One important thing I neglected to mention concerns lower rates as well. Not only will lower rates tend to push the eye of the storm back out to 5-year recasts, it will also drastically reduce payment shocks. With 12-month MTA around 1.4% today, a borrower could see his mortgage recast to a rate of, say, 5%, as opposed to around 9% when the chart was created. Still an increase over previous payments, but perhaps a tempering of the damage.

In any event:
1. The chart needs updating to paint a better present day picture.
2. Beware option ARMs are a small part of the mortgage and housing market (although a larger part of the “defaulted” market) so basing housing price movements off of OA trends may not paint a relevant picture.

Indeed, I am sure that adds to the “fog” surrounding anyone’s ability to time an entry into the whole real estate investment sector. In the end though – if you can purchase with a long term perspective, I am one of those who believe we are in the process of over correcting to the downside now. Just as many were wrong to think RE could go up forever, I think there is an overly cautious perspective to the downside. No matter when the last option arm actually resets – if you look at that chart there will be a massive (and fairly abrupt) interruption to the supply side of housing.

Unless the doomsayers are right, it will most likely be timed with an improving economy. Even if we are in an L shaped recovery – there should be some stability at that point. Those still with jobs should no longer be living in daily fear that they will lose them. That, couple with the fact CAP rates are already now attractive to RE investors should lead to increased demand.

I am not advocating one buy blindly – but I do believe for someone willing to do their research and hold long (more than 5 years)- certain markets are beginning to offer attractive opportunity in real estate that may not present itself again (at least in my lifetime).

I just wanted to mention that the fully indexed rate is another thing to consider, too. The chart was created back in 2007 I believe, when index rates were much higher than today. Many option ARMs are indexed to 12 month MTA. With index rates and fully indexed rates much lower today, that would tend to push recasts outward toward the 5 year limit. It would be interesting to see just how much of that “eye of the storm” has returned with lower rates.

As for real estate prices, they are very localized. While housing futures forecast a roughly 26% decline in prices for 2009, that can vary sharply for costal cities, rural areas, and those most affected by the bubble runup. As an aside, I think “getting back to averages”, as some people argue, will not be enough. Most bubbles tend to overcorrect on the way back down.

The option arm was a complicated product and almost always contained a reset based not only on time but also the % above the original loan value. As the borrower deferred interest and it added on to the principle balance they could trigger a reset if the principle reached certain parameters. Lenders set their automatic resets as low as 110% of the original balance. SOOOO…a very important factor was/is the full indexed interest rate (”real interest”) they were paying.

Many people were so focused on the deferred interest payment – they did not realize they were paying extremely high “real interest”. Lenders paid big commissions to brokers in order to provide incentive for them to “sell” the highest rates possible. The net result is that many of these option arms that were set up as 5 year loans ultimately “recast” in about 3 or 4 due to the fact they deferred so much interest that they exceeded the original balance threshold.

That being said – basically my opinion is that this chart is a bit misleading. Many of the option arms ORIGINALLY schedule to reset in 2010 and 2011 are actually resetting now. Meaning – there is no “eye of the storm” but more likely we will see an elevated level of foreclosures, similar to what we are currently experiencing, through the first half of 2010. But based on how the option arm works, I expect most of them will be through the system by the end of 2010. At which point there will be a dramatic drop.

So is it safe to buy? Depends on your location – but in my area I believe it is. I just bought a 1630 sq ft house in Gilbert AZ for $119,000. There were four competing bids on it. It is 4 years old in a 3 time award winning master planned community. That is $73/sq ft. How much lower can it go before the sheer cost of materials provides a natural bottom? Obviously I do not think much lower – but that is the question. However – if you think inflation is a possibility down the road – you have to acknowledge that inflation in raw materials will lead to a rise in the cost of housing. If you can’t build it for $73/sq ft – then it will not remain at that price forever.

Just my two cents of course.

The option arm was a complicated product and almost always contained a reset based not only on time but also the % above the original loan value. As the borrower deferred interest and it added on to the principle balance they could trigger a reset if the principle reached certain parameters. Lenders set their automatic resets as low as 110% of the original balance. SOOOO…a very important factor was/is the full indexed interest rate (”real interest”) they were paying.

Many people were so focused on the deferred interest payment – they did not realize they were paying extremely high “real interest”. Lenders paid big commissions to brokers in order to provide incentive for them to “sell” the highest rates possible. The net result is that many of these option arms that were set up as 5 year loans ultimately “recast” in about 3 or 4 due to the fact they deferred so much interest that they exceeded the original balance threshold.

That being said – basically my opinion is that this chart is a bit misleading. Many of the option arms ORIGINALLY schedule to reset in 2010 and 2011 are actually resetting now. Meaning – there is no “eye of the storm” but more