Well hello there. I felt compelled to check in because I’ve been feeling guilty about my recent habit of exclusively linking to my voiceofsandiego.org articles in lieu of writing proper Econo-Almanac-only content. I don’t mean to make a habit of it. But I’ve been occupied with other pursuits, and at times like these I need to meet my Voice obligations first, lest editor Scott Lewis administer one of the savage beatings for which he’s so well known. (Incidentally, one of the aforementioned pursuits was setting up a website for the financial advisory firm I joined. The site will include occasional articles on finance and investing, so some Piggingtons may find it of interest).

Alright, I realize that the most inane possible genre of blog post is the one where you apologize for not writing more blog posts, so let’s move on. There are a few items worth noting…

Defaults and Inventory Levels

There are some mixed signals coming from the market. On the bull side, as discussed in the forums and in last month’s housing report, inventory hasn’t picked back up much and sales volume is decent.

However, on the bear side, defaults are on the rise. In the last quarter of 2006, San Diego posted a 168.5% increase in defaults from the prior year — and the the pace is increasing.

I wrote about this a bit at Voice but I think that as far as prices are concerned, it’s the latter statstic that matters. In short, we are seeing less "want to sell" inventory than we saw last year, but more "must sell" inventory. Buyers will of course opt for the must sell homes because those are the sellers who can be pushed around. Must sell homes set the price levels, and to the extent that this type of inventory is rising substantially, prices will likely decline even if the other type of inventory is flat or falling.

I think the increase in volume is likely due to buyers finding more (relative) bargains, so I don’t think the stabilization of sales volume is necessarily bullish for prices. Defaults and REOs are the numbers to watch going forward.

More Subprimers Head for the Exits

We’re seeing more institutions back away from riskier mortgages –examples here and here. The big problem with this trend is that many of the people to whom they so carelessly lent in the past are now facing resets that will drive their payments beyond affordability.

The original plan for all involved was probably to refinance the borrower’s loan when that happened… but with lower home values, tighter lending, and (depending on the original loan date) higher rates, such borrowers won’t be able to get loans anywhere near as favorable as what they had in the first place.

Unless mortgage lending starts to loosen up again, look for that all-important "notices of default" number to rise further as this plays out.

Vacancy Rates

Commenter sandiegobanker1 linked to this blog post on rising vacancy rates, a trend first noted here (to my knowledge) by forum regular jg. I agree with both commenters that this is a significant trend. While that vacancy rate may look small in comparison to the entire housing stock, vacancies account for a pretty large percentage of for-sale inventory. My friend Ramsey, who has been watching this stuff closely for San Diego, tells me that 37% of San Diego MLS listings in January were vacant. A full 51% of SD homes sold in January were vacant.

This is a good example of what I was describing in the section on defaults above. The vacant homes are more likely to be "must sell" since they drain the owner’s money while providing neither rental income nor shelter.

And what do you know, the percentage of vacant sold properties is much higher than the overall vacant percentage. In other words, the more motivated sellers are the ones doing the selling. That will show up in prices.