Pain

[admin]

No fun, being a homeowner, now, if one is selling or considering selling; deseasonalized sales are nearing ugly levels:

[img_assist|nid=1730|title=
Prices and Sales|desc=|link=node|align=left|width=400|height=229]

NODs are rocketing up:

[img_assist|nid=1731|title=
Notices of Default|desc=|link=node|align=left|width=400|height=229]

Is employment flattening?

[img_assist|nid=1732|title=Employment|desc=|link=node|align=left|width=400|height=229]

It’s good to be on the sidelines, now. I feel for the folks who are trying to get out now, or will be over the next few years.

[powayseller]

NODs are interesting. We’ve had unusually low levels of NODs. Are we going to hit the 3,500 level again, or will be double that?

[Anonymous]

My guess: bigger, much bigger, given the (1) low levels of NODs in recent years, (2) ridiculous prices that folks borrowed against, and (3) ‘unpopularity’ of 20% equity cushions. What are your thoughts?

[powayseller]

I think much bigger too.

NODs have a certain “normal” rate based on difficulties that arise in a person’s life. Bankruptcy, illness, medical problem, job loss, etc. leads to foreclosure. In the last few years, the normal amount of NODs was reduced because it was so super easy to just sell your house at the first whiff of problem with the mortgage.

NODs rise above their “normal” rate during periods of high unemployment. Therefore, the 3500 NODs/quarter level should be reached again if we have the same number of homes and the same level of unemployment as we did in the 90’s.

I’d need to go back through my unemployment projections from a prior post and compare it to unemployment in the 90’s to give an accurate forecast. For now, let’s assume unemployment is the same, so that would result in the same number of NODs.

Now let’s add the foreclosures from the people facing payment shock who cannot refinance. 68% of San Diego’s purchase and refi loans were ARMs, for a total of 306,000 loans *(see calcs below); let’s assume half cannot refinance and will foreclose, an assumption I think is conservative. That is 154,000 NODs in 2007 – 2010. If we spread that out over 3 years, that is 12,833 NODs/quarter, which is almost 4x the peak of the prior downturn.

If we assume that 95% of the payment shock loans will default, a figure that I personally think is more realistic, then we would have (306K/12) 25,500 loans in default every quarter from 2007 – 2010. If they are not evenly spaced, we could end up with 40,000 defaults in one quarter alone. Remember, that scenario assumes that half of all ARM loans have been refinanced. If that cannot occur, the defaults are higher still. If more than 10% of homeowners got ARMs, the figure is still higher. Is it crazy to suggset 95,000 NODs at the peak NOD quarter in 2010, the year that I think will be the worst?

* payment shock calcs
From very gross estimates, 306,000 San Diego loans are subject to payment shock.
(68% of 40,000 homes sold = 27,200 loans in 2004 and 2005 are ARMs; let’s assume 10% of homeowners refinanced in each of those years: 10% of 1.1 mill homeowners = 110K; 68% got ARMs = 74,800; 27.2K purchase + 74.8K refi = 102K total in each year; in 2 years = 204K loans subject to payment shock; add 102K for 2006 and 2001-2003, giving 306K loans)

[Anonymous]

Very nice chain of logic, PS. First forecast of NODs that I’ve seen; congratulations!

Seems plausible; even if the numbers are only 1/3 to 1/2 what you lay out, things will be terrible.

When things get that bad, ugliness happens: in the 30s, there were lots of strikes, farmers crashed foreclosure sales to stop the proceedings, bankruptcy judges were strung up from trees, etc.

I repeat: repent, rent, save, and arm!

[rseiser]

I saw others criticize you (PS) on this high assumption of defaults of ARMs (e.g. 95%). Am I correct, that it doesn’t depend only on if they can meet the payment shock, but also how their house is valued. So for the ones that bought last, the amount might be huge by what they will be under water. So even if they can barely scratch together the payments, e.g. by taking more debt elsewhere, if their condo has a market value of $350,000 and they have a $700,000 loan, they might just call it quits. How does this depend on the type of loan? In which case can they walk away (and just get bad credit), or when are they still liable for paying back part of it? (Sorry to ask such a basic question that probably everyone on this forum knows.)

[no_such_reality]

Where does your 306,000 number come from? SD is only generating ~40,000 sales/year at peak. Roughly only the last two years are exposed on an equity basis. Plus whomever refi’d to the max.

I’m thinking it looks like you’re off by a factor ten. Which is still quite phenomenal given a quarterly default of 9500 homes.

Even if you adjust the actual default from 95% to something like 33%, you still end up with 3000+ defaults, which at August’s current sales rates, is an entire quarter worth of sales.

That’s probably the uglier way of looking at it. How few actually defaults need to occur to get to over half of the home sale volume being defaults.

[powayseller]

nsr, my calculations are all there, in the last paragraph, showing how I got 306,000. They are all estimates, but take a look at the calc first, and then tell me if you think I’m off by too much or by too little. I was hoping that people would look at the calcs and give me some feedback.

You’re right, it’s not the absolute number of defaults that matters, but the percentage of homes for sale that are distress sales.

Someone told me recently that the foreclosures I’m talking about are mayne not a big deal in the overall picture, since maybe that is only .002% homes in San Diego in distress; it is a number she came up with to make her point. But .002% of 1.1 million is 22,000 homes, which is almost every home on the MLS today, and would be 1/3 of all homes on the MLS if spread out over 3 years. That is going to have a huge impact, and that is the point that I keep trying to make and it’s not getting across. nsr, you got it though, but for the others, let me make sure you all get it: it is not the number of distressed sales or NODs that matters,but the percentage of distressed homes for sale.

So even if only .002% of homes in San Diego are getting foreclosed right now, that means almost every single home on the MLS is in foreclosure and we would see huge price reductions within weeks as these distress sales compete for buyers! Not only that, it is going to put serious downward pressure on the home prices of the other 1.1 million homeowners and lower their prices a LOT.

I hope I explained it well, but if anyone can make it more clear, please do so. Some of this is hard to explain.

[Author]

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