Of course I am aware that these loans adjust annually…thats why I said what after year one? The one thing that your model lacks is an increase for RISK. That is why jumbo paper is at 3% or more higher than conforming fixed right now. ARMs in the future will certainly be associated with short term rates, but here in California, where a great many folks owe more than the new con-jumbo (after Jan 1) $625K, people with arms are basically screwed. And rents are all over the board here in Los Angeles…and nobody, especially the self-employed, wants to rent and lose the interest tax deduction. Housing does suck, and it is dragging the economy, yet the mainstream media keeps spewing the Wall Street Bulltime propaganda. If the money doesn’t start flowing soon, or the governmanet doesn’t come up with a bailout designed to help to taxpayer, not the bank, then we are all going to be screwed.

Well Dave, typically these loans adjust every 12 months based on the index and margin.

If rates skyrocket these folks are hosed.
However, as we have seen, when housing sucks it begins dragging the economy. This (at least in the past few years) leads to a decline in short-term rates. So, you see, if the amount of $ and the number of people affected by ARM resets are significant to the economy, then there is negative feedback impact on short-term interest rates. If the amount of $ and number of people affected by ARM resets is insignificant to the economy, then we shouldn’t worry about their impact should we ?

Here’s a good rule of thumb on future resets. For every quarter-point increase (annually) it increases the monthly payment by about 4%.
So, if someone has a 1-year ARM that increases by 2% over a 4-year period, it has the same effect on them as a 4% annual increase in their rent.

The impact of ARMs in the future depend on three things:
1. Short-term interest rates
2. Short-term interest rates
3. Short-term interest rates

Housing: Huge Shadow Inventory?
by CalculatedRisk

Sacramento Real Estate Statistics has some excerpts from a Deutsche Bank research report by research analyst Nishu Sood: “An inventory overhang builds in the shadows” (no link)

Peter Viles at the LA Times covers the story: Bank sees huge “shadow inventory” of foreclosed houses

This is interesting data, and worth reading the excerpts. In the report, Sood argues: “MLS listings do not fully reflect distressed inventory.” and then he provides some tables (see the above link).

But it’s not as bad as it first seems. I’ve chatted with Max at Sacramento Real Estate Statistics (thanks Max!), and in the notes, Nishu Sood writes:

Source: Realtytrac, Housingtracker, Deutsche Bank
Note: Foreclosure inventory includes pre-foreclosures, auctions and REO. 2/3 of pre-foreclosures are assumed to become foreclosures.
So these are not all REOs; in fact most of these homes are probably in the foreclosure process.

Yes, Sood makes a good point – there are many homes not listed that are probably future foreclosures. And I’d add, there are many homeowners waiting for a “better market” to list their homes. So inventory will probably stay elevated for some time.

But, just to be clear, Sood’s stats are not unlisted REOs held by some bank in the shadows.