San Diego Housing Bubble News and Analysis

Who's going to buy all of those foreclosed homes, even at 25% off? The $600K house is now $450K. Here in SD, that will still be out of reach of many first time homebuyers, assuming we return to the standard of 20% down, fixed rate mortgages. Maybe there enough first-time buyers renting right now with $100K ready to spend on a down payment/closing costs, I don't know. Or maybe everyone is just going to use option ARMs from here on out. Perhaps if incomes go up between now and the time this plays out, a 25% maximum drop is possible. Of course if incomes are rising, we will have inflation which means interest rates are likely to rise as well which means payments will go up which means... Well, you get the idea. Also, if interest rates go up, are people going to want to use their $100K as a down payment when they could just buy CDs and collect interest? Certainly no one is going to be counting on home appreciation for a while, the group psychology will have been spoiled by the bubble casualty stories just now beginning to hit the news.

Who knows? It's interesting that the question is now not, "are home prices going to drop?" but rather "how bad is this going to get?"

Concho,
You are a bit off the mark. A depression has to be on a national level not locally. My example addresses the issue on a macro level nationally. Please try ot stay on point.

SDR

The total mortgage debt in the US is $9.1 trillion (2005).

10% of all mortgages will reset in 2007.
"The Federal Reserve estimates that 20% of outstanding mortgages have variable rates. Half of those are set to change interest rates this year, Fed Chairman Ben Bernanke told lawmakers earlier this year."

$9.1 trillion x 6.25% = $ 568 billion in losses, assuming you can sell the house at a 25% average loss. In the last downturn, just one bank in LA had 560 houses on its books that it could not sell, because there were not enough buyers. My friend was a realtor in LA at the time, and she managed those properties and rented them out. Then over time, as the market picked up, they started selling small groups of those homes. These were nice homes, in Laguna Niguel, in Pacific Palisades, on the beach. There were no buyers at the bottom of the market. Some homes were just boarded up until the market turned around. So we can't assume the bank will get back 75%. They may end up holding the house for *years*.

Also, let's add the unearned interest income that is on the books of the "stupid banks", the ones that did not offload the risk to the MBS (mortgage backed securities) market. Washington Mutual has, by my estimates, $ 1 billion of unearned interest income that is will not get, not ever get in my opinion. When they take that $ 1billion or greater loss in the next few years, I shudder to think of the fallout. Think back to the 1980s S&L bailout and multiply by 10 or more.

However, the biggest problem from the housing bust will be the rising unemployment as we lose 1/3 of all jobs created since 2000 (since they are real estate related), the ripple effect to corporations and the stock market. Think about Home Depot, Shaw Carpet, Pacific Kitchen Sales, all those lumber yards, copper and other commodities, stock market, credit card companies... they are all going to take big losses.

The rising unemployment rate will put extra burden on the government for social assistance at a time their own revenue from property taxes and sales taxes is shrinking. The Voice of San Diego just had an Opinion piece this morning about Chula Vista's unreasonable promises, based on a forecast of ever rising property taxes flowing to their coffers. Even Jerry Sanders needs property taxes for SD to grow at 2% annually to meet his stripped down budget. How will San Diego handle 10% annual declines to its budget?

Oh, and another stock market collape, at it loses 30% of its value by next summer, will wipe out even more savings.

What I don't know is the effect of our reducing housing prices on foreigners' willingness to keep lending us money. If they stop, how will that affect our interest rates?

Did I leave anything out?

sdr, nice thread. I'd like to know your opinion on something. How long do you think we Americans can consume more than we produce, why can't we be more productive, and how will our lives change when we are forced to create that balance?

I'm not suggesting we're headed for a depression (I know far too little to suggest such a thing), but I do think you're overlooking the ancilliary effects.

Such widespread foreclosure would certainly put extreme downward pressure on home prices across the market. This puts a serious dent in the housing ATM which reduces non-housing related spending.

New home starts would continue to decline (all this inventory is now available), so there would be significant job losses in all housing related fields. Higher unemployment, further reduced spending in all areas.

Reduced spending causes job loss in non-housing related fields, further reduced spending.

It's never just the one isolated thing, rather cause and effect just as things always have been.

Okay, strike SD from the comments, but the situation here is similar to the one in LA, SF, Seattle, NYC, and probably a few other places that combined, are bound to have a big effect on the US economy. I'm still not convinced that buyers are going to be lining up in droves to buy those properties at 25% off. Maybe in Austin, maybe in Charlotte. Certainly, the loss of the interest from the aggregate of the loans is not that big, as you point out. But what about the loss to the population that has seen their "savings" disappear overnight? What about the lost jobs in construction, mortgage lending, real estate, etc... I don't know that we'll see a depression, but I think we may see a realignment of national priorities towards more productive activities than building McMansions in Amarillo...

