by Osman Parvez
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 If you want to make a smart real estate decision, it’s important to understand the factors that affect the real estate market. When you’re getting ready to buy or sell, you need to know what’s happening at the micro level of your neighborhood right down to the street level. But if you’re watching how things are shaping up for the longer term, look at the big picture.

As you know from my frequent updates, foreclosures are a problem for the housing market in Colorado. As I’ve illustrated, the depth of the trouble varies dramatically from region to region and city to city. Within Boulder County, foreclosures are concentrated in Longmont. The City of Boulder is far less affected. Meanwhile, the situation in Boulder County (as a whole) is a far cry from what’s happening in Adams and Arapahoe Counties.

The bad news is that even though there was a dip last month, I suspect the foreclosure rate will take a few years to come down to more typical levels. Here’s why (if the chart is hard to read, click for a larger image).

As you can see in figure 1.6, both subprime and alt-a mortgage delinquencies peak 18 to 30 months after origination. Figure 1.7 shows how a large wave of subprime rate resets carries forward to 2009 before falling sharply. Most of the rate resets are probably indexed to the prime rate, LIBOR, or the discount rate. As you know the FED cut the discount rate yesterday another quarter percent. This followed a half percent rate cut in September. Although a quarter point won’t make much of a difference to most borrowers, if the FED continues their tact the cumulative change has the potential to help those facing steep mortgage rate resets in the coming 18-30 months(with added risks of inflation).

From the Baltimore Sun:
…a more aggressive rate cut by the Fed might help some homeowners with adjustable-rate mortgages, which are at the heart of Wall Street’s concerns. These adjust based on indices that are influenced by the Fed funds rate. So a steeper rate cut would mean that mortgages that adjust in coming months would still go up, but not by as much.

By the way, I strongly recommend reading the mortgage market related section of the latest IMF Global Financial Stability Report. It’s also the source of these graphics.

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