Wednesday, January 24, 2007

L.A. Times: More Californians at risk of losing homes - "People are living on the edge ...they have good jobs but they bought over their heads.."

The quarterly numbers for mortgage default notices are out in this January 24 report by David Streitfeld. We'll compare this report to the October report and see what the numbers are and what people are saying.

For Q4 2006, the number of mortgage default notices issued to Californians was the highest since 1998, rising to 37,273. (The accompanying graph in the story says "Southern California", but I think the number applies to the entire state.) That is up 145% from Q4 2005. The number of foreclosures was 6,078 for Q4 2006, up from 874 in Q4 2005. That's an increase of 595%, nearly 7X.

Yet, the attitude of mortgage lenders and analysts the article surveys is "So far, this isn't alarming", "I don't really see any stress out there. Most people... are figuring out ways to get those mortgages current by any means possible so they're not kicked out on the street."

I don't think they get it. I guess they just don't want to yell "Fire!" in the crowded theatre yet. While I would agree that the pure raw numbers by themselves may not necessarily be indicative of anything, the rate at which they have been changing has definitely been making me take notice!

Unfortunately, this article comes up short. It does not break down the default rates by county, as was done for last quarter. If the L.A. Times subsequently publishes this breakdown, I will blog it.

The article brims with all kinds of rationalizations for the numbers though. At least for this quarter they now admit that the option of escaping foreclosure by selling into a booming market "isn't available to recent buyers or those who have visited the pig (piggy bank) once too often." Also, the economy was very bad here in California for a period of time during the 90's. And yet my interpretation of all this is, isn't it amazing how rapidly these numbers are worsening while the economy is still holding up!?!?!

It's hard to believe that in the mid-1990's, the quarterly defaults routinely exceeded 50,000 and foreclosures topped 15,000. I think we're easily going to blast through those levels and very soon. But the article makes a good point here. Again, the raw numbers are not indicative of anything unless you have something to compare them against. We have a substantially higher supply of housing stock and more homeowners. If we compared the number of homeowners getting default notices compared to the total number of homeowners in the state we'd have a somewhat better idea of how much trouble we are in at this stage. Nevertheless, I find the rates of change alarming, and I am amazed by the seemingly blase attitude toward these changes.

Don't believe for a minute that the mortgage lender fairy is bailing out everybody in trouble. The article talks about a man who was faced with a 50-50 chance of dying on the operating table because of his heart problems. So he refinanced the house to make sure his wife had a cash cushion, failing to read the part about how the payments would skyrocket. And there was another problem. He lived. The equity went toward paying his medical expenses and bills. And then his property value started droppping. As he puts it, "If I hadn't survived, everything would have been fine."

The mortgage broker trying to help this man out of his mess admits, "People are living on the edge, and they can't help it with the price of houses. They have good jobs but they bought over their heads, into the American dream." The Center for Responsible Lending notes that those who bought most recently are most at risk with their subprime loans. The center estimates that 25% of the subprime loans made in Merced will result in foreclosure. Vallejo, Bakersfield, Fresno and Stockton are also high risk, along with several other unnamed California cities. The Center estimates a loan failure rate of 21.4% for 2006 subprime loans in the state, with Nevada and Washington D.C., expected to have worse rates. They will probably get the trend right in their forecast - let's see how the actual numbers fare later.

But back to the blase attitudes of the experts. The jump in foreclosures "won't crash the housing market. As long as no life event comes along that pushes them over the edge, they'll probably be OK. With 85% of Americans dying either of cancer or cardio-vascular diseases thanks to their under-exercised junk food fast food lifestyles, I'm not particularly optimistic that the bulk of leveraged homeowners in poor health will escape such financial catastrophes.


Blogger wannabuy said...

It's hard to believe that in the mid-1990's, the quarterly defaults routinely exceeded 50,000 and foreclosures topped 15,000. I think we're easily going to blast through those levels and very soon.

First, nice find Bearmaster. :)

2nd: Oh, we're going to blow through those foreclosures. There was some discussion today in Ben's "bitsbucket" about moving out of state. Put my name in that hat. I haven't commited, but I've gone from disliking being transfered to having hope for that scenario.

