Editore"s Note
Tilting at Windmills

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January 24, 2007
By: Kevin Drum

HOUSING BUBBLE UPDATE....The housing market in Southern California continues to deteriorate:

Default notices jumped 145% in the last three months of 2006, accelerating a trend that began in late 2005 as home sales started to cool. It was the largest number of default notices in any three-month period since 1998.

...."So far, this isn't alarming," said John Karevoll, chief analyst at DataQuick Information Systems, which compiled the data. But if default notices "keep going up at this rate, it could get nasty fast," he added.

I dunno. Foreclosures are now running at the same rate as the early 90s, when our last real estate bubble burst, and are increasing at a much faster rate. That seems fairly alarming to me. And if I had purchased a home in the past few years using some weird negative interest mortgage, or whatever it was the loan wizards were touting in 2005, I'd be very alarmed. I guess it depends on your point of view.

Kevin Drum 12:04 PM Permalink | Trackbacks | Comments (38)

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For more background on the weakness of housing market nationally, see:
"New Reports Highlight Housing Market Woes."

Posted by: AngryOne on January 24, 2007 at 12:16 PM | PERMALINK

Loan lizards, eh?

Posted by: Matt on January 24, 2007 at 12:17 PM | PERMALINK

Last year at this time, I was invited to a meeting of real-estate developers in southern Florida. Word amongst these people was to stop building houses and concentrate on business/office/retail development. Seems the housng market there was badly overhung, with an estimated 70% of homes bought on speculation by people who could not afford them. The industry was bracing for a glut of foreclosures and tens of thousands of non-saleable houses flooding the market.

Even if your So. Cal exoert doesn't see the trend as alarming, the industry certainly does.

Posted by: Derelict on January 24, 2007 at 12:19 PM | PERMALINK

Yet another reason why when we retired from service we settled in KC - the real estate market is sane and stable.

Posted by: Blue Girl, Red State (aka Global Citizen) on January 24, 2007 at 12:20 PM | PERMALINK

> And if I had purchased a home in the past few
> years using some weird negative interest mortgage,
> or whatever it was the loan wizards were touting
> in 2005, I'd be very alarmed.

So what _was_ Alan Greenspan trying to achieve with pumping those dubious instruments? Was he trying to _force_ a large-scale default? Even for a Bring Back the Gilded Age plan that seems a bit extreme...

Cranky

Posted by: Cranky Observer on January 24, 2007 at 12:25 PM | PERMALINK

The 10-year downward slide of default notices is, uh, interesting-- If you assume that the long-term percentage of defaulters is approximately constant, we're headed for a bloodbath.

Posted by: MattF on January 24, 2007 at 12:32 PM | PERMALINK

So, is the end of '07 still a good bet for the bottom of the market in So. Cal?

Posted by: enozinho on January 24, 2007 at 12:34 PM | PERMALINK

Eno! email keeps bouncing back. Would you email me at this address please? I need to ask you something...

Posted by: Blue Girl, Red State (aka Global Citizen) on January 24, 2007 at 12:43 PM | PERMALINK

Anyone who purchased a mortgage the last two or three years is better off defaulting on their loan rather than paying interest on a home that is no longer worth the amount of the loan taken to purchase it. I know someone who walked away from a $10,000 deposit on a new-build because the home is now not worth the original purchase price by about $30-50,,000. Although he tried to negotiate the purchase price down by $30K, the builder was only willing to discount about $15,000. No one wants to be stuck paying interest on a loan for an investment that is no longer worth the purchase price.

The bipartisan reduction in bankruptcy protection came just in time for mortgage lenders.

Posted by: Brojo on January 24, 2007 at 12:45 PM | PERMALINK

Just emailed you GC. I'm surprised you've been getting bounced.

Posted by: enozinho on January 24, 2007 at 12:58 PM | PERMALINK

I don't see anything in the linked article that says the foreclosure rate is as bad as during the early 1990's.
As for increases in the foreclosure rate, keep in mind that because the absolute number of foreclosures is quite low even a relatively small numerical increase translates into a big percentage increase.

Posted by: Peter on January 24, 2007 at 12:59 PM | PERMALINK

Anyone who purchased a mortgage the last two or three years is better off defaulting on their loan rather than paying interest on a home that is no longer worth the amount of the loan taken to purchase it.

Well, you would trash your credit rating by defaulting...

