In the last few years, we sold 40,000 homes annually. Let’s average this to 50% ARMs per year(some years were 50%, while later years were 80%). This gives us 20,000 homes per year financed by ARMs. How many of the 1.1 million SD homeowners refinanced out their equity with ARMs? Maybe 20%? 10%? 5%? I found 3 in Poway who bought in the 1980’s and got these loans to liberate equity. Let’s say 1%, just to be ultra conservative.
In the last 3 years, we had 93,000 ARMs.
3 * (20K + 1% of 1.1 mil) = 3 * (31,000) = 93,000
Let’s assume that 10% of these people are under the age of 25, and upwardly mobile in their careers. I think this is generous, because a study showed that half of 900 people surveyed on an exotic loan study this year lied about their incomes by over 60%. The study compared the loan application income to IRS records.
Half of the 93,000 lied about their income and exaggerated it by at least 60%. So 46,500 people exaggerated their incomes and can’t even afford those loans at current interest rates.
10% can afford it now, and after the reset period, because they are upwardly mobile. That leaves 90% of 93,000 who will not get significant raises. So 83,700 people with ARMs that they can’t afford. This is the most conservative estimate I am willing to make. It doesn’t even include HELOCs, assumes only 1% of SD homeowners refinanced during the housing boom, and gives a 3 yr average of 50% exotic loans (I think if you add I/O and stated income and HELOCs the number of people in over their heads is much higher).
83,700 people with ARMs, in over their heads, who probably can’t make their new payments in the next 3 years.
This is almost *triple* the current level of sales.
What would happen when inventory skyrockets as these homeowners and banks put those properties on the market? If 1/3 of these people sell their homes every year, we would be adding 27,900 homes to inventory every year, doubling the inventory.
If sales keep decreasing by 10 points per quarter, we will sell at most 20K homes next year. Today our inventory and sales level is 8 homes/buyer. What will happen when we have 32 homes/buyer, and those homes are listed by people in default or REO departments of banks?
What if my estimate was too conservative, and we have 60 homes/buyer?
How will the buyer fear and psychology shift into high gear, and people will flee housing purchases with the same frenzy that they used on the way up?
Some people talk about the last bubble. We didn’t have all these exotic loans. Just replace the # of people laid off from defense jobs in the last bust with the # of people with ARMs. How will the change in underwriting guidelines be different this time? Any similarities, or is it an order of magnitude worse this time? Does anyone know?
