Inflation or Deflation

Every so often I like to post a light hearted item. Hat tip to Greg Mankiw for featuring this funny video of Merle Hazard and Bretton Woods singing a country song about if we're heading for inflation or deflation.

Either scenario is bad for the mortgage market---If there's inflation, mortgage rates will rise causing slower principal repayments and possibly lower property values in the short term (as the monthly payments increase b/c of higher interest rates). If there's deflation, consumers will postpone spending b/c their dollars will buy more stuff in 1 year than what it will buy them today.

Alt A and Option ARM resets to trigger next wave of foreclosures

Last night 60 Minutes had a very interesting story about how a second wave of defaults will hit the housing market. The first wave of course, has been the sub-prime loans that have gone bad. The second wave will consist of Alt-A loans and Option-ARM loans.

This potential wave of future resets in Alt-A and Option ARMs, according to Credit Suisse really begins in 2009, ramps up in 2010, and ramps up again in 2011.

These resets, coupled with increasing unemployment rates, in my opinion will continue to hold-down real estate values for the next several years.


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