Lets take a look at the real impact of the subprime meltdown. I am even hesitant to call it a meltdown. Media buzzwords always seem to have a "hype" to it that both captures attention and yet doesn't quite tell the story right. I digress.
This is a purely numerical analysis designed to determine the impact it will have on purchase transactions. I heard this in a Mortgage Market Guide telephone conversation late last week and here it goes:
- Last year almost 20% of mortgages were subprime (lets assume this is still the case)
- In today's market 40% of transactions are purchases
- This means 8% of all purchase money is subprime
- If 20-30% of applicants can not obtain a subprime loan due to tighter guidelines then it follows that there will be a 2% reduction in the number of purchase transactions
To put this in perspective when mortgage rates increase by 0.5% there is a corresponding 2% decrease in the number of mortgages written.
Hence from this we see that the current subprime "meltdown" is equivalent to a 0.5% increase in rates. That is why Mr. Bernanke said yesterday the fallout is contained and why the Fed didn't lower the Federal Funds rate in response to the subprime crisis.
;)
;)
Shailesh, number do not look bad, but at the grass root level, after 100% financing gone, people have to come up with real money to buy, that mean any where from 5-10 percent for the purchase price. That is not very easy when medain home price is in 600's here in Orange County CA. It is not only the subprime but the panic created with the subprime that is going to effect the home sales and above numbers do not show that psychological factor.
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