Housing Bubble Bursting?

[Brad Ellis]

Randolph,

OK you want sources other than my memory.

Remember that what we are talking about is whether the CA economy was recovering by 1995/1996 or not and whether or not that was contributing to the high foreclosure rate back then. Your source says it was- but of course that is an assumption made by the advisors to the highly competent CA legislature, but:

Unemployment figures for that time period show an entirely different picture:

1990-5.8
1991-7.7
1992-9.3
1993-9.4
1994-8.6
1995-7.8
1996-7.3

Source: Wikipedia

So, this data suggests that hiring at least was strengthening beginning in 1994. Apparently the higher rates in 1992-1993 did NOT cause the spike in foreclosures that occured in 1996. Even as unemployment subsided, foreclosures were still going up THREE YEARS after the peak and then declined in 1997.

Today we have unemployment in 4.7% range +/-.

Sorry, but you have not at all made your case for this current rate of foreclosures having anything to do with economic performance in the mid-1990s since the CA economy is also doing OK right now.

We already know what is causing the current peak in foreclosures (assuming it is a peak). It is the credit tightening. And THAT is caused by the direct actions of Wall St. basing credit extension upon default rates of which 75% or more actually cure and do not result in foreclosure. However, nowhere in their actions is any reality check by looking at actual credit losses. Looking at those the picture is entirely different.

As I have said before this is manufactured by the investment community for their own benefit. They get to be far more choosy, pay far less for the paper- even though the rates on that paper are higher than in recent years and even though they continue to pay no more to the individual investors- so the differential goes right into the pockets of Wall St. firms.

Maybe that is why all the analysts are so bullish on many or most of those stocks.

Brad

 

[Randolph Kinney]

Brad,

You have convinced me with your unemployment statistics of the 1990's. There is absolutely no cause and effect with foreclosures and economics of the 1990's. It seems to suggest that foreclosures happen, an unpredictable event with out causes. People, for some reason, stop paying their mortgages and that results in foreclosure in the 1990's.

Certainly, your observation of the unemployment statistics of today compared to the 1990's does drive home your point; "... this current rate of foreclosures having anything to do with economic performance in the mid-1990s since the CA economy is also doing OK right now." I never made such a connection. My connection was the 1990's had economic problems and today we have relatively good economics. My conclusion was that the causes of foreclosures in the 1990's was economically based while today, something else is causing the foreclosures.

People today are not paying their mortgages for an entirely different reason than those people back in the 1990's. You just don't know what it was. My assertion was that people who stopped paying their mortgage in the 1990's most likely did not have jobs. You obviously believe it was some other reason. Today, I assert people are not paying their mortgage because they have a job but for some reason can't make their mortgage payment.

I don't know Brad, you say this time around is manufactured by credit tightening. I say that you have not made your case.

It is just a mystery why people don't pay their mortgages. After all, the 1990's were good times, just like today.

 

[Brad Ellis]

Randolph,

I am laughing too. Seems we will never make this case either way.

I'll grant that the Wall St. credit tightening is my own conspiracy theory- it will never be proven. Not unless these guys go on CNN and own up to something! It might be more herd mentality as anything else. Would not be the first time.

Foreclosures do not happen in a vacuum and what we now see may well be just the spike from the 80/20 subprime products and other silly ones. I'll continue to monitor actual credit losses however since that is always the bottom line.

And it will end- maybe this year or maybe next.

Brad

 

[Randolph Kinney]

Randolph,

I am laughing too. Seems we will never make this case either way.

I'll grant that the Wall St. credit tightening is my own conspiracy theory- it will never be proven. Not unless these guys go on CNN and own up to something! It might be more herd mentality as anything else. Would not be the first time.

Foreclosures do not happen in a vacuum and what we now see may well be just the spike from the 80/20 subprime products and other silly ones. I'll continue to monitor actual credit losses however since that is always the bottom line.

And it will end- maybe this year or maybe next.

Brad

Brad, looking at the two graphs below, OFHEO Price Index and DataQuick's foreclosure history, it appears that house prices have some correlation to the number of foreclosures during the 1990's. It appears the house price decline bottomed out shortly after the peak in the number of foreclosures.

Maybe we have a chicken and egg question? Did the decline in house prices produce the foreclosures or did the foreclosures produce the decline in house prices? You can see from the OFHEO graph that California has not declined in price at the same rate foreclosures have gone up now or then.


http://www.paperdinero.com/HPI.aspx?id=USA|CA|LosAngeles-LongBeach-Glendale,CA&start=1987&stop=2006

Below is another graph. This one deals with San Diego Case-Shiller Home Price Index and notice of default (NOD). The red sales-per-default line clearly serves as a leading indicator, peaking or troughing well before a corresponding change in price levels. It's also interesting to note that a sales-per-default figure of "2" seems to be the magic number here: for the most part, prices have risen when the sales-per-default ratio was above 2 and falling when the ratio was below 2.

Clearly today, what is causing stress to produce the stagnant / falling house prices and foreclosures in California is not from job losses or a macro economic event. It may be a number of singular elements that compound each other, a multiplier affect. The price of gasoline has gone up. Property taxes go up at the rate of inflation plus bond issues (Prop 13). Food prices are up. Car insurance is up. Medical costs are up. If wages are not keeping pace with people's actual cost of living, that squeeze has to show up somewhere. Just a thought.