Posted by: Tom on January 24, 2007 at 1:01 PM | PERMALINK

One of the primary reasons for chapter 13 bankruptcy is to allow people threatened with forclosure to remain in their homes. We have gone out of our way the last few years to make bankruptcy difficult and expensive. Got to protect those gold plated credit card companies at all costs.

Posted by: Ron Byers on January 24, 2007 at 1:03 PM | PERMALINK

Just answered you Eno, and it hasn't bounced back yet...

Posted by: Blue Girl, Red State (aka Global Citizen) on January 24, 2007 at 1:04 PM | PERMALINK

Blue Girl--
Kansas City does have quite affordable housing, but that doesn't mean all of us made a smart choice in regards to mortgages.

The Mrs. and I have found ourselves in a pickle -- we had to move in 2005 because our first house was too small for our growing family, across the street from a meth dealer (which included the occassional gunshot), and the market was ripe for selling.

The new house was only $150K (F/B split, 3BR, 3BA, 1,800 sq. feet, backs up to woods ... lovely), but we took out a 3/27 ARM to initially afford it.

Granted, we were dumb enough to enter into it, so I'm not looking for sympathy. But thousands (if not tens of thousands) of folks are going to find themselves in the same bind we are: How to refinance our old mortgage, yet still afford monthly payments on the home of our dreams.

Lenders were so eager to capitalize on the boom, and buyers so eager to buy, that many of us bought into the dream without realizing that, at some point, you gotta wake up. Lenders will lose because they'll miss out on those tidy little interest payments, while the buyers will lose their homes.

It's gonna get ugly ...

Posted by: Unholy Moses on January 24, 2007 at 1:05 PM | PERMALINK

I find most of the reporting on housing prices to be very weak. I have yet to see any good analysis on the basic supply and demand issues. My sense is the fundamentals are not that bad because the demand for housing is increasing more than the housing stock. Not only is there population growth, but also smaller household size and more second homes. Additionally, the baby boomlet of the 80's and 90's is starting to enter the housing market.

I also think California is very different than many other places. Prices started off unusually low due to the housing recession in the 90s. My impression is there is more "creative" home loan financing than other parts of the country. Florida is also an exception due to the speculation. But this is complicated because Florida is one of the biggest second home market for Americans and people throughout the world.

I live in the Midwest and we are nicely stable here.

I understand why people want the housing market to cool down, but I don't understand why so many seem to be rooting for a complete meltdown.

Posted by: observer on January 24, 2007 at 1:11 PM | PERMALINK

We live across from some condos and I'm convinced that we have a couple of flippers who've gotten themselves into very big trouble. They're asking over $500K for a two-bedroom condo that's not very big. It's been on the market for at least two or three months with no takers and no reduction in price. I really don't see how they're going to be able to make their money back, much less make a profit.

Posted by: Mnemosyne on January 24, 2007 at 1:15 PM | PERMALINK

I am a mortgage loan officer. Negative amortization loans are not junk but they are not for everyone. For example: $100,000 @ 6.5% (30 year fixed rate) = $632 per month. A negative am loan could make the payment as low as $253 per month. The question is what are the opportunity costs of making the full payment? The borrower always has the option of paying interest only or principle and interest as well. If they pay the minimum of $253 they MUST invest the diference of $379 into an interest bearing account or some other investment. The theory is that this consistent monthly investment can offset the negative am accumulation and even surpass the future balance of the mortgage well before the full term of the loan. In addition, the subject property should appreciate at a rate equal to or higher than the negative amortization can accumulate. Also, these loans are usually refinanced within 3 to 5 years. When that happens, the negative amortization that has accumulated is deferred mortgage interest which is tax deductible. When this deferred interest is paid off with the new loan, borrwers normally receive a massive tax return in that year. That return can then be used for further investment or to pay down the balance of their new mortage. And since these loan payments are based upon the outstanding balance, monthly payment amounts can potentially be offset again. The problem is that loan officers sometimes don't know how these programs work or how best to use them. Borrowers are also lead to believe the minimum payment is a principle and interst payment and they spend the savings rather than invest it.

Posted by: plane on January 24, 2007 at 1:15 PM | PERMALINK

Oh I agree, Unholy Moses. It is going to get really ugly in short order. Back in '04 we were a day away from closing on a lovely little ranch in Waldo, downsizing after the kids were raised, doing the opposite of what you did. But we backed out a day before because I had misgivings about an ARM, especially with plans for both of us to enter doctoral programs. We stayed put on hospital hill, sold to Urban Couer Development, rented, and just bought a unit in a secure midtown building, with a more substantial down payment and a fixed-rate loan.

