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Corn+Soybean Digest

The Road Warrior Of Agriculture

Could The U.S. Housing Bubble Blow Up?

Everyone ranging from the media to the experts is indicating that the housing bubble is in for a soft landing. Let’s build a case for a blow up:

· The National Association of Realtors in December 2005 was predicting median house price would rise by 6% in 2006. The bad news is, it was down approximately 2% in 2006.

· The inflated bubble was created from of 120% loan-to-value mortgages, negative amortizations, teaser rates and adjustable rate mortgages (ARMs). These were known as sub prime loans.

· From 1994 to 2003, sub prime loans grew at an annual rate of 25% – up tenfold in nine years.

· In the past two years, sub prime loans were $900 billion and 80% were interest-only ARMs. In 2006, 38% of sub prime loans were for 100% of the price of the home.

· In the third quarter of 2006, 12.5% of sub prime loans were delinquent, causing seven sub prime lenders to go into financial bankruptcy.

· One to two trillion dollars in home loans are on ARMs, or 41% of loans made in recent years will see payments increase in 2007. Ouch.


· Possibly one out of every five sub prime loan mortgages could go into foreclosure.
· Over one million homes may be repossessed and $75 billion in home equity would be lost.
· Many of these loans were sold as securitized packages.

Will the bubble pop? Any little adversity could tip these individuals to the ugly side of debt.

Action Lesson Learned
Low documentation loans with “don’t ask, don’t tell” policies are great when real estate is appreciating. But like the ’80s in agriculture, the U.S. housing industry may experience the trials and tribulations of easy credit.

Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected].

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