The other well publicized events are when ARMs reset. Since house prices are not rising, flat at best, falling at worst, people who are at the margin cannot refinance to lower their monthly payments and have to absorb the shock of mortgage payment increases.

The end to falling house prices and foreclosures will come when the excesses have been corrected to produce an equilibrium of income versus housing affordability. Incomes either have to rise faster than inflation or house prices have to fall to a lower level to be marginally affordable to absorb the inventory of houses for sale. The run up in house prices was not correspondingly matched by a run up of income, a disequilibrium. A significant number of people bought houses on speculation, not based upon their incomes. I believe it is these people who are defaulting today.

 

[Randolph Kinney]

Why we shouldn't be bailing out subprime lenders or borrowers

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/04/22/BUGU9PB34E1.DTL

Dumb: Buying a house you can't afford with no down payment and a loan whose monthly payments will explode in a few years.


Dumber: Lending money to people who can't afford a traditional mortgage, especially when they have lousy credit ratings and don't substantiate their income.


Dumbest: Bailing out dumb and dumber, especially with taxpayer money.


State and federal lawmakers, community groups and housing advocates are proposing schemes to prevent the victims of the subprime loan crisis from losing their homes. I hate to sound callous, but it's hard for me to know who the victims are in this mess.

If mortgage brokers or lenders used inflated appraisals or made false or misleading statements, they should be prosecuted or at least forced to restructure the loans. If borrowers lied about their income or assets to get a bigger loan, they too should be prosecuted.


But many people got into the subprime mess because they were willing to believe a fast-talking broker who told them they could buy a home, or a bigger home, or take more cash out of their home than they could with a conventional mortgage.

Keeping people in homes they had no business buying is wrong in many ways.


Many experts say we are in the early innings of the foreclosure cycle. If we bail out people today, will we be willing and able to help people who fail later in the game?


Propping up borrowers who took a gamble on a house and lost reinforces gambling.


A major fear among politicians is that rising foreclosures will drag down the value of all homes.


A new report from the Joint Economic Committee of Congress cites a study that said "a single-family home foreclosure lowers the value of homes located within one-eighth of a mile (or one city block) by an average of 0.9 percent."


With or without bailouts, the subprime crisis is going to hurt many people. But it could have a silver lining. If it brings down home prices, more families could afford homes with realistic mortgages. And if it reminds everyone that buying a home is a risky proposition, so much the better.

 

[Randolph Kinney]

U.S. Economy Weakened as Homebuilding Slumped Last Quarter

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5BSFTxATZ7I&refer=worldwide

April 22 (Bloomberg) -- The U.S. economy expanded last quarter at the weakest pace in more than a year, depressed by the longest continuous homebuilding slump in a generation, economists forecast ahead of reports this week.


The Commerce Department will report April 27 that gross domestic product, the sum of all goods and services produced, grew at an annual rate of 1.8 percent in January through March, according to the median estimate in a Bloomberg survey of economists. That compares with a 2.5 percent gain the previous quarter.


Spending on residential construction projects dropped at a 15 percent annual rate last quarter after a 20 percent slump the previous three months, according to a forecast by economists at Lehman Brothers Holdings Inc. in New York.


A drop would extend declines that began in the last three months of 2005, marking the longest such stretch since 1981-82.

Sales of existing homes, to be reported by the National Association of Realtors on April 24, dropped 4.3 percent to 6.4 million, according to the survey median. New-home purchases in March may have increased to an 890,000 pace after slumping to an almost seven-year low of 848,000 a month earlier, a Commerce Department report a day later may show.


``I don't think the market is stabilizing,'' Donald Tomnitz, chief executive officer of D.R. Horton Inc., said on a conference call last week. The housing markets in California, Florida and Arizona ``are becoming tougher,'' he said.


D.R. Horton Inc., the second-largest U.S. homebuilder, said fiscal second-quarter profit plunged 85 percent as the weak housing market forced the company to walk away from options to buy land.

 

[moh malekpour]

