I realize some will interpret this as me being a wise guy, but as far as I’m concerned this is all according to the script. It’s 1991 all over again, only worse. The only thing that surprises me was how long they were able to hold out. By stalling for so long they have only pressurized the situation. That’s why it now appears to be unwinding so rapidly.
I think the pace of sub-prime’s collapse will increase in the next few weeks, and the manner in which the survivors underwrite their loans will swing like a pendulum to the other extreme. We will end up going back to 10% downpayments and higher interest rates because these lenders have to undewrite the additional risks that go with a declining market and reduced investor participation.
Think about what this is going to do to the general market psychology, and hence to both volumes and pricing. It will become the corrolary to irrational exuberance.