Posted by: Blue Girl, Red State (aka Global Citizen) on January 24, 2007 at 1:19 PM | PERMALINK

I am a mortgage loan officer.
Then you should know that it is principal, not principle, unless you're talking about ethics.

Posted by: Nemo on January 24, 2007 at 1:31 PM | PERMALINK

yes....principal not principle...my mistake....thank you.

Posted by: plane on January 24, 2007 at 1:39 PM | PERMALINK

would prefer to see the times graphic as a percentage of mortgages, rather than a total. Population has surged in Southern California since the mid 1990s, and I am guessing the number of mortgages has surged even more. As a percentage, the number might not be so shocking.

Posted by: exhuming mccarthy on January 24, 2007 at 1:47 PM | PERMALINK

The bigger problem is that the financial knowledge of most people, never mind basic reading and math skills, is so low that they have no idea what they are getting into when then sign up for an exotic mortgage.

Most people I know couldn't calculate a stream of interest payments if it hit them right between the eyes and have no idea what the terms Net Present Value (NPV), opportunity cost, or amortization mean.

The real issue is that fact that most people have:

a) no idea how the mortgage they just signed really works
b) and are making such a big stretch financially to get into a house that they have no margin for error

It's more of an educational issue than anything else, which which is why Personal Finance 101 should be a mandatory class in order to graduate high school.

Posted by: mfw13 on January 24, 2007 at 1:47 PM | PERMALINK

I blame it on the gays.

And the Mexicans.

Posted by: Disputo on January 24, 2007 at 1:55 PM | PERMALINK

Blue Girl--
We ssoooo need to do lunch some time. Seriously ... I'll send you an e-mail.

Posted by: Unholy Moses on January 24, 2007 at 2:47 PM | PERMALINK

think you're right on, mfw13... In 2005 I sold a condo after 2 years of unsuccessful attempts. It was part of a massive, old, decaying complex and had lost about 20% of its value in the 2 years it sat unsold. All I got from the HOA was an increasing torrent of costly special assessments.

The person who bought it snapped up my unit and 10 others scattered thruout the same complex, putting down just 5% cash and leveraging the rest with Int-Only or "option ARM" loans. I still haven't the foggiest idea why she did that; it made about as much sense as buying Enron on margin during its collapse.

When I rolled the proceeds into a single-family home in a better area, I had to spend hours on the phone with mortgage brokers patiently explaining that I wanted a straight-up 30-year fixed note, thanks very much--no option arms or interest-only or any of the other 31 flavors. They are slick...and relentless. I can see why so many fall for it, if they do not understand mortgages and basic finance.

Posted by: Lionel Hutz, attorney-at-law on January 24, 2007 at 2:51 PM | PERMALINK

Florida is filling wetlands and building multi-million dollar homes almost as fast as ever. I am one with the working crowd, where nobody I know can afford to live in the doghouse of one of these waterfront mansions. These are the same homes that hurricanes love to gut because the sand dunes were dug up for landscaping, these are the same homes that the state is trying to cut insurance rates for, these are the same homes that No'therners are buying regardless of the economy elsewhere in the nation. I live in my mom's garage, but the housing economy in FL is still go, by gum.

Posted by: Doghouse for Rent on January 24, 2007 at 2:55 PM | PERMALINK

I live in the Midwest and we are nicely stable here.

You must live in a different Midwest from the rest of us:

"The Midwest had 204,656 foreclosure filings in 2006, [which is] up more than 70 percent from 120,298 filings in 2005."
Posted by: Disputo on January 24, 2007 at 3:29 PM | PERMALINK
if I had purchased a home in the past few years using some weird negative interest mortgage, or whatever it was the loan wizards were touting in 2005, I'd be very alarmed.

Uh, why? A negative interest mortgage would be cool: pay nothing, and your debt decreases on its own.

A negative amortization mortgage, OTOH...

Posted by: cmdicely on January 24, 2007 at 4:13 PM | PERMALINK
Anyone who purchased a mortgage the last two or three years is better off defaulting on their loan rather than paying interest on a home that is no longer worth the amount of the loan taken to purchase it.

Uh, that depends how much the house is worth to you other than as a potentially resalable asset. And, of course, how much you like your credit rating.

