An Outlook

A few weeks before Christmas, the 60 Minutes television program on CBS aired a segment entitled, “A Second Mortgage Disaster on the Horizon?” If you didn’t see the program you can read it and/or view it on the Internet. But here’s an abbreviated version of the issues they brought up during the story.

While we are all familiar with the sub-prime mortgage fiasco and the catastrophic events that have unfolded as the default rate on these mortgages has skyrocketed, experts are concerned about two other types of exotic mortgages that were being written as home prices were skyrocketing: Alt-A and Option ARM.

The Option ARM type of mortgage attracted borrowers with low “teaser” interest rates that reset after 2, 3, or 5 years. So a monthly payment of say $800 can reset to as much as $1500. And now the Option ARMs that were written at the peak of the housing wave are resetting.

According to Whitney Tilson, an investment manager quoted in the show, “The defaults [on Alt-A and Option ARM mortgages] right now are incredibly high. At unprecedented levels. And there’s now evidence that the default rates are tapering off.”

When asked about the potential damage from the Alt-As compared to the sub-primes, Tilson responded: “Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have the Option ARMs on top of that. That’s probably another $500 billion to $600 billion on top of that.”

Finally, Tilson was asked how many of these Option ARMs he thinks will fail: “Well north of 50 percent. My gut would be 70 percent of the Option ARMs will default.”

On the Monday following the 60 Minutes broadcast Fitch Ratings updated its loss projections for all Alt-A mortgages throughout the country. According to Todd Sullivan, on the seekingalpha.com Web site, “Fitch…now expects losses on all Alt-A collateral to far exceed the estimates of its ‘moderate stress’ scenario…”

Sullivan goes on to quote the official statement from Fitch as stating, “Market developments, ongoing home price declines and loan performance trends in the Alt-A sector over the prior six months have effectively eliminated the possibility of this stress scenario.”

Okay, so that was the bad news before the Holidays and the bad news we can look forward to in the coming months…on a national level. Now let me tell you why, despite all these grim predictions and the certain hardships this country will face in the coming months, I believe that the Door County real estate market will begin to turn around this spring.

When the stock market nose dived in late September, virtually every American – whether they are day-traders, money market investors, or lower middle-class with a pension fund – lost a considerable portion of their money. The affluent portion of our population lost money, as well. The difference between most of us and this affluent portion of the population is that they are still (in the vast majority of cases) well off. Sure they lost money; and sure, they are/were just as shell shocked as the rest of America, but they still have considerable wealth.

So let’s suppose you and I are members of this affluent group. The blood bath of September and October is past, but the stock market – and most other investment vehicles – is uncertain at best. We’ve lost a considerable portion of our money, but the shock has worn off, we’ve re-grouped and restructured and now we need to determine the best place to invest our money.

If you jumped ahead of me here and guessed that real estate is the best investment option in an uncertain economy congratulations! If you or I actually were actually affluent we might be pretty good at managing our assets (well, maybe you would, I’m not very good with money and I have the dual liability of two children who can consume my money at rates far exceeding my capacity to earn it).

So this brings us to Door County. If you pay close attention to your tax bill, and follow the stories reporting the process that actually determines our assessments on this bill, you may know that the equalized property valuation for the Gibraltar School District actually rose by 3.9 percent this past year! This is a considerable drop from previous years when the valuation consistently rose from 6 percent to 9 percent or more each year – but it still went up in a housing market that was simply atrocious for most of the rest of the country.

Keep in mind that the equalized valuation takes into account not only rising home values but also improvements to home and properties. Still, I believe it is fair to say that even if most of the 3.9 percent growth is the result of property improvements, individual home prices in the Gibraltar School District held their value in the past year and may have even risen slightly. How many other places in the country can make that same claim?

So let’s go back to where you and I are affluent, have taken a hit in our finances, but have now re-grouped and are looking to invest our money somewhere safe – like real estate. If we (or, at least you) are as shrewd as I believe then we will do our homework before we leap into the market. And if we do our homework thoroughly and properly, we will discover that there is a peninsula of land in northern Wisconsin, which has a long, rich history as a primary vacation destination, where property actually held its value during the past year.

I know where I would look to buy and I’m sure you know, as well. Spread the word realtors! As Todd Sullivan said in the aforementioned report: “…if you are looking for that summer home…2009 and 2010 will be prime picking for them!”