Brad,
My source is my memory and record from the times that I went thru those days. After collapse of Soviet Union, President Bush, the elder, decided to close some Army bases and cancel some defense contractors. Most of those bases and defense contractors were in CA. Two large bases were in Orange County (El Toro Marine and LAT helicopter bases) and a huge defense contractor. It took them 2-3 years to close those bases and move or lay off all those personnel, which had a devastating effect on housing and business market in Southern CA especially in Orange County due to those two big bases and huge defense contractors. In addition to that was the county tax collector (Bob Citron) bad investment took the Orange County to Bankruptcy, which had a bad effect on CA economy.
The real estate slum and foreclosures continued for 6 years from 1993-1999. HUD of Santa Ana was loaded with foreclosures in that period as I was doing some of them myself. HUD Disposition Department was contracting out their REO appraisal directly themselves and it was continued till 1995 when the downsizing started after mid term election of 1994. In 1995 due to their policy downsizing, they contracted their REO to a AMC called SMS and SMS and HUD contract was bought by first American Appraisal Co in 1998 which later was changed to AppraiseIt. AppraiseIt was not doing a good job handling HUD REO and the whole HUD REO was contracted was awarded to Golden Feather form 1999 onward. All these years the HUD and other banks were loaded with foreclosures. At that time most army personnel and defense contractors were either laid off or moved to other states. But as the door was closing in real estate market due to all those foreclosures and unemployment’s, a new door was opening so called Globalization, NAFTA, Trade, and Technology. Everyone started to get out of real estate related business and get in to either trade or technology. Export/import to Far East and getting in tech centers and learn how to do it was a mantra at that time. Computer and software stores opened everywhere and most employments were in the trade and tech sectors. Silicon Valley (San Jose) and Irvine were the centers of this development and it continued till the tech bubble and finally tech bubble collapsed. Unfortunately the history is repeating itself. My next post is an article that is about a possible devastating foreclosures in the Inland Empire. 2 big base closures (San Bernardino Base, and March Air Base) were the foreclosure trigger at that time and Sub prime seems to be the trigger at this time.

 

[moh malekpour]

Subprime assault on southern California

http://www.ft.com/cms/s/af13bd1a-ef...uid=5aedc804-2f7b-11da-8b51-00000e2511c8.html

Far away from the sun-kissed beaches and palm trees that make up southern California’s idyllic coastline, trouble is brewing in the Inland Empire.

Two years ago the sprawling arid region that lies to the east of Los Angeles was one of California’s property hot spots.

The increase in foreclosures has “come on strongly and quickly and none of us anticipated it”, says Ms Mercado. “And it is nowhere near ending.”

 

[Randolph Kinney]

Countrywide's Mozilo Says Regulators May Worsen Subprime Losses

http://www.bloomberg.com/apps/news?pid=20601009&sid=aST7PK5_3Ua8&refer=bond

April 23 (Bloomberg) -- Banking regulators may push more homeowners into foreclosure by making it tougher to refinance subprime mortgages, said Angelo Mozilo, head of the largest U.S. home-loan lender.


The Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency proposed guidelines last month that would encourage lenders to turn down borrowers who won't be able to afford mortgages after ``teaser'' rates expire. Rates on loans to people with poor or limited credit are typically fixed for two or three years and then rise.


The plan is an ``inadvertent attack on liquidity exactly when it shouldn't happen,'' Mozilo, co-founder and chief executive officer of Countrywide Financial Corp., said in a phone interview last week from his office in Calabasas, California.


The change would block more than half of subprime borrowers from refinancing mortgages at a time when slumping real estate prices have already caused delinquencies to rise to a four-year high, according to Mozilo. Teaser rates on almost 2 million subprime loans will expire in 2007 and 2008, according to First American Corp. a Santa Ana, California-based realty data firm.


Mozilo compared the proposals to the savings-and-loan crisis of the late 1980s, when he said more than 1,000 thrifts failed in part because regulators set rules that encouraged thrifts to buy bonds with credit ratings below investment grade and then forced them to sell, causing prices to tumble.

``The Fed is very different than the OCC,'' which regulates national banks and ``is very different'' that the Office of Thrift Supervision, which oversees U.S. thrifts, Mozilo said. Countrywide became a thrift last month, dropping its OCC charter.


Regulators, lenders and consumer groups are coming ``to the conclusion that the best way to deal with the issue that is looming in regards to subprime resets is to -- to the extent that they can make those payments -- put them into 30-year fixed-rate loans or comparable products that don't have these reset features,'' said Kevin Petrasic, an OTS spokesman.

About 20 percent to 30 percent of people who took out subprime mortgages in 2005 and 2006 won't meet the financial thresholds regardless of whether the new guidelines are adopted because lenders aren't lending as much against property values, according to debt strategists at Lehman Brothers Holdings Inc.


The main cause of delinquencies and defaults has been ``flippers, speculators and people knowingly stretching themselves without the capability to get past any bump in the road,'' Mozilo said.

 

[Brad Ellis]

Moh,

Dataquick data for 1996 for SoCal:

" #Sold #Sold Med($K) Med($K)
May-95 May-96 Chng. May-95 May-96 Chng.

Los Angeles 6,710 8,400 25.2 $164 $164 0.0
Orange County 2,528 3,865 52.9 $193 $198 2.6
San Diego 2,443 3,284 34.4 $163 $168 3.1
Riverside 1,857 2,545 37.0 $126 $123 -2.4
San Bernardino 1,813 2,343 29.2 $120 $121 0.8
Ventura 844 1,030 22.0 $184 $199 8.2
So. California 16,195 21,467 32.6 $160 $163 1.9


Source: DataQuick Information Systems


The numbers are the right represent the percentage change year over year in 1996.

Note that all counties were increasing already back then except
Rriverside County. This does not mean they had recovered from 1990 levels- only that they had already bottomed most everywhere in the Southland. Note that this was before the F/C market hit its peak.

Note also this is May data. There is certainly a chance that many of these markets had actually bottomed in 1995- again not revoering all lost equity but having reached the bottom.

Check your memory, sir.

Brad