The Federal Reserve reported today that delinquencies increased substantially in the first quarter of 2009. You will notice a substantial rise in residential real estate, commercial real estate, and credit cards. The only one of the three that isn’t at an all time high is residential real estate, which is still below the S&L crisis on the early 90s.
The residential real estate is what concerns me the most. Just as there seems to be a stabilization in real estate, we are finding defaults are increasing again. According to Realty Trac, foreclosures rose 32% in April. This won’t help a real estate market with 11 months of supply already.
Even more troubling, we can expect more real estate turbulence starting in July 2009 and lasting through 2011. There are an enormous number of option ARMs resetting during this period. For those who aren’t familiar with Option ARMs, they allow a homeowner to make a payment based on one of four methods: a 15 year mortgage, 30 year, interest only, and negative amortization loan. The negative amortization allows homeowners to pay less than the interest only option. This means any interest not paid is added back to the principal. So the mortgage is actually increasing over time. These real estate time bombs will start going off this summer and continue for two years. Many payments will increase by 30% or more once the readjustment kicks in on homeowners.
This debt deflation has a ways to go and stands to get substantially uglier than we have already seen. Any advice for these homeowners or comments on our debt?