I am more and more convinced that today's housing problems aren't going away anything soon.

I have an employee in my company who recently bought / overpaid for a house. Since his income cannot possibly service interest, the bank offered him a reverse amortizing loan, whereby not only does he not need to pay down principal for the first 15 years, but he doesn't even need to make full interest payment. Instead, the outstanding loan balance moves up by a little bit each month so that the outstanding balance is 15% higher in 2022 than today. It is a 30 year mortgage and the principal payments are quite burdensome in years 16-30. In addition, they have permitted him to encumber the house further with a high yield equity line of credit.

I like the guy and I hope he makes it, but I cannot believe that these types of mortgages have been handed out. For the purchaser / borrower, the bank has provided the opportunity to live beyond their means for the first 15 years, backed by a bet that real estate will be higher in 15 years so that the purchaser / borrower can sell or refinance the property then. There is also the expectation and hope on the part of the purchaser that their fortunes will improve over the next 15 years so that whatever the property market looks like, it will be possible at the very least to stay in the home. However, for the lender / counterparty, this strikes me as an untenable bet. Banks have provided the opportunity for many to live beyond their means. For those that can do it for 15 years, there could very well be a mortgage default then until real estate has moved dramatically higher. If I believe the media, this guy is not the only one to enter a deal like this and the banks have taken on dramatic risk throughout the spectrum that is going to take years to be assessed.

Everybody is speaking about the coming ARM reset cycle as being a turning point in the housing market. With these types of 15 year deals still have closed in the first half of 2007 and a housing market which is only beginning to show signs of cracking (and which usually runs in long cycles), I believe that this will take decades to work itself off. In this case, it is probably going to take 15 years before the bank knows if the borrow would be able to service the loan balance were it not an abnormally amortizing situation.

One other thought - a lot has been made of who should bear the burden of stupid loans like this that go bad. I saw Bill Seidman, CNBC's chief commentator, said that their should be no bail out as that is the only way that the banks will learn not to do this again. I would submit that everything runs in cycles and that there will be another massive housing bubble caused by the same type of lending in 20 years, and if you don't have some relief, the borrowers will be screwed, the bank shareholders will be screwed, and the bank executives will walk away as fat cats anyway.

The US Department of Housing and the US Census Bureau reported today that sales of new houses tumbled by 21.2% from a year ago. That's one of the steepest declines on record. Of course, part of it is because of the media attention given to the credit crunch and related problems. That would have scared even the hardiest buyers away.

The data also shows that the median sales prices declined by 7.5% to $225,700, one of the largest drops in several decades.

Now, it's important to remember that this is data for New homes. Sales and prices of existing homes haven't fared that well either. Sales of existing homes fell 4.3% to a seasonally adjuted five year low. Prices on existing homes though were flat.

So what does this mean? I'm not really sure. It's clear the homebuilders are getting clobbered as their rows of new homes are sitting empty. What I want to see is the inventory number for existing homes on the market. I'm wondering if sellers are pulling their homes off the market. In tough times, many homeowners decide to sit tight and wait for better days. That in itself will reduce sales. If so, maybe things aren't so bad in the existing home sales market. After all, sales are tumbling but prices aren't.

It does seem clear though that we have some pain to go through until homeprices adjust to more rational levels, at least in some parts of the country. Here in Boston, prices have barely come down and homes are still selling, despite the fact that prices are amongst the highest in the country. It all really seems to depend on where you are.

The National Association of Realtors reported today that sales of existing homes in August fell to a 5 year low. Purchases declined 4.3 percent, less than forecast, to an annual rate of 5.5 million. Sales dropped 13 percent compared with a year earlier and median home prices rose 0.2 percent to $224,500.

Of course, this contradicts data from the Case-Schiller index which shows home prices falling by several percentage points in July. It's hard to imagine this decline reversed in August.

Either way, it seems clear that real estate is coming down as it had to. Prices were simply too high.

