What’s Taking So Long?

[TheBreeze]

“Husing busts are worse than stock market busts.”

Do you have any statistics to back up this assertion? The Great Depression was preceded by a stock market bust. Has there been a housing bust that led to something worse than the Great Depression?

“Fifth, 25% of all mortgages are resetting to higher interest rates next year and millions of people will lose their homes in foreclosure and become renters (or tenants with Mom and Dad).”

You got a cite for this, poway? This statistic is hard for me to believe.

I admire your use of statistics and would note that poster “Rimpy” from the Motely Fool message boards had tons and tons of statistics to back up his stock-market bubble prediction beginning with his first post in 1997. Today, his “Bubble Port” is 4% higher than it was when he first started it in 1998. A very bad return on investment, but not a disaster by any means.

I agree that home prices are very likley to decrease, but counting on total economic destruction as a result of the housing bubble is unreasonable in my opinion.

[Anonymous]

TB, I think that we’ll have ‘total economic destruction,’ due to our past overconsumption. I lay out my logic here:

http://piggington.com/depression?page=1

The housing bubble is merely a symptom of the easy credit/overconsumption environment that we’ve had for some time. Now, the bills are coming due: consumer debt to disposable income is at 130%, which is exactly the level at which the Japanese consumer quit spending back in the late ’80s. Result: retail sales have clearly slowed, as have purchases of autos.

Folks have big bills from past overconsumption, and now interest rates are at risk of going up given the attractive investment opportunities in Europe and elsewhere and the cold feet that foreigners are having about purchasing ever more U.S. Treasury debt.

We’ve over ‘invested’ in real estate, and now construction is slowing markedly. Example: it’s going to take years to absorb the condos already built and now being finished in downtown San Diego.

Big bills, rising interest rates, and slowing employment makes it difficult for folks to pay their bills, as evidenced by higher notices of default and foreclosures.

If holders of MBSs go after issuers of MBSs because of poor performance (payments) on the portfolio, and the issuers go after their ‘insurers,’ we’ll have a financial meltdown given how many times the risk has been sold/resold (and given that ‘insurers’ did not sufficiently reserve to cover their exposure, to wit, Fannie Mae’s miniscule equity: $39B against a $2.0T mortgage portfolio, as of 12/31/04).

I think we’ll have a disaster, but falling home values are only one, and only a symptomatic, element.

[pencilneck]

Just my 2 cents regarding the question “whats taking so long?”

a 10% drop in the price of median homes and a 30% drop in sales, year over year, is a huge and fast drop in a market that is perceived to be so stable. Housing market busts historically take place over years rather than months. Personally, I’m amazed at how fast market sentiment is changing.

[pencilneck]

Just my 2 cents regarding the question “whats taking so long?”

a 10% drop in the price of median homes and a 30% drop in sales, year over year, is a huge and fast drop in a market that is perceived to be so stable. Housing market busts historically take place over years rather than months. Personally, I’m amazed at how fast market sentiment is changing.

[sdrealtor]

Well said pencilneck.

[powayseller]

Housing busts are worse because more people are affected. That is the point I made above, including the data on recessions and the amount of higher consumer spending due to housing price increases vs stock price increases.

US residential mortgages total $ 10 trillion. 20% of that is adjusting next year, according to moody’s.com. I quoted 25%, because the percentage is much higher in San Diego, probably on the order of 40% or higher.
” The Saturday WSJ reports that “More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007, estimates Moody’s Economy.com, a research firm in West Chester, Pa. Let’s repeat that number: Over the next 20 months, more than two trillion dollars worth of adjustable rate mortgages will reset at higher interest rates. ”
March 2006, The Big Picture
http://bigpicture.typepad.com/comments/2006/03/coming_soon_mor.html

[TheBreeze]

Thanks for the link, poway. I had no idea that 20% of mortgages havewould reset over a 20-month period beginning in March 2006. I was thinking that 5% resetting every year would be a lot. 20% over 20 months is a huuuuge number. This should certainly hasten housing price declines.

