How bad can it get? Investment adviser John Mauldin recently published a month-by-month account of the dollar amount of mortgages that will be reset through 2008, and the largest reset amounts pop up in the first six months of next year. In fact, as he points out, the $197 billion of mortgage resets so far this year is "less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007, or $521 billion."
So, we haven't even begun to feel the pain yet. It's bad enough for the folks who will find that they can't keep up with the higher mortgage payments and will have to move out of their homes. It's almost the same as homeowners trying to find buyers for their homes – nearly impossible in a market where home prices are falling.
The Fed can try to calm such fears all it wants by lowering the discount rate and giving banks more time to pay back loans (from overnight to 30 days), but the real problem can't be fixed with more access to credit. The fact is nobody wants any more of that. What they really want is cash to pay off their debts. And the bad news just keeps accumulating:
Housing prices dropped 3.2% percent in the second quarter compared with last year, the largest drop since Standard & Poor's started tracking home prices in 1987.