted a density map of foreclosures and layered it over a map of ARM lending hot spots, I bet you'd find a nice correlation. In the meantime, the people who got lured into spending beyond their means are going to get increasingly desperate to hold on to their gains.

Unfortunately, it's going to be a losing battle for most. If you can't pay the note now, you probably won't be able to pay it later. All you can really do is buy more time. But, to do that, you will have to go deeper into debt. And, I think that's exactly what a lot of people are about to do.

For the people who can afford it, or who are not locked in to tightly, I think we will see a lot of refinancing as people try to get OUT of the ARMs race. People who can successfully do this may be able to dodge a bullet - for now. But people who can't afford to do that will have fewer options.

Most will probably try to go deeper into debt just to stay afloat. But, will the money be there for them? I doubt it. Forget the fact that the money supply is vastly smaller than it was when this boom got started. How are you going to get a home equity loan when your home is worth less now than it was when you bought it?

It's hard to see an easy way out of this. And it's NOT from a lack of trying. All the talk of soft landings a few months back was a collective game of wishful thinking. But, you don't hear that kind of talk now. At some point, reality has to set in. And, it looks like we're about to get a heavy dose of reality.





* photo by Ben Garvin, Pioneer Press