San Diego Housing Bubble News and Analysis

City Attorney Mike Aguirre has filed a lawsuit against Bank of America and its new subsidiary Countrywide. The central complaint of the suit appears to be that Countrywide engaged in fraudulent practices by putting people into high-risk mortgages and that Countrywide, as Aguirre put it in a press statement, "originated loans with little or no regard for the borrowers’ financial ability to afford the loans or to sustain homeownership." The suit is intended to prevent Countrywide (now Bank of America) from initiating foreclosure on any homeowner who has a high-risk mortgage and who actually occupies the home.

The lawsuit may be well-intentioned, but it's unlikely to help San Diego and there's a fairly good chance that it will make things worse.

It's also yet another bailout attempt.

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Earlier this year I wrote about Joseph Galascione, a San Diego real estate broker who does some serious digging into the local mortgage pool to try to ascertain the prevalence of future foreclosures. Below are some conclusions from Galascione's recently released study of mortgages due to reset in the third quarter of this year. The study, incidentally, is freely available at the website of Galascione's firm, ERA® Metro Realty.

To review the premise, a resetting loan is considered to be at "high risk for foreclosure" if the borrower made a down payment of less than 20 percent and the monthly payment is expected to increase by at least $500 upon reset.

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I will begin this blog entry with an allegorical play in three acts -- starring you as the protagonist!

Act I

Your deadbeat brother-in-law shows up at your door and explains that his business, Joe's Exclusively Deep-Fried Seafood and Mortgage Hovel, hasn't been doing so well. You aren't surprised, given that his company is extremely indebted and has been mired in accounting scandals for years.

As a result of his troubles, he has gotten himself into so much debt that he has no chance of paying it off. He asks you and your spouse for a loan.

Act II

Your spouse, sympathetic of course, suggests that you lend Deadbeat Brother-In-Law (DBIL, for the remainder of the play) some money. You suggest to your spouse (Spouse) that since DBIL is unable to pay his current debts, loading him up with yet more debt isn't really a good solution. You also note the unlikelihood of being paid back in such a scenario.

Act III

Without asking you, Spouse dips into the joint checking account and lends DBIL the money anyway. Spouse also makes a big investment in the stock of DBIL's insolvent Mortgage and Deep-Fried Seafood business. But Spouse tells you not to worry: it's in everyone's best interest, and anyway, DBIL wasn't actually having any financial problems in the first place! Also, the stock pays out its dividend in fried clams!

Fin

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Fannie Mae and Freddie Mac, collectively known as the government-sponsored enterprises or GSEs, are huge government-backed yet privately owned companies whose main purpose is to buy mortgages. They are also, according to a recent Fed governor among others, insolvent -- that's "broke" to you and me.

This story is all over the news so I'm not going to rehash it -- here's a NY Times piece for those who want more. I just wanted to note that this is a huge crossroads for the housing and mortgage finance bailout efforts about which I've written several times on these pages.

A failure of the GSEs would be huge. They either own or guarantee over $5 trillion worth of mortgages, accounting for nearly half the mortgage debt in the country. And in the days of dwindling private mortgage issuance, the GSEs provide a huge chunk of the lending that takes place. Were they to stop buying mortgages, as the Times article puts it, it "could bring much of the American housing economy to a standstill." Many think that the government would step in and take over the companies before that was allowed to happen.

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We haven't paid much attention to mortgage rates of late, a fact that is understandable given that the real action in the mortgage market has involved defaults on high-risk loans rather than incremental rate changes. But let's check back in on the topic.

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I'll just say up front that this is one of those lame blog posts that links to another person's blog post and then appends a little extra commentary at the end, which is exactly the type of blog post that one might expect on a Friday afternoon in late June.

The linked-to blog post in question comes from local real estate luminary Jim "The Realtor" Klinge, and it offers up a host of data comparing subprime and Alt-A mortgages in California. The difference, to put it simply, is that while "subprime" describes mortgages given to borrowers with low credit scores, "Alt-A" describes high-risk mortgages granted to people with better credit scores.

I've long argued that subprime loans weren't the only ones at risk of default, and Jim's data (sourced from the New York Fed) shows that this is true. (For instance, 23.5 percent of Alt-A loans have late payments over the past two years.) But what interests me most about Jim's post is that it suggests that much of the Alt-A pain may still be pretty far in the future.

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Last week I noted that May had been another good month, as these things go, for home sales. But there is more to the story, as you might expect. Just as there has been a huge disparity in price declines between different areas of San Diego, the recent surge in sales activity has been every bit as uneven.