CONCHO, you are right. Think about all the people counting on their home to fund their kids' college tuition and their own retirement. This is just anecdotal, but I've had so many people tell me they will sell their home when they retire, and I try to plant the seed that that retirement portfolio is shrinking (and then they change the subject).

I think we can all agree that we are in for some challenging times as a nation. The complexities of analyzing and forecasting the economy are too numerous and dynamic to ever accurately project. I just like to take a top line simple look every once in a while to test what I hear.

Another negative: a lot of people bought houses out in the boonies and were willing to do the commute because their houses were going up-up-up in value. No one will want these houses in the boonies now. The pool of buyers for these houses (and there have been a lot of them built in the last few years all over the country) will be close to non-existant. The banks will not be able to sell them at any price since the market will be illiquid. Defaults will cascade since no one who needs to sell will be able to. In the better locations, houses will still sell, but at much reduced prices.

I think that the real estate downturn won't affect consumer spending enough to cause a depression. Americans have an amazing ability to move on. People will let their houses go before they cut back on their steak dinners and ice cream. Eventually, they'll say f--- it, I'm not going to let the house own me. They'll walk away and move on.

Actually it turns out that mass foreclosures might be good for the economy because people will put their incomes to consumption rather that debt payments. That is preferable to owners tightening their belts to make mortgage payments.

Holding on to real estate albatrosses is what caused 15 years of stagnation in Japan. The beauty of the American economy is the ability to cut the losses and let better owners manage the looser assets/properties.

I see a 50% drop in real estate prices from the peak but I don't foresee a protracted downturn in the general economy.

Do you think mortgage defaults will cause a depression ?

YES

To think otherwise is naive. almost 10 trillion in mortgages ? How many of those have to go sour before you see it on a macroeconomic scale ?...then ask yourself, how many of the loans the last 4 years or so were ARM's ?

LOOK OUT BELOW 

Everytime I contemplate mortgage defaults I find it depressing. Every default is a person, most defaults affect a family - it is usually a painful proposition. I have to admit - I have been moved to tears as I've viewed the ads for auctions of multiple homes in the Michigan area -- everyone of those properties represents a sad story to me.

My guess - the worse it gets the worse it will get.

I speculate that over a certain percentage of properties that are for sale that are foreclosures the price decline will take off geometrically. I don't know where that level is, whether it is 4% or 5% but I postulate that it will be somewhat similar to the Richter scale for earthquakes.

Ouch!

"I'm still not convinced that buyers are going to be lining up in droves to buy those properties at 25% off. "

Remember all those people who sold in 2004, 2005, and 2006 and made 100% on their money in 5 years? They are waiting for it.

I think most of the doom and gloomers forget that for every screwed speculator and late-buyer, there is someone with a wad of cash who sold the house to them in the first place.

It is hard to put a number on the effect of this, but it must be considered and I rarely see anyone on this forum bring it up - 'cept me.

I don't think there are very many of us who cashed out. Other than those on this board, I only know of only two other people who cashed out. One person was forced to cash out in 2004 because of job loss and need the cash for a new business venture. The other person moved out of San Diego for a three year military tour. After talking to us, they sold instead of renting out their house. However, they would not have sold if they were still living here.

I think most people are holding their breath, hoping the tsunami passes over quickly.

For every house sold, someone cashed out.

Sure, for every house sold, someone cashed out and reinvested right back into RE at a higher price. When they realize that they can't cash out anymore, and their ARMs reset at double or triple their current payments, and they can't refinance anymore, then you'll see the real pain. When economic stagnation sets in and the Fed have to hike interest rates to defend the dollar then the pain will be accelerated.

I know some people in this boat. Very few households can "afford" to carry 800k houses but that's what has been selling. Even when those houses go back to 400k, the number who can truely afford those homes would still be the same.

Wait 'til 2010 and see who's right.

Selling a house and moving up to a more expensive house is not cashing out.

Your theory that lower prices will bring in more buyers is not borne out by the facts. People are irrational, so they buy high and sell low. That's why most investors underperform.

If sales were dependent on lower prices, then why did sales INCREASE when prices INCREASED? Under your theory, sales should decrease as prices go up.

Likewise, sales decrease as prices decrease. We are back to 2004 prices, so why aren't our sales going UP? As a matter of fact, our sales are way down from October 2004.