The commerce department just reported the latest housing start information and its worse than analysts expectd. Starts of new homes fell by 2.6% to a seasonally adjusted annual rate of 1.331 million while authorized building permits fell by 5.9% to a seasonlly adjusted rate of 1.307 million. Bothnumbers are the lowest since 1995.

While month by month data is often volatile and should be taken with a grain of salt, housing starts have shown a decline over a period of time. For the last six months, annualized starts were 1.42 million down from 1.45 million in the five months through July.

In addition, the National Association of Home Builders reported yesterday that builders are the most pessimistic they have been in the last 22 years.

Here is some more info to chew on:

Nationwide, 15% of foreclosures are non-owner occupied houses. In these states, the number ranges anywhere between 25% and 32% (in Nevada).

It seems like this entire problem is really limited to speculation that occurred by a bunch of idiots in four states that was aided and abetted by Countrywide and a few other bubble-pushers who convinced provided the capital that they needed to make completely irrational bets.

I still believe that this so-called recession is an Angelo Mozilo-induced bump.

The number of foreclosures reached record numbers in the second quarter led by California, Florida, Nevada, and Arizona. According to data from a report issued by the Mortgage Bankers of Association, a record 0.65% of loans on one to four unit properties entered the foreclosure process in the second quarter of 2007. This represents the highest level in the surveys 55 year history.

The numbers were primarily driven by four states: California, Florida, Nevada, and Arizona. Outside of these four states, the foreclosure rate actually dropped across the country.

Doug Duncan, the chief economist of the Mortgage Bankers Association reported that:

“"Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings. Thirty-four states had decreases in their rates of new foreclosure and the increases were very modest in the states with increases, other than those four."

Duncan also cited the differences in performance between fixed rate and adjustable rate loans:

"While the seriously delinquent rate for prime fixed loans was essentially unchanged from the first quarter of the year to the second, and the rate actually fell for subprime fixed- rate loans, that rate increased 36 basis points for prime ARM loans and 227 basis points for subprime loans."

California, Florida, Nevada, and Arizona account for more than one third of the country’s sub-prime ARMs and foreclosure starts on those ARMS.

Additional data from the survey showed that 1.4% of all loans were somewhere in the foreclosure process during the second quarter, up from .99% a year ago.

I've noticed that when many people buy a home they make an assumption that their costs are now fixed. They no longer have to worry about rising rents since many of them have fixed mortgages. What they fail to realize is that there are other property costs that inexorably rise, like taxes, insurance, and maintenance.

Lately, after conversations with several neighbors and acquantices, I can see how these costs may push many into foreclosure. The threat may even be greater than adjustable rate morgages resetting since rising taxes hit everyone, regardless of their mortgage situation.

Despite the fact that property values have declined over the last two years, property taxes continue to increase. On my street, the average house and condo has seen its bill increase by between 30-35% per year. Since the average tax bill is between $4-5,000 that's an increase of between $1,200-$1,700 per year. On a monthly basis its over $100 per month just in increased taxes, none of which is tax deductible.

One woman I know purchased a new condo that had recently been renovated. When she purchased it, the listing sheet showed the old assessed price and the old taxes. After she moved in, the condo was reassessed and because it had been thoroughly renovated, her taxes doubled. She purchased the unit with one set of financial expectations and must now confront a very different set.

I know of another couple that purchased an expensive condo at the top of the market. They are now underwater and have an expensive mortgage to pay. On top of that they recently received an assessment for 15% of the value of the condo. They both have good jobs and are successful, but they aren't sure where they are going to get the money to pay the fee. To them, the once unthinkable thought of foreclosure has become a potential reality.

I've been a bit skeptical about the gloom and doom scenario painted the by the pundits regarding real estate. I think generally most people are going to be okay. But there are certainly pockets of real pain. The gravy train is over and its clear that in a sinking market, there is little to no margin for error.