On Wednesday night president Barack Obama told the American public that the economy is recovering and that things are better than they were seven months ago when he assumed office.

One of the statements he made to back up his claim was that home sales were increasing.

Yes it is true that home sales are on the rise but according to the National Association of Realtors Pending Home Sales Index the increases are being driven by two factors:-lower priced homes and an $8,000 federal tax credit that will expire on November 30th.

Home prices across the nation have dropped steeply partly because of the bursting of the housing bubble but also in large measure due to foreclosures (which exert downward pressure on home prices)  that as of August were up 18% from the year ago period and are at near record levels.

The NAR estimates that 2 million people will take advantage of the tax credit resulting in an additional 350,000 sales that wouldn’t have taken place without the credit.  That sounds good but according to calculatedrisk.blog.com taxpayers paid $45,000 per additional house sold when you factor in the total of the expected credits the government will issue.  Plus since they were for lower priced homes the impact on the economy will be minimal.

So even though home sales are increasing they are largely being driven by factors other than an improving economy as Obama claims.

The president is either ignoring or unaware of a ticking time bomb that will only put further pressure on the economy and home sales, interest -only loans.

According to an analysis of interest-only loans done for the New York Times there are 2.8 million active loans worth $908 billion.

A little more than half of those loans will reset within the next two years and provide a severe test for both the housing market and the economy as the interest-only provision expires and principal is added to payments

Estimates are that depending on the size and term of the loans the resets will increase mortgage payments anywhere from 20 to 75 percent.

That will push many homeowners to the brink as home prices have fallen dramatically during the recession and incomes have stagnated at best leaving many borrowers owing more than the house is worth.

As Yogi Berra said “It’s déjà vu all over again.”

The clock is ticking away on this bomb and growing a little louder every day.

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