“The bulk of Southland homeowners who sold their homes in October doubled their money, according to data released Tuesday, suggesting that the housing slump may not be as big of a drag on the economy as feared.”
Homesellers earned 80%(Riverside) – 90% (San Diego) profit on October sales. So far, most sellers are seeing big profits from their sales.
“Cagan has said that the homeowners who have risky adjustable-rate mortgages and are expected to face higher monthly payments represent a fraction of the total housing market.
His earlier research shows that about 13% of people who bought homes in Los Angeles and Orange counties from 2004 through the first half of this year using adjustable-rate mortgages are likely to default, resulting in $12 billion in losses spread over five years, out of some $223 billion in total loans.”
I think that 13% number is going to climb to 90% by the end of 2007. IMO, it is only 13%, because only a small percent of loans have reset.
We know that the majority of ARMs are resetting over the next 2 years, so the number of ARM resets to far is very small. As an example, and I don’t have the actual numbers, let’s imagine that 15% of ARMs in San Diego are resetting this year, and 13% defaulted. That is almost a 100% default rate. What happens when the other 85% of ARMs reset? I would be flabbergasted if more than a few percent of households could swing a 50% – 100% increase in their mortgage payments. With prices back at 2004 levels, how many 2004 or 2005 buyers can refinance? They just don’t have the equity.
The article stated that in San Diego, a little over 6% of sellers lost money on their house sales.
As an example, and I don't have the actual numbers, let's imagine that 15% of ARMs in San Diego are resetting this year, and 13% defaulted. That is almost a 100% default rate.
That's quite an imagination – I haven't seen any data suggesting default rates anywhere near 100%.
While I too believe reseting ARMs will be a problem in the next couple of years, suggesting 90% defaut rates without any actual data to support your position makes you appear to be an alarmist.
Love your posts PS, but when you make these type of predicitons based off of a "let's imagine" data set, you're no different than the cheerleaders on the other side arguing that a soft landing is in order.
I’m not sure why you quote this guy as he seems as much a cheerleader of the RE industry as anybody else on that side of the fence. His message is always the same, i.e. sure there will be some decline, some defaults, but it will be spread over a number of years and won’t really have any significant impact on anything. Cagan’s as bad as David Lereah if you ask me.
(not to mention, he’s not really supporting your point)
Cagan is more optimistic than I am, but I wanted to show his viewpoint. I’m surprised by his comment that 13% of recent ARM buyers are likely to default. After home prices drop further and more equity is erased and the bulk of loan resets start, the 13% number is likely to rise very fast.
I did make a mistake. I thought he meant that 13% would default this year, and thus the other 87% would default later, but he means 13% are likely to default, ever. Sorry for not reading that properly, and thanks for pointing that out.
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