Today I came across a detailed analysis of the mortgage meltdown in California along with detailed graphs, long-term analysis, and an indepth look at where we are in the overall housing bubble.
The T2 Partners paper provided by More Mortgage Meltdown can be downloaded here:
I recommend looking over the entire presentation, as it provides a play by play of where we have come in the last 3 years, and what to expect for the coming 3 years. I agree with the general assessment that we are in the middle innings of the overall price declines (perhaps in Inning 5 of 9), but the real movement is yet to come in the middle and high-end price tiers. Of course, there is no way of accounting for significant outside involvement that might change that outcome, however any change must be structural and permanent (such as offering citizenship to anyone purchasing real estate, offering 20% of the purchase price, no questions asked by the government, or total global thermonuclear war. I doubt many can understand what those outcomes would look like, so we’ll focus on the most likely scenarios.
The key is really what is happening and will continue to happen California. Their assesment, given by Mark Hanson, is in my opinion spot on to how I expect the next 2 years to play out:
California housing — at the low end — is ‘bottoming’ mostly because: a) median prices are down 55% from their peak over the past two years, thereby making the low end affordable; b) foreclosures have temporarily been cut by 66% through moratoriums reducing supply; and c) demand is picking up going into the busy season.
But the moratoriums are ending and the number of foreclosures in the pipeline is massive — they will start showing themselves as REO over the near to mid-term. The Obama plan held the foreclosure wave back, creating a huge backlog and now the servicers are testing hundreds of thousands of defaults against the new loss mitigation initiatives. We presently see the Notice of Defaults at record highs and Notice of Trustee Sales back up to 9 month highs — there is no reason for a loan to go to the Notice of Trustee Sale stage if indeed it wasn’t a foreclosure. However, the new ‘batch’ are not only from the low end but a wide mix all the way up to several million dollars in present value.
Because the majority of buyers are in ultra low and low-mid prices ranges, the supply-demand imbalance from foreclosures and organic supply will crush the mid-to-upper priced properties in 2009. We already have early seasonal hard data proving this. As the mid-to-upper end go through their respective implosions this year and the volume of sales in these bands increase as prices tumble, the mix shift will raise median and average house prices creating the ultimate in false bottoms. We also have data proving this phenomenon.
You can find this narrative (and much more) on slide 62.
Again, thanks for all your insight on this matter. I’ve called on a few short sale situations only to find the realtors still playing their games. When I questioned them about the so called multiple offers, I asked why would one be paying these prices on a distressed property when I could go down a few houses and buy the same without the headaches…… they could not give a reasonable response…. your right, the current economic situation is only going to put futher pressure on this market. From what I’ve gathered also, the market will suffer additional downward price adjustments and will never see the days of 2005/2006. Wait a while longer and then see how this all unfolds… especailly with GM hitting the skids this week. It will have some impact indirectly thorughout the country…..
Thank you thank you thank you for writing this blog. I am in escrow on a mid-500k range home and have decided to back out, after reading through this blog and drhousingbubble.com. I’ve decided instead to continue renting and saving for another 1-2 years. Since I don’t intend to live in California for more than 10 years, buying at the absolute bottom of the market is important to me. Thank you for convincing me to wait.