Kass: The Simple Math of Subprime's Slide

Credit Suisse(CS Quote) projects that about $500 billion of mortgages will reset this year (60% of these are subprime loans). According to First American CoreLogic's recent study, "Mortgage Payment Reset: The Issue and the Impact," resets will produce 1.1 million additional foreclosures (and more than $100 billion of losses) over the next six years. That's nearly another 185,000 homes per year coming into supply, on top of the nearly 1 million homes foreclosed on in 2006-07!

What is particularly worrisome to me is that home prices remain inflated relative to household incomes (Merrill's Rosenberg did a good analysis on this topic last week; Today's home prices stand at the highest multiple to disposable incomes in history). We have still not resolved the high price of homes by either prices moving lower or incomes moving higher. Affordability (or the lack of) will provide another headwind to the housing recovery.

Inventories: Another Headwind of Supply

There remains too much land and finished product inventory owned by the homebuilders. The publicly held companies are positioned to weather the storm, but the more levered private companies will be a continued liquidator of land and homes. Indeed, new home-price incentives look to be on the ascent, another headwind to supply.

With housing activity dropping and resets rising, consumer confidence should dive in the months ahead, construction employment will plummet and a cessation of mortgage equity withdrawals will further grease an already weakening slide in personal consumption expenditures.