by Calculated Risk on 11/16/2007 03:22:00 PM

Note: Danielle DiMartino was warning about a housing bubble a couple of years ago when she worked for the Dallas Morning News. She now works for the Federal Reserve Bank of Dallas.

Here is DiMartino's current Economic Letter (with John V. Duca): The Rise and Fall of Subprime Mortgages (hat tip Kett82)

Here is the Dallas Fed reset chart. This shows most of the reset problems for subprime are still ahead of us.

Note that this chart doesn't include the second wave of resets for Option Arms coming around 2010. See here for a longer term chart.

Here is their conclusion:

The rise and fall of nonprime mortgages has taken us into largely uncharted territory. Past behavior, however, suggests that housing markets' adjustment to more realistic lending standards is likely to be prolonged.

One manifestation of the slow downward adjustment of home prices and construction activity is the mounting level of unsold homes. The muted outlook for home-price appreciation, coupled with the resetting of many nonprime interest rates, suggests foreclosures will increase for some time.

The sharp reversal of trends in home-price appreciation will also dampen consumer spending growth, an effect that may worsen if the pullback in mortgage availability limits people's ability to borrow against their homes.

Although recent financial market turmoil will likely add to the housing slowdown, there are mitigating factors.

First, the effect of slower home-price gains on consumer spending is likely to be drawn out, giving monetary policy time to adjust if necessary.

Second, the Federal Reserve has been successful in slowing core inflation while maintaining economic growth. This gives policymakers inflation-fighting credibility, which enables them to coax down market interest rates should the economy need stimulus.

Third, even if the tightening of mortgage credit standards undesirably slows aggregate demand, monetary policy could still, if need be, help offset the overall effect by stimulating the economy via lower interest rates. This would bolster net exports and business investment and help cushion the impact of higher risk premiums on the costs of financing for firms and households.