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Face it: The housing bust is here

Missed in last week's 'Fed is done' euphoria was more stark evidence the housing bubble has burst. Growing numbers of homeowners can't make their payments.

Back on June 12, 2005, Time Magazine chose this headline for its cover: "Home $weet Home: Why We're Going Gaga Over Real Estate." I did not share the euphoria, as I believed that the housing bubble was about to peak.

In fact, in my column two months later -- the headline of which, "It's RIP for the housing boom," stood in stark contrast -- I said that Time's cover would be shown in retrospect as basically having marked the peak. That real-time view little more than a year ago has been validated, regrettably.

The fabled engine of our economy is clearly unwinding. The sobering implications, however, were lost on the stock market last Tuesday. That's when a weaker-than-expected PPI number incited the umpteenth Fed-is-done rally. What folks ignored that day: News from the National Association of Homebuilders that its Housing Confidence Index fell to the lowest level since early 1991.

When 'adjustable' becomes unsustainable

But the bigger picture is becoming increasingly harder to ignore. What we'll soon be seeing on a regular basis was portrayed by The Wall Street Journal last week, in a story titled "Homeowners Start to Feel the Pain of Rising Rates" (subscription required). The subtitle nicely summarizes the thrust of it: "Payments on Adjustable Loans Hit Overstretched Borrowers; 'Budgets Are Out of Whack.'"

It begins with the story of a Detroit accountant who was looking to lower her monthly payments. In 2004, she refinanced a $312,000 mortgage via an option-adjustable-rate mortgage that offered various payment choices, as do so many of these plans. Her (introductory) rate of 2.3% is now up to 8.75%, and her loan balance has grown to $324,000. She claims that the terms weren't clearly spelled out. But if she actually read the documentation, as accountants often do, and didn't get it, you can imagine how many people truly understand their mortgages. (Hint: The number rhymes with "hero.")

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/FaceItTheHousingBustIsHere.aspx