Of the mortgages that reset in 2006, is there any way to know how many resets led to a default?

[Steve Beebo]

Pencilneck –

“a 10% drop in the price of median homes and a 30% drop in sales, year over year, is a huge and fast drop in a market that is perceived to be so stable.”

If we ever get a 10% y.o.y. drop in median resale prices, that would be huge. That hasn’t happened yet, though. To this point prices are off 5% from 12 months ago. The 30% drop in sales is huge, but that appears to be almost completely the lack of investor buyers in the market.

jg –

Home building has slowed to a crawl, but that’s actually healthy for the market. The more new homes that are built right now, the more downward pressure there will be on prices, since there isn’t a lot of market demand for new houses in SD now.

If builders keep building new condos Downtown, that market will take a long time to recover, though. I don’t know what bank would want to make a construction loan on a new project downtown at this time.

[Mexico Resident]

“The 30% drop in sales is huge, but that appears to be almost completely the lack of investor buyers in the market.”
/Steve, I think this is an example of why people tend to pull your chain. You’re AGREEING with a previous post but you have to qualify it. Who cares WHY there was a 30% drop, it’s still HUGE. I think your statement that declines were only 5% is misleading. Why not say the decline was only 2% and quote the figure for the entire continent? If you look at distinct markets I think you can seem some with 10%+ declines.

[lostkitty]

Okay – this may be a dumb comment… but if I had a loan that was due to reset to a higher interest rate soon, why couldnt I just refinance? There are ads EVERYWHERE (seen the annoying ones on CNN.com with the dancing idiots?). Why couldnt a large number of these people do that?

[Steve Beebo]

Mexico Resident –

I’m not completely agreeing with his statement. It is a fact that median resale homes are off by 5% in the past 12 months in SD County. I was just correcting his 10% figure. And I don’t mind if people yank my chain. I just like to sometimes point out that things aren’t quite as bad as some believe.

lostkitty – you have a good point. A lot of people will be refinancing into other loans. The problem is, that an incredible number of people have gotten loans of up to 100% of their homes’ value in the last couple of years, (either as purchases, or as cash-out refis), and if prices even go down 5%, they may not be able to refinance at all.

[lostkitty]

Yes, but doesnt that mean that the appraisals have to come in 5% lower? At this point, i am guessing the appraisals arent down much at all. Also, I am sure there are appraisers in the pockets of mortgage companies that will get the ‘right” number. It will be in the interest of the mortgage companies to keep this whole thing propped up as long as possible.

[Steve Beebo]

Mexico Resident:

I have seen many areas that are off in price by 10%. I’ve seen individual properties that have lost 20%. But I am also seeing a lot of established areas in SD County that have had very little to no declines in price over the last year. Prices WILL continue to decline, I’m just not sure how much. You may not feel that the median price is an accurate gauge of the market, but the bottom line is that the median resale price is down by 5% in the last year, not 10%.

[Steve Beebo]

lostkitty –

Appraisal values generally are lower this year than last year – some areas by a little, and some by a lot. Unless an appraiser is just plain dishonest, you can’t argue with market data, both recent sales and active listings. I’ve done quite a few appraisals in the last 6 months, where the current value is lower than the outstanding loan amount.

Some appraisers will try to push the value up, but most banks will have a private fee appraiser or on-staff review appraiser look at the appraisals they receive. (At least I hope most do.) It’s very common for the review appraiser to cut the appraised value.

[Anonymous]

SB, yes, slowing construction is good for home pricing, as it reduces the rate of buildup of inventory, with its negative impact on pricing.

But, slowing construction is bad for the construction guy losing his job, bad for Home Depot and Macy’s that sell fewer appliances and furnishings, bad for the mortgage broker who has fewer homes to finance, etc. Not good at all, for employment/wherewithal to pay. Reduced employment and wherewithal to pay is a major, major factor that will negatively impact the real estate market beginning in ’07.

Then, home prices will really come down, despite fewer homes coming online.

Just my read of the future lay of the land.

[Author]

Posts