Foreclosures Are Skyrocketing

On Tuesday, I started thinking about buying a condo on the water. Not now, but three or four years from now. Even so, I will start doing work in my local market soon so I can be ready when the ultimate bottom occurs.

I believe that we are at the beginning of this bloodbath in residential real estate. And the properties that are going to come down the hardest will be condos at or near the beach. I think that when this is all said and done, you will read about condos being sold at distressed prices, 50%, 60% or even more off their original asking prices from the top. It is going to be ugly.

And at the height of pain, I plan on buying.

But now is not the time. According to Bloomberg.com:

U.S. foreclosure filings surged 90 percent in May from a year earlier as more homeowners fell behind on their monthly mortgage payments, RealtyTrac Inc. said.

There were 176,137 notices of default, scheduled auctions and bank repossessions last month, led by California, Florida and Ohio, the Irvine, California-based seller of foreclosure data said in a report today. The median price for a U.S. home slid 1.8 percent the first three months of 2007 as the housing slump entered its second year, according to the National Association of Realtors. The filings rose 19 percent from April.

A jump in foreclosures at a time of year that traditionally is the busiest for home sales means the slide in prices probably isn't over, said James Saccacio, chief executive officer of RealtyTrac. Typically, more than half of all home sales occur in the April to June period, according to Freddie Mac, the No. 2 mortgage buyer.

"Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year,'' Saccacio said in the report. That will add "to the downward pressure on home prices in many areas.''

Ranked by the number of foreclosure filings, California topped the list, with 39,659 in May, and Florida was No. 2, with 21,704. Ohio was No. 3 for the third consecutive month. It had 13,214 filings, said the report. Rather than count the number of unique households in foreclosure, the study counts the number of foreclosure-related legal filings, which could result in some properties being double- or triple-counted.

There will also come a time when I will back up the truck on the homebuilders. But we are not there yet. I think we will go back to the valuation lows last seen at the beginning of the 1990s. I suspect the homebuilders' stocks will be cut in half from these levels. Then, I will be in heavy.

Oh, and also, commercial real estate is stupid. My biggest net exposure is short the REIT index, (IYR).

Comments

[Malkiel:]

I'm taking the California numbers as a confirmation of the theory I expressed as comment to an earlier article, that the most dangerous mortgage products that led to this meltdown were all invented first in the California market to shore up seller's price positions in a market where prices are hopelessly out of line with incomes. It's just bizarre to watch HGTV features where Californians who make average incomes are reaching to buy 400-900k houses which they wouldn't even consider trying for in other places where sanity rules. We will know the reforms are real and have taken hold when California prices fall into line with similar parts of the rest of the country, or we'll be in trouble if the slick operators in the industry keep finding a way to pass money to people who can't afford it in that market when sellers across the rest of the country have all suffered losses for their sins...

2007 Jun 13 10:02 AM

[david s:]

What exactly would constitute a "similar part of the rest of the country" to California? Real Estate is not a commodity.

2007 Jun 13 08:20 PM

[brynaw:]

FYI: Foreclosures now greatly outnumber sales in San Bernardino & Riverside Counties.

Foreclosure rate spikes in region
www.pe.com/business/lo...

Riverside County recorded 4,550 foreclosure filings last month, which was more than four times the 1,066 filings recorded in May 2006.

San Bernardino County was the seventh-ranked county in foreclosure activity, with one foreclosure last month for every 166 households, or a total of 3,633 filings, up more than seven-fold from 513 a year earlier

Southland home sales hit 12-year low
www.latimes.com/busine...

Most of the erosion in May’s sales appeared in the lower-priced regions, particularly the Inland Empire. In Riverside County, sales fell 45.4% to 3,307 year over year, while in neighboring San Bernardino County, sales plunged 46.5% to 2,220.

2007 Jun 13 09:49 PM

[brynaw:]

<i>Real Estate is not a commodity.</i>

David S,

Do you mean to imply that "All Real Estate is Local"?

In all seriousness, in the nearly 40 years I've been alive, California real estate has been significantly more expensive than most other parts of the country. Even so, it has NEVER come close to the stratospheric heights it has achieved over the past 6 years, when inflation-adjusted and measured against its supporting economic fundamentals (rents and incomes). It's true that big, desirable cities with low unemployment and high job growth (S.F., L.A., NYC, Boston, Miami, etc.) will *always* demand a certain premium over rural and not-so-desirable areas. However, this doesn’t mean that no price is ever too high to live there, or that prices cannot correct because “everyone wants to live in ______”.

