L.A. Times: Flood of Foreclosures could drive home prices lower

From my initial interpretation of May data, it looked to me like the party is rapidly drawing to a close. We hit the iceberg a while back, and our hosts said there was a bit of flooding in the recent homebuyer room and the damage was confined, so everybody continued to party. But now the engineers have fled because more compartments have flooded. First it was the subprime compartments. Now our economic ship is lurching oddly, and it really looks like it's time to get those lifeboats ready - this could be serious.

This June 8 article by Annette Haddad reports that the lenders looking to unload properties aren't slashing prices just yet, but that could all change.

Right now about 3% of homes in California are owned by lenders, compared with less than 1% a year ago. So far, lenders have not felt too much heat yet from carrying non-performing assets on their books. Lenders say they are "concerned" about "flooding" communities with "below-market" priced homes and contributing to further deterioration of a neighborhood.

Southern California foreclosures increased 18% just from March to April. In one study cited, owners will take 20% or more off their asking prices when foreclosures make up 8% or more of sales. Well, if the batch of Redondo Beach data I collected last week is any indication (keeping in mind that one week of data is not definitive), Redondo Beach may be steaming into that port soon.

We've already seen 25% come off of peak asking prices on homes listed during the Great Trend Change (end of 2005 - beginning of 2006). But we haven't yet seen 20%+ reductions en masse. You know, panic slashing. I'm waiting for that.

About a year ago, 10 homes of all the homes up for sale in the five-county region of Southern California were owned by lenders. Today, that number is about 3,000 out of 120,000.

Countrywide's nationwide list of foreclosed homes is up 60% since January.

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So when did lenders get so altruistic? Weren't they concerned about changing the character and affordability of a neighborhood when they approved all those bubbleminium and dot condo and Taj Majal construction loans? Weren't they concerned that applicants had to stretch too far to make payments and that the applicants were going down the road to financial ruin?

The lenders with REOs are caught between a rock and a hard place. The end result will be the same. They can decide to slash prices now or market conditions will force them to slash prices later. Either way prices will come down.

If the lenders don't start cutting prices now, would-be buyers will remain fed up and may consider looking out of the region. When buyers get pissed off and leave, what's that going to do? When companies can't recruit workers from out of state because of high housing costs and the company decides to move elsewhere, what's that going to do to this market?

If the lenders cut prices now, maybe prices will start down sooner and maybe we can get the pain over with a year or two sooner, rather than dragging the pain out further.

Lenders this year are counting on a rebound. They are literally betting the house on it. We've seen this movie playing before, in the early 90's, and it wasn't pretty.