The Perfect Storm--5 year ARMS

In 2008, the financial markets were shaken by bad loans, foreclosures and the resulting fall in real estate prices. The bubble burst. Prices are now starting to stabilize in the housing market. Now that doesn't mean a 300K home will sell right now because most of the sales in real estate are in the under 220K range. Problems still exist.

But soon we will enter the "Eye of the Storm" where things are better. But a "Perfect Storm", the backside of the hurricane, awaits us in the future. This could be really bad for your home value, the ability to sell, and your portfolio.

Let me illustrate: The peak of the Greenville, SC real estate market was in 2006 and 2007. Those years were the #1 and # 2 all time record in total units sold in the Greenville area. The ARMS (Adjustable Rate Mortgages) issued in these years are the problem.

The 2006 2 & 3 yr. ARMS have mostly been absorbed. The 2007 2 yr ARMS again are mostly absorbed. The 2007 3 year ARMS will work through the system in 2010. BUT The total of 2 and 3 yr ARMS from the 2006-2007 record sales years are dwarfed by the # of 5 yr ARMS issued in those two years. Which means---that in 2011 and 2012 these ARMS are going to reset and people will need to refinance those mortgages. The problem: 48% of those homes are "upside down" right now (They owe more than their homes are worth) And they are predicting that 75% of these mortgages will be upside down in 2011. The market will once again become flooded with foreclosures and short sales---home prices are going to plummet, banks and financial institutions are going to be in major trouble! Can our government bail out the banks and financial institutions again?

The good news is that for a period of time estimated to begin in April of 2010, the market will improve (the eye of the storm), but sometime in late 2011 the storm will hit.

This may be a case for deflation....rather than inflation. I'm still holding to inflation in 2011. We'll see and adjust. All this has major ramifications on your portfolio!