California’s long-term affordability stats have been well below the rest of the country for a long time, this is true. Whereas in the past, the long-term median price-to-HH income ratio might be 3:1 in “flyover country”, in CA, it was probably closer to 5:1 (pre-bubble). Rents have also been persistently higher in CA by a similar margin, which indicates that (a portion of) higher prices is *not* speculative in nature, but a true “destination” (or NIMBY) premium. The problem today is, prices are ridiculously out of line with BOTH rents and incomes, even accounting for that so-called "sunshine premium". The CA median price-to-HH income ratio today is close to 11:1, and rents cannot cover more than 50% of carrying costs of a new mortgage (assuming a conventional, non-toxic loan) and a typical down payment.

I should also mention that part of CA’s high pre-bubble price-income ratio is probably due to NIMBYism and illegal immigration, as much as a “sunshine” or destination premium. 40 years ago (before UBLs, Prop. 13, anti-development zealots, Reagan immigration amnesty, etc.), the price-income ratio here was about equal with the rest of the country –about 3:1. Explosive population growth among illegals of course has increased real housing demand, while virulently anti-market forces have artificially constricted supply. So, arriving at a long-term price-income equilibrium ratio closer to 5:1 does not seem too unreasonable for today's California. But 11:1? That looks a bit toppy and unsustainable, even by CA standards.

Bottom line: when the fundamentals are this far out of whack, prices must eventually revert to the mean, either by general inflation, or by nominal price drops, or (likely) both. Either way, a house purchased today --or very recently-- is virtually sure to lose substantial real value --especially here in LA-LA land.

2007 Jun 13 10:21 PM

[cardocs:]

Great job and research!! I am in the same boat as you. I currently don't own a home in the US although I live here part time. I would like to buy a condo near the water somewhere too. I am very flexable on location. I was wondering if you would share your knowledge on how to do the research and where you are looking. Thank you for your consideration.
Kevin

2007 Jun 14 11:54 AM

[rbirish_2:]

Malkiel wrote on June 13th: "It's just bizarre to watch HGTV features where Californians who make average incomes are reaching to buy 400-900k houses which they wouldn't even consider trying for in other places where sanity rules."

I live in Silicon Valley and I can tell you that the people here do not make average incomes. In fact, we are some of the highest paid workers in the US or anywhere globally for that matter. We have thousands of examples of engineers, who are 22 or 23 years old and fresh out of college, earning $70,000 to $100,000 per year with almost no work experience. If two engineers get married here, then family household income is quite often greater than $150,000 to $200,000 per year which makes a $400K to $900K house quite affordable.

My best friend is 36 year old sales exec for a networking company and she earns more than $200K per year. Her husband is an engineer working for a chip company and he is earning about $140K per year. My point is, with a few years of experience under your belt, married couples in Silicon Valley often earn in excess of $300K per year. That's about 5-10 times more than the national average income.

So, it's no surprise to me that we live in $900,000 houses.

2007 Jun 16 01:17 PM

[c1ue:]

RBirish,

Your statement is anecdotally true, but it is always important to have context.

From EDD via the viewfromsiliconvalley.... website:

Dec'06 1MoChg 1YrChg
Total Workforce 857.3 0.2% 1.1%
Employed 820.9 0.5% 1.5%
Unemployed 36.4 -4.7% -5.5%
Unemployment % 4.2% -6.7% -6.7%
JOBS
Total Jobs 896.9 0.1% 1.8%
Total Farm Jobs 5.0 -19.4% -3.8%
Goods Producing 217.1 -0.4% 0.8%
Services Providing 674.8 0.5% 2.2%
GOODS PRODUCING:
Construction 45.8 -1.5% 1.8%
Computer Periph. 28.6 -0.3% 2.9%
Semiconductors 51.5 0.2% 1.0%
Electronic Instrmnts 19.3 0.5% -1.5%
Nondurable Goods 12.3 -0.8% -1.6%
Other Mfg. 59.6 -0.3% 0.5%

2007 Jun 17 03:18 AM