Second Half 2007 Housing Estimate - Based only on foreclosures

NEW -> Contingent Buyer Assistance Program
Masterofdamoney_IHB

Masterofdamoney_IHB

New member
<p>For the purposes of this document, we will be assuming that EVERYTHING outside of foreclosures is a constant. We will be assuming that bank guidelines, wall street investors who buy mortgage backed securities, loan programs, sales #'s, etc. are all at late2005 levels (at the peak or just a bit over). Crazy, I know, but that's what we are going to assume for now.</p>

<p>I have been working with foreclosed properties and their homedebtors since mid-2006. I saw this area as a rising industry, and started focusing on it. Needless to say, this has become a huge business for me. I work for homedebtors and realtors, negotiate with the banks on their behalf, set realistic short sale prices and timeframes, find rentals for the displaced homedebtors (you can't imagine how difficult it can be to find a rental that will take someone with a fico in the 400's AND who has a BIG dog or two...), etc.</p>

<p>To this end I have been tirelessly reading over the NOD, NOS, and REO reports every week for the last 12 months. I look at OC, LA, SD, Riverside, and SB. I will only be talking about OC here.</p>

<p>12/2006 - 1/2007 saw very, very few NOD's (OC was averaging UNDER 100 a week) and almost non-existant NOS/REO's. The reasons for this are simple - equity and loan guidelines. At that time, going NOD wasn't so bad. You still had equity, and could easily sell. If you wanted to stay, you could still find a subprime loan that would make it happen.</p>

<p>1/2007-3/2007 was when the NOD's started ramping up. I saw the #'s rise from under 100 NOD's a week to 200 NOD's a week during this time. NOS and REO ramped up exponentially during this time (averaging under 30-40 NOS and 10-20 REO per week).</p>

<p>Now we get to the meat of the story.</p>

<p>3/2007-6/2007 - NOD #'s were EXTREMELY consistent during this time, averaging 200 NOD's a week. I saw NOS and REO #'s going up at alarming rates during this same time. Remember that it takes 3-4 months for an NOD to go NOS (if they don't sell/payup the property), and another 1-2 months for an NOS to go REO (if it doesn't sell at auction/get a bailout at last minute/etc.). NOS's averaged around 70 during this timeframe, and REO's at around 40 per week.</p>

<p>7/2007 - These are the averages for July, 2007: OC NOD's per week: 382. OC NOS per week: 225. OC REO per week: 130.</p>

<p>Think about that. In July we have nearly DOUBLED the amount of NOD, NOS, and REO transactions that occured in OC vs the 3 months prior to that (March - June). And March-June was DOUBLE the 3 months prior to that (Jan-March)!</p>

<p>Also keep in mind that California, as a whole, set a new record for # of foreclosures EVER last month. Well, we are going to REALLY kick that records ass! Double? Nay. Triple? AT LEAST.</p>

<p>What affect will this have on the OC RE market? Well, even if EVERYTHING else remained a constant in the last half of the year, we would have to see AT LEAST double, probably triple-quadruple the amount of distressed/short sale and REO properties on the market. Figure 250+ REO's going on the market each WEEK from here on out in OC. And that number will scale at a scary rate vs the NOD's. This will be in addition to an enormous amount of shortsales... I can't calculate that with any accuracy, but listings should be at least 2-2.5 times the amount of REO's added per week. </p>

<p>This means a flood of must-sell quick houses entering the market, and a lot of homedebtors that are chopped out of the market. After all, with a foreclosure on their record, their credit will be toast and they will not be able to re-enter the buyer's market for AT LEAST 4-7 years, minimum. Tons of homes entering the market + a removal of a LARGE number of credit-capable homebuyers from the market.</p>

<p>What does this mean to home prices? IMHO this factor alone is good for a 10% or so decrease in OC housing. Keep in mind, this is independant of any other market conditions. Factoring in loan guideline changes, investor insecurity, rising inventories, and a buyers market that is terrified to purchase right now... and you have the making of a monumental drop in home prices over the last 1/2 of 2007. I would say it's POSSIBLE that we will see 20-30% drops during this time.</p>

<p>And this is just the OC. I dared to sneak a peak at the LA NOD list for last week, and I shut it down after about 15 seconds. It scared me... </p>

<p> </p>

<p> </p>
 
A growling bear... I love it! I'm pessimistic on having a monumental drop in prices this year, though. I've had my hopes up for too long only to be disappointed at what seems like watching paint peel.
 
<p>It depends on when the REO's really start slashing. That is the point of no return.</p>

<p>It's possible you won't see the bulk of the damage until 2008-2009, since most people are close to being/already upside down and they can't shortsale unless they get behind on their payments... which is NOT something they are going to 'want' to do.</p>

<p>Once you start seeing the ARM loans adjusting on homes that are worth LESS than they owe (which will account for 60-70% of the properties in OC, at least!), the pain begins - sans vaseline.</p>
 
<p>The toxic loans were flowing freely right up until 02/07. Assuming that most of those are 2/28's, I reckon we'll be looking at ugliness for the remainder of the decade. That Credit Suisse loan reset chart floating around suggests the same thing.</p>

<p>I'm hoping that the Fed discount rate won't be cut anytime soon. Take some of the sting out of the resets and it will drag this thing out even longer. </p>
 
Aren't mortgage rates more closely tied to the 10yr Treasury Note and not short-term interest rates? Big Ben is to much of an inflation hound to starting cutting rates to keep growth expanding.
 
Fixed? Yes. I'm talking about ARM's. I can't see drowning FB's being very selective when it comes to what type of mortgage they refi into. As long as it makes the pain go away.
 
