America's economic future, revealed

As home prices fall throughout the country, many borrowers facing higher monthly mortgage payments (thanks to a reset) will not be able to refinance into another loan, and, thus, another low-interest, affordable, introductory rate. That's because banks won't refinance your loan if your home's value has fallen to or below the amount you owe on your current mortgage.

So if those borrowers cannot make the higher, reset payment... foreclosure, here they come. That's why the number of resets correlates with the number of foreclosures.

The chart shows that the much-hyped "subprime" mortgage problem all but ends this year. Look for analysts to call a bottom to the real estate market when the number of subprime foreclosures falls later this year. Real estate salespeople will urge everyone to jump in and buy since, they will say, the worst will be over.

They will be wrong. The chart shows that resets among prime borrowers will surge next spring, glutting the market in more expensive, desirable communities and forcing down prices there. Then, the pain builds in 2010, leading to a peak in foreclosures in 2011.

Remember, with big mortgage lenders like Countrywide and IndyMac out of the picture, and the Fed restricting the types of mortgages that lenders can write, the housing market will not have the massive amount of easy money available to it that fueled the recent bubble in prices. Even after the damage is done, there will not be enough mortgage money available in the market to reinflate home prices.

So when we do hit bottom, we're going to stay there for a while.

Clearly, no one ought to be expecting the housing market to help the economy over the next several years. If there is to be any significant housing recovery, it will need to be helped by getting would-be home buyers money from other sources, such as wage increases or increased savings. You know, the old-fashioned way that people got money to buy things.

I also suspect that Republicans will use the reduction in subprime mortgages as the election approaches as "proof" of an impending economy turnaround as they appeal for votes. Then, whichever party loses the election will use the 2010 meltdown to blame the winning party for botching the economy. But what happens then to mortgages will not be the new administration's fault. That egg already has been laid, even if it will not hatch for another two years.

My kids recently have discovered the "Back to the Future" movies. The key plot point in the second film is a sports almanac, which is taken back in time so its owner can make a fortune betting the winners.

Consider this chart your version of Biff Tannen's sports almanac. Bet/invest accordingly.

Robert Niles also can be found at http://www.themeparkinsider.com