In 2007, 2.5 – 5 million people will have ARM resets, according to my estimates ($ 1 trillion of ARMs at $200K – $400K each). These are mortgages made in 2003 – 2005 (5/1 or 3/1 ARMs). Payments on the 2003 ARMs will go up 50 – 70%, since rates were very low in 2003. Payments on the 2004 and 2005 ARMs will go up 40-50%. Prices today are at 2004 levels and next year will be at 2002 levels. Let’s say 30% of the ARMs were made in CA, so that’s several 100K to 1.5 million.
So we’ll have several categories of foreclosures and short sales:
1) first mortgage ARM holders, who are protected by the bankruptcy laws. Several hundred thousand to 1.5 million people in CA who cannot afford their new mortgage and must sell their homes in 2008. The home values will be LESS than they paid. The bank cannot come after them.
2) ARM holders who refinanced after 2003 – 2005 when they purchased the home. No protection.
3) Long time homeowner who refinanced to take advantage of lower interest rates. This is your frugal Home Depot manager or County building inspector, who took out a 15 year mortgage when rates went down. Also includes the high end appliance salesman who refinanced to a 30 year mortgage when rates went from 8% to 5.5%. None of these people ever took out a HELOC or refied the equity out. They are sitting on a stash of equity. When they lose their real estate dependent job, they must sell. Will they have enough equity to avoid a loss at foreclosure? Most will.
4) Long time homeowner who refinanced to take out equity. People who bought their homes in the 1980’s and had tons of equity in the mid 90’s, when refinanced it all out. No longer protected by the first mortgage laws, and having spent all equity, they are upside down. They refied to the limit of their 2003 appraisal. Home value in 2007 is below their 2003 refinance appraisal.
5) HELOC Joe Six-Pack. They put in the pool, remodeled, bought the Hummer, got Cindy that brand new Mustang convertible as a graduation gift, sent their kids to Harvard, all gratitude to the Housing Credit Card. Now the HELOC rate has gone up, the equity was taken out, and they are upside down at foreclosure.
6) Any others I missed?
So, we’ve got a lot of folks who will have their assets seized by the bank, the IRS billing them. I expect a wave of bankruptcies and the 40K people leaving annually will pick up to 120K in the peak year.
Eventually, by 2015, it will all calm down. Sacramento will work hard to make this state business friendly, and with the lower cost of living, employers will return, knowing they can get good employees to move here. Vacancies will be high, rentals and homes will be cheap, and traffic will be low. We will start the next boom cycle. All of us piggington people will be out buying up properties.