<p>LIBOR and the Federal Funds rate are always pretty close, especially the 6m and 1y.</p>

<p><a href="http://ia.mortgagecoach.com/">http://ia.mortgagecoach.com/</a>.</p>
 
<p>Masterofdamoney,</p>

<p>You are right you are being modest with your numbers because the increases continue every month. By taking the NODs for last 6 months of 2006 and the REOs for the first half of 2007 the conversion ratio is 40%. Like you said if that stays constant then add 2251 more REOs by year end. For the first 14 business days of July I estimate OC has had 822 NODs so far and the average per business day is 59 compared to June's 53, May's 46 and April's 39. That is a 51% increase just from April. The rate of increase is unprecedented compared to 91 to 92. </p>

<p>If you have been reading the forums here for awhile you know that I follow the foreclosures like you do. I try my best to keep the forum readers up to date with the current conditions. Feel free to add to or let me know if any of my numbers don't match what you are seeing. It sounds like you have access to better and more current data than I do and if you would be willing to share the numbers it would be greatly appreciated.</p>
 
I still don't think much will happen if LIBOR or the Feds Fund Rate is cut as to many Lenders, or what is left of them, are going to want higher spreads on these loans; thus making their existence worthless.
 
This is a great thread. There is a new meme floating around which says foreclosures won't be that bad.





masterofdamoney,





Perhaps you and graphix can coordinate on an analysis post. Data like you are presenting will completely destroy the foreclosures-won't-be-bad meme. I would like to see that.





If you combine this data with the research done earlier which showed a large increase in foreclosures by the percentage drop in prices, you can do an iterative calculation to see how the downward spiral drills a hole straight to Hades.
 
<em>"This means a flood of must-sell quick houses entering the market, and a lot of homedebtors that are chopped out of the market. After all, with a foreclosure on their record, their credit will be toast and they will not be able to re-enter the buyer's market for AT LEAST 4-7 years, minimum. Tons of homes entering the market + a removal of a LARGE number of credit-capable homebuyers from the market."</em>





That is exactly the phenomenon I was describing here: <a href="http://www.irvinehousingblog.com/2007/05/21/the-day-the-market-died/" rel="bookmark" title="Permanent Link to The Day the Market Died">The Day the Market Died</a>





Obviously, I am in complete agreement with your assessment of the situation.
 
Masterofdamoney wrote...<p><i>

"Once you start seeing the ARM loans adjusting on homes that are worth LESS than they owe (which will account for 60-70% of the properties in OC, at least!), the pain begins - sans vaseline"</i>

<p>

This is scary, seriously if home prices drop say 40% to 50% then most buyers over the last 4 years will be upside down. That'll affect a number of people in Quail Hill, TR, Woodyabury me, PoS, Northpark, Tustin Field I & II, and most resales. Yikes... That can be 8,000+ units, 7 years of inventory or more.
 
I have 529 plans for my kids, but I know others were planning to use equity in their homes to finance their kids college education. It'll be a shock to little Johnny if mommy and daddy who moved to irvine for better schools, can't afford to send him to Stanford or MIT, unless he gets 40K/year in loans and grants.
 
Movingaround,

<p>

NOD=Notice of Default


NOS=Notice of Trustee Sale (typically 3-4 months after NOD is sent to homeowners)


REO=Repossession
 
REO = Real Estate Owned (generally through repossession)





Bubblegum,





The pain we are about to witness will have far reaching ramifications. I hadn't thought about that scenario, but it is going to be a problem for all those dependent upon continually rising real estate values.





I keep thinking about all the baby boomers waiting to retire. I guess they will have to wait a little longer...
 
<p>movingaround,</p>

<p>Check out the sticky thread on <a href="http://forums.irvinehousingblog.com/discussion/346/1/foreclosure-and-distressed-property-topics/">foreclosures and distressed properties</a>. I give a general break down of how the process works.</p>
 
<p>Here is a little help on how rates are adjusted by lenders:</p>

<p>The Fed has minimal DIRECT impact on mortgage rates. When the Fed raises the discount rate this raises the Fed Funds rate that is charged to Banks to borrow money. This is NOT the money that banks use for mortgages. The amount of money secured by mortgages in the trillions of dollars. This dwarfs the amount held in deposits by Americans as well as the amount of actual cash outstanding. Changes in the discount rate have a greater impact on the interest rates you earn on deposits, or the interest you pay on a car note or personal line of credit.</p>

<p>Mortgages are originated by Banks and sold (at least that vast majority) to a securites firm like Deutsche Bank, Lehman Bros, Bear Stearns, etc.. These companies "purchase" the loan from the originating bank for an upfront fee, usually 2-5% of the outstanding balance. Since the bank also services the loan, they receive a small portion of the monthly payment from the borrower. The remaining portion of the payment is sent off to the investor whom pays the bond holders. Depending on the credit grade of the borrower and the required profit margins of the servicing bank, the borrower's interest rate/cost is determined. The interest rate and closing costs that a borrower qualifies for are a compilation of their credit/income profile, the servicing bank's requried profit margins, and the investors purchase price. This is why rates can differ from bank to bank. Most conforming loans do not differ as much since they are purchased by the same investor. Conforming loans are purchased by Freddie Mac or FannieMae. If the mortgage is not originated by the servicing bank, ie mortgage broker, then you have another party getting their hands in the mix.</p>

<p>Investors figure out what they are willing to pay for a loan by looking at what the 10 year note is doing. If the bond yields are rising, then the would-be bondholders that purchase the mortgage-backed securities from the investment house will requet a higher rate of return. When rates rise on federal bonds (zero risk) then they must rise on other investments. This premium is eventually passed onto the servicing bank and ultimately the borrower</p>
 
You must log in or register to reply here.
Back
Top