Using the zip code-level sales data kindly offered up by our pals at the Union-Tribune, I collected information on all zip codes that had more than 20 sales either in May 2007 or May 2008. I put the resulting list in order based on the year-over-year change in sales activity, with the biggest sales increase at the top. Then I took some averages for the top 20 zip codes (those with the biggest increases) and the bottom 20 (those with the biggest decreases). The two lists are here for anyone who wants more detail.

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As promised, here is a followup chart to Friday's article on how long it's been since home prices were at current levels.

This chart once again uses the Case-Shiller index to track San Diego home prices but adjusts those prices for the effects of inflation as measured by the Consumer Price Index. By taking account of inflation, we can observe how expensive housing is (and was) not just in dollar terms, but compared to everything else.

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Earlier this week we examined how much home prices have fallen in percentage terms. Let's now look at things a different way: how far have prices fallen in terms of time? In other words, how long ago was it that prices were last at their current levels?

The accompanying chart attempts to answer this question using the three tiers of the Case-Shiller home price index in addition to the overall index for San Diego. To find the appropriate months, I just took the March value of each index (the most recent available, unfortunately) and noted what prior month was closest to the March figure.

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I recently wrote that San Diego's more upscale housing sub-markets aren't out of the woods just yet. One of my arguments concerned the behavior of the region's more creditworthy borrowers: it's not that they stayed away from risky loans during the boom, just that the types of loans they tended to get took longer to reset than the subprime loans that are currently blowing up all over the county's less expensive neighborhoods.

For a visual I point you to the mortgage reset chart hosted on the always-informative Calculated Risk economics blog. While I suspect that San Diego was a little ahead of the nationwide figures represented on the chart, the fact remains that the types of risky loans often taken out by the well-heeled have barely begun to reset. (This March article offers a more in-depth treatment of the afore-linked chart and the topic of Option ARMs, mortgages that can cause particular trouble upon recast given their negative-amortization payment schemes).

Now a bit of evidence for higher-end mortgage distress is starting to trickle in.

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Earlier this month, we saw that San Diego employment declined on a year-over-year basis in March -- something that hadn't happened during the last recession (nor for 15 years, according to the U-T).

The accompanying graph shows how many jobs were added year-over-year by the top four sectors for employment growth how many were lost by the bottom four sectors. Over each bar, I have noted the average hourly wage within that sector (for some reason, the BLS site does not report government sector wages -- perhaps they consider that a little too personal).

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When I wrote the first installment of BailoutWatch this January, I intended to post occasional updates to keep readers apprised of the ongoing housing bailout efforts. Well, the truth is that I haven't even been able to keep up.

That column wasn't even the first on the subject -- it had followed hot on the heels of this one. Since the January post, the bailout attempts have been coming fast and furious. They've also been getting progressively more irresponsible and transparent in their attempts to reward the very institutions that enabled the housing bubble in the first place.

Let's go through a selection of recent bailout-related developments.

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San Diego employment has just decreased on a year-over-year basis, falling by 1,700 jobs between March 2007 and March 2008.

That is a very small drop in the grand scheme of things, representing a decline of just .1 percent. But it's the first time in a long time that employment has turned negative at all. The data I pulled from the Employment Development Department website goes back to the year 2000, and it shows that even during the recession and slowdown that took place at the beginning of this decade, the weakest month showed a year-over-year increase of 2,300 jobs.

So even though we are not in an officially recognized recession, San Diego's employment situation is worse than it ever got in the aftermath of the 2001 recession.

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The latest Quarterly County Employment and Wages (QCEW) report came out this week. You may recall from a prior article on the topic that this employment survey is quite a bit more accurate than the monthly employment estimates, but that it is typically ignored because it lags by six months.

You may also recall that I advanced the theory earlier this year that the statistical adjustments employed by the agencies that put out these numbers were causing job growth to be overstated. Shortly after I wrote that article, this thesis was vindicated with the arrival of revised estimates showing that San Diego employment growth had indeed been much weaker than initially reported.

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Our favorite housing cheerleader, Chuck Smiar, is back in the news again today with another attempt to scare real estate fence sitters into action. After issuing a warning to hesitating homebuyers that they were "in for a surprise" back in December, Chuck had this to say in a North County Times piece earlier today:

"There's a lot of buyers sitting on the fence waiting for the bottom. And I think if they don't jump in soon, they're going to be sorry."

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