There’s a simple reason you shouldn’t get too excited about the “green shoots” of an economic turnaround.
In the housing market, a lot of prime mortgages are becoming subprime as a new wave of foreclosures begins to hit. Mainstream homeowners — those previously “safe” borrowers with sound credit who have conservative, fixed-rate mortgages — are getting into trouble at an alarming rate.
In the first quarter, the percentage of these borrowers who were behind on their mortgages or in foreclosure had doubled from a year earlier, to nearly 6%. For the first time in the housing crisis, these homeowners accounted for the largest share of new foreclosures.
Job losses are a major reason once-safe borrowers are falling into trouble. With unemployment likely to rise, the problem will only get worse. So the core challenge at the heart of our economic crunch — a poor housing market that infects banks and the whole credit system — is not going away soon. That’s bad news for the stock market and the economy in general.
“A couple of months ago, a lot of people had hoped that the housing collapse was about over,” says money manager and forecaster Gary Shilling, a well-known bear who called the housing problems early in the cycle. “But it was more hope than reality.”