In October 2004, sales were 4700. Now we are back at those same prices, but our sales are only 3200. Why aren't all those buyers who are waiting in the wings, jumping on the chance to buy at 2004 prices?

Because the lower prices get, the more people start to think, "The prices are getting lower, so I'll just wait a little longer and see how low they'll go..."

So your logic/theory is violated by real world facts.

"People will let their houses go before they cut back on their steak dinners and ice cream."
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I couldn't disagree more. I believe the overwhelming majority of homeowners have in the past and will again if necessary forego the extras, blow off credit card payments and student loans, etc etc just in order to save their house from the bank.

Are you saying the high prices of homes in San Diego did not cause sales to drop?

Perhaps you would adivse sellers today to raise their prices to increase sales activity.

To answer the original post - I don't think this will lead to a depression in the US. Maybe in China, though ...

The 6.25% loss might not be terrible...but the weird thing is how much of this debt has been turned into derivative products created by some hedge fund math phd turned finance wizard. Alot of very smart people have created a lot of very weird financial products used by completely unregulated entities with god knows what sorts of exposure. Remember Long Term Capital Management? I think there is hedge fund exposure (based on complicated bets on the dollar, oil, mortgage debt, god knows what else) that completely dwarfs their exposure. Who knows what will happen to these hidden derivative markets in your scenario. That's what is scary.

I don't expect a depression (hey brother can you spare a dime sort of depression). But alot of people are going to losing their homes to foreclosure - the growth curve on the notice of default data for California is a sight to behold. It looks like housing PRICES in 2003,4,5.

Indeed, any one who literally cashed out will be in good shape to snap up properties after the correction. However, I suspect the number of people that actually did this in the literal sense, i.e. actually have cash, not more debt, is rather small.

Additionally, these people are shrewd and are not going to buy back into RE until the market has hit absolute rock bottom and simmered a bit. Who knows when that will be.

powaseller - you are forgetting that factors other than home price affect sales. 2006 interest rates were higher than 2004, for example. You are looking at complicated multi-variate problem through a simple lense of price vs. sales. No wonder you are confused.

OH, and here's a link showing there is some cash out there to be invested. Money market investment at an all time high.

Money Markets

Does all this mean I think the housing market won't go down? No. It just means that there is a safety net down there somewhere between us and a depression.

sduuude, I don't proclaim to know what causes housing bubbles or housing price increases of any sort, but just disagreed with you that price declines will bring in more buyers. The fact is, prices are declining and so are sales. Raising prices won't increase sales, because of "exhaustion" as Rich put it so well; basically, the momentum has turned.

PS,
Your use of circular logic and "chicken and egg" examples makes me chuckle. You say inventory and prices are falling because sales/demand are falling. The you use the counter arguement to say "Hey look! Prices are falling but sales aren't rising". It's all about demand and prices react accordingly. Of course you know thisd but sometimes I think you get caught up in the circular logic.

My logic is sequential. Feedback loops exist only as bubbles build and pop, but not at turning points.

First we had a positive feedback loop as rising prices led to higher sales, as people were afraid of being priced out or anxious to ride the wave to the top.

After prices got too high for first time buyers, the cycle stalled, inventory built up, and prices came down.

This downward price movement is scaring more people off, and the negative feedback loop has begun.

So we've got feedback loops that work to a climax on the upside, and to a complete devastation on the downside.

Sdrealtor,

As an aside, how are you defining a depression?

I have mixed feelings about this, as the coming defaults are going to affect different folks in different ways. My dearly departed gran-dad lived through the 'Great' depression and I remember him telling me that some folks made bank during the time. For example, a friend of his that was in the repo business.

My point is that while RE-related industries will be hit hard, others may be unaffected or even feel a stimulus. For example, I work in higher education where we often see increased enrollment during recessionary periods as people stay in school longer, or return for more advanced degrees.

I've seen elsewhere the excellent point that should RE end up in the toilet, those that still have jobs will end up spending less on housing and pump more money into the general economy. This might make up somewhat for the shortfall created when folks can no longer use their homes as ATM's.

I think of a Depression as being not unlike what happened during the great depression. Massive unemployement, stock market crash, family fortunes wiped out etc. etc.

"Will mortgage defaults lead to a depression?"

Answer: no.

Has anybody noticed that when the title of a topic or a paper is a question, the answer is almost always "No"? Sometimes the question is hard, and sometimes is easy. This is an easy one. Sometimes the question is truly dumb, like the one on the 9/11 topic. So dumb that it doesn't even deserve an answer.

Oh, yeah, and since we're talking about question-titled topics, I guess you know my answer to the "Can you say conspiracy in the housing market?" topic.