The overall number of bad loans relative to the number of loans made isn’t that high, but the dollar amounts stemming from those losses are sizable. How many good loans does a lender have to make in order to pay off the losses stemming from the one foreclosure where they lose $75k or $100k? What happens when those principle losses start exceeding $150k per foreclosure, AS IS ALREADY HAPPENING in some Riverside County neighborhoods? There’s profit in making a loan and selling it off to the secondary market but that margin isn’t THAT big. These lenders aren’t being driven under by a lack of demand, they’re going down because of the margin calls.
I think the big story here really is going to turn out to be the credit contraction and it’s results.
If you hold the notion that prices locally were driven that high by speculators and marginal buyers who were enabled by easy credit, it would follow that a credit contraction will have the opposing effect. Many of the banks are losing money right now, many of the secondary market investors are losing money right now. Eventually the only way they’ll continue to participate is if the reward justifies their perceived risks. More negative press contributes to more negative perceptions above and beyond those that would already be justified by these losses.
All indications going forward are that credit is going to be both much more difficult to obtain and much more expensive. A 10% mortgage interest rate may not be outside the realm of possibilities in our near future.
At street level that means more downpayment requirements, more underwriting of credit and income requirements, more scrutiny of the collateral valuations (appraisals and automated valuation products) and higher interest rates. If the investors were hyper agressive before the opposing corollary will be hyper conservatism, which will be reflected by higher interest rates.
The $800k house may end up costing the $575k price just because of financing, but that won’t change the amount of the payment or the ability of the borrowers to make that payment.
Poof, the previous buyers in that neighborhood are now down $225k. That’s just the effects of financing, alone and apart from any other factors.
Because there will be less room for monkey business, only those borrowers who really are able to pay will be getting those loans. That doesn’t even touch the underlying dynamics of a regional economy that has been largely subsidized – if not driven – by the real estate industrial complex. Fewer RE-related jobs = fewer buyers who can make the high-dollar house payments. The combination speaks to the “effective” half of the term “effective demand”.
More buyers will be reluctant to commit, more buyers will reduce their maximum housing expenditures and will decline to pay the 50+% of their income for housing in lieu of other alternatives. That speaks to the “demand” half of the term “effective demand”.
I think we’re moving past the point of talking about bumby rides.