I'm actually in that position right now, and not worried too much about it; one of the reasons we financed based on the expectation of not flipping the house anytime soon is we expected that the real estate market was near a local peak, but had other reasons to wanting to own a home at the time we bought.

Yeah, so right now the house is probably worth less on the market than we owe on it. But its not a particularly big deal; we're not planning to sell it any time soon, or counting on milking money out of it.

Posted by: cmdicely on January 24, 2007 at 4:20 PM | PERMALINK

cmdicely: A negative interest mortgage would be cool

It was invented by Art Laffer.

Posted by: alex on January 24, 2007 at 4:41 PM | PERMALINK

Yet prices have yet to fall in Los Angeles. Unlike San Diego, LA has not yet had a single month of year-on-year decline. The latest figures showed the median sales price in LA in December '06 was 6.5% higher than December '05. Whether the housing bubble is bursting or simply cooling off, its sure taking a long time to see a real drop in price.

Posted by: buckeye on January 24, 2007 at 5:34 PM | PERMALINK

"So what _was_ Alan Greenspan trying to achieve with pumping those dubious instruments? Was he trying to _force_ a large-scale default?"

No. I think he was trying to avert a deeper recession by hiding inflation in the housing market--make people wealthier by letting them own bigger homes and use them as ATMs to continue living beyond their means and supporting the consumer economy. But now that housing is coming down (and possibly crashing--look at the slope on that graph!) we're going to be in trouble--unless they can hide that inflation somewhere else or pull another boom out of their butts. I don't know what his long-term thinking was though. It just seems like a delaying tactic to me.

Posted by: Bolo on January 24, 2007 at 6:13 PM | PERMALINK

the subject property should appreciate at a rate equal to or higher than the negative amortization can accumulate

Which is great. Until the home doesn't appreciate. Then negative equity will accumulate.

Posted by: oc_fliptrack on January 24, 2007 at 6:52 PM | PERMALINK

It isn't just the ARMs, negative Am, and all the other exotic loans, but the complete lack of any equity in properties, that threatens to compound the bursting of the bubble. Virtually all of the loan underwriting disciplines, most still in effect during the '80s and early '90s are long gone. Incomes haven't been verified, anything goes home appraisals, and outright fraud are setting the stage for a lot of pain.

For those interested in coming attractions, search the Denver Post archives for stories by David Olinger. These hair raising stories, (many front page above the fold on Sundays) document highly organized fraud rings buying homes, and walking away with hundreds of thousands in cash from each settlement. One convict bought 5 500K homes, each for close to 750K. Two were purchased while he was in prison (brings new meaning to gated community!).

Check the statistics on "first payment missed" mortgages.

The only way liquidity will come to many markets is via "short sales" where lenders agree to settle for less than the outstanding debt.

The final touch on all of this is that the "anything goes" lending practices are being shut down, which means the marginal buyers aren't going to qualify for anything. Predictions: a lot of folks are going to lose everything, and a lot of folks involved in the home sale/finance/appraisal businesses are looking at some quality legal time ahead, be it civil and/or criminal!

Posted by: RickG on January 24, 2007 at 9:07 PM | PERMALINK

This is the most informative comment thread in Washintonmonthly history, ever.

A++++++++. Will come back to this site and read again. Thanks!!!!

Posted by: a on January 24, 2007 at 10:13 PM | PERMALINK

http://themessthatgreenspanmade.blogspot.com/

As for the distortions caused by 'hiding inflation in the housing market' see the chart at:

http://www.shadowstats.com/cgi-bin/sgs/

Which compares the way the CPI used to be calculated vs the 'smoke and mirrors' methodology currently employed.

Posted by: MsNThrope on January 25, 2007 at 8:49 AM | PERMALINK

The rise in the number of foreclosures is another sign of the buoyant American economy. Since President Bush has siezed control from the Democraps, the number of people who are fit to own their own houses has ballooned, productivity is up, industry is booming, trade with the rest of the world has expanded exponentially, salaries of the real wealth creators - the CEOs - have mushroomed, and the American economy is the wonder of the world. That's why the Iraqis are so desperate to embrace the American dream and are unwilling to see Old Glory hauled down from Baghdad; they value the gift of freedom brought by Mr Bush and cannot understand the treasonous mewling of the cut and run self hating liberal Americans.

Posted by: Al n Egbert on January 25, 2007 at 11:40 AM | PERMALINK




 

 

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