Boston was like this (discussion on relocating) six months ago and then their RE started tanking.

We'll see. I admit I'll flip flow 20 times on this! But I was shocked that where the latest rumor puts us has:
$3,000 less income/year (52k vs $55k for LA)
Median home price ~$102k (IIRC, its close to that)
Better education (incredibly high density of engineers, as the south bay used to be...No one invests in their child's education like engineers.)
Weather? Ok, worse(humidity), but when you can afford $12k/year more for vacations... you can escape.

Got popcorn?

12:51 PM, January 24, 2007  
Blogger bearmaster said...

For anybody that hasn't read it, I still strongly recommend reading Schizomania, because I think it has done a great job in modeling our historical migration patterns in this country, and it's looking pretty good in its forecasts for where we are headed (and, except for a patch of land near Owens Valley, California just ain't it.)

You can find my review here.

My engineering coworker who is moving his family (2 tiny kids) out of Los Angeles up to Oregon is leaving this weekend. He rented a 3 bedroom home up in Portland for $1400 a month. He'd easily be paying double that here.

The economics are driving people away, plain and simple. And have you caught Steve Lopez's columns at the L.A. Times? People are fed up with the gridlock too. I'm really starting to think the only real fix for that is a reduction in the number of people - and that means moving out of state.

1:13 PM, January 24, 2007  
Blogger stealthcat said...


I'm probably in a similar situation to you. I'm also an engineer in the south bay, and happened to grow up in the midwest (so I know what non-california is like).

For the few years I've been out here, I think Cali is great, but would not have too many problems moving back to the midwest (I sure don't miss the humidity, though!). It helps that one of my company's major locations is located in one such low-cost-of-living places.

It will be interesting to see how things go. Either way, we can look forward to cheaper housing =).

9:59 PM, January 24, 2007  
Blogger wannabuy said...

It will be interesting to see how things go. Either way, we can look forward to cheaper housing =).

Yep. It will be interesting. I had a discussion today with some Toyota guys (parts management, big businesses); the mindset is entrentched... I think owners who bought pre-2002 will stay, others might leave.

Notice the might.
There is a strong family draw to so-cal. I cannot pretend that I don't add value to that.

We'll see...
Did you see the stock market today? Bond yeilds up... (inplies money pulling out of bonds) stocks down (implies money out of bonds...) Did the Yen carry trade end without a memo? ;)

Got popcorn?

12:35 PM, January 25, 2007  
Blogger bearmaster said...

I wonder why the cutoff at 2002 - the potential is there for a decade of values to be wiped out over the next few years.

Hmm, maybe the people on the upper deck of the Titanic (as opposed to steerage) feel safer.

While perusing properties "in trouble" it has amazed me to see that they weren't all recently bought - some properties have been lived in longer than a decade. Guess Mom and Pop dipped into the piggy bank once too often - for a lavish wedding for the daughter, top-league college expenses for the kids, maybe a nice vacation, a new RV, plus, plus...

What a painful way to learn that home equity is not the same as having cash in the bank.

My coworker, his wife and 2 children are moving to Portland, Oregon Saturday. His sister is in Silverlake, due to get married in March, his parents are semi-retired to Palm Springs, having left Peoria. Her folks live in Morro Bay, and her sister is in San Francisco. To say that leaving was difficult would be an understatement!

1:01 PM, January 25, 2007  
Blogger wannabuy said...

I wonder why the cutoff at 2002 - the potential is there for a decade of values to be wiped out over the next few years.

Quite possibly.

My assumption is that pre-2002 buyers are much more likely to be able to slog it through falsely thinking they are protecting equity. Prices will drop lower... but most early buyers will previal.

However, I do realize mortgages in years 3 to 5 have the most defaults (historically, seems to exclude 2006 mortgages...).

However, I have made zero account for the HELOC/refinancing mania that went on for the last decade. That has the potential to destroy more false "equity" than anything else for this debt could completely stall the upgrade market making those in the 2nd class deck so trapped they fall down to steerage. ;)

I'm curious what the stock markets do tomorrow. It could be interesting... It could rebound and rally.

Got popcorn?

5:41 PM, January 25, 2007  

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