Seth Chalnick's  Instablog

Last year we had an unprecedented number of foreclosures. Since then loan defaults have only increased. And yet inventory is down, not up. Sales are up, but only compared to last year. They in no way account for these record defaults.

The recent increase in real estate prices has been focused on lower end homes only. Higher end homes are in a flat out stand still. Meantime, the volume on the lower end is anemic. The inventory is at about 10% of where it would normally be and about 1/500 of where it should be.

All this talk about the "real estate bottom" really only pertains to the lower end market, whose technical signs of improvement are being taken grossly out of context.

As far as the technical improvement is concerned... real estate isn't as seasonal as people think. Folks buy homes when they're ready financially, not when the kids are out of school. The $8k stimulus is helping a bit, but the real help is coming from artificially low rates, and even more artificially low inventory. This is creating a temporary buying surge and it can only last so long.

From a fundamental perspective, there is simply no answer for the tens of thousands of loan defaults that sheepishly exist as non performing assets on the phantom balance sheets of the bankernment. And there is virtually no mortgage market for homes above $800k. The prime market is not comprised of folks who are "better insulated". It is comprised of folks who haven’t been tested yet. The 5yr rate resets are just starting to come online now, and people are starting to default again in droves. If a borrower's rate reset stays effectively close to the same rate they originally locked, then the p&i payment shock (from i/o) increases about $1,000/mo on an $800k mortgage. If rates tick up, look out below.

If people think $300 shopping mall coupons have a stimulus effect, just wait for its reverse (times too many)... when the real drivers of our economy start to lose their homes to foreclosure.

The prime reset bucket is… about three times the magnitude of the suprime reset bucket, which... contrary to popular opinion… has not been dealt with… at all. Its been swept under the rug via mark to market switcheroo and shadow inventory holdback.

Btw, the prime reset wave is not limited to the higher-end market, but also encompasses the lower end market too, which folks mistakenly discount as being baked into the subprime collapse. Many lower end homeowners had 5yr i/o’s too.

Also, by "prime"... I do not mean option arm's. I mean option arm's, alt A, and yes, prime too. Remember Fannie and Freddie? They were rated AA the week before they crashed.

And what about the derivative situation? I remember thinking that the stock market didn’t bake them into the equation until the subprime loans actually defaulted. Since the market didn’t predict this and it nearly collapsed the entire world financial system… is the market so smart that it already factored in the prime defaults?

I know a guy who left his home two years ago because he thought it was going to be foreclosed upon. He just got a call from the lender who apparently has been trying to track him down. He still owns the home and didn’t even know it. He assumed it was re-sold, because he noticed that someone else… is LIVING there.

This scenario is more commonplace than the public realizes. This is the wake of the supbrime. Prime has not even started yet.

As Dow approaches 10,000, all I can think about are VIX calls.

Disclosure: long VIX calls.