Foreclosures and motivated sellers

A couple of follow-ups to yesterday's Dataquick report on California foreclosures:

--Motivated sellers. We've heard often that this downturn won't be as severe as the mid-'90s real estate bust because the California economy is fine, and thus there are few "motivated sellers" as desperate as the newly jobless aerospace workers who, according to economic legend, helped drive prices lower in the early and mid-'90s. Commenter Cal sets this one straight: The banks and lenders that find themselves owning foreclosed houses are as motivated as any seller as you will find, and there are more of these motivated sellers every day, and they are becoming a bigger and bigger part of the market:

(This from Cal):
--2006 Third Quarter, Notice of Trustee sale (NTS) as a percentage of sales reported by DQ for L.A. County in 3Q06: 1.93%

--2007 Third Quarter, Notice of Trustee sale (NTS) as a percentage of sales reported by DQ for L.A. County in 3Q07: 20.35%

--So 1 in 5 sales last quarter essentially have been replaced by more motivated sellers.

Trouble on the Westside? Writing in today's Los Angeles Times, Peter Hong quotes a Beverly Hills agent who predicts the foreclosure wave will eventually make its way west of the 405: "It's working its way to the Westside. The Westside is always last to get hit."  More: "In four Newport Beach-area ZIP codes, for example, there were 11 foreclosures in the third quarter, up from just three in the same period last year. There were seven foreclosures in Bel-Air, and none a year ago."

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Photo Credit: AP

Comments

[Toby]

The Westside is always the last to get it AND the last to recover (they never tell you that part).

You see, now things are back to normal (meaning 20% down and documented income) it makes buying naturally more expensive Beach(ish) homes harder than inland homes.

Even if homes prices drop 50%, the average down payment on the Westside has to be close to 50,000 to 100,000 dollars (depending on Condo/home).

I'll tell everyone though, if you want to live on the Beach, in about 2 years, it will be your best opportunity for a while. But you got to start saving now...even for a condo (You might get away with 10% down or 25,000 but your interest rate would be WAY better if you had 20%).

[Mike S]

I see again and again calls for government intervention. Government provides an important function in contract enforcement. It appears the government is moving in that direct to improve contracts and contract enforcement.

As for a bailout... any decent economist will warn government intervention in financial markets creates perturbations far worse than the problem being addressed. To see the foreclosures in an 'otherwise' healthy economy is simply an indicator of bad business decisions. Government bailing out bad business is itself bad business--it's throwing good money after bad. That includes lowering the federal funds rate to an absurd level and wantonly flooding the monetary market to save Wall St. investors from their own greed and "head's we win, tails we get bailed out" attitude.

People seem myopically focused on mortgage reset as the 'wolf closest to the sled.' The real 'whammy' is the looming 10-12% interest rates Alan Greenspan and other legitimate economists predict we'll see as early as 2010. This doubling of present interest rates is unfortunately how macro economies correct for artificially-low risk premiums that occurred through the rampant greed and fraud perpetrated in the mortgage market.

Sadly, any bailout makes the near term slightly better for the greedy, but worse for the responsible and compounds the problems we'll face within 4 years.

The conclusion: We should be hammering for a government crackdown on contract enforcement/prosecution of fraud and tell people the honest truth: they made bad market decisions by living beyond their means and/or buying homes they never could afford.

Mike S.

[Enlightenment]

Why is SoCal in this mess:
- Rampant Greed.
- "Blind" Stupidity.
- Rampant Fraud.

[GDC]

Even in the Westside, I think it will hit slower this time and will likely last longer than the last downturn. People are "trapped" in their million dollar homes now. They took out equity and refinanced numerous times. Unlike the last downturn (who had to sell due to job losses and high equity), this time the amount of their debt will prevent them from selling at too big of a discount. When foreclosures eventually happen on the Westside (in about 2 or more years), then the banks will hold on to them. It's an outrage that banks can carry these homes at their "appraised market value" on their books rather than their true prices (what it can sell for now). If investor demand that they sell these liabilities within 60 days, we'd have a major correction right now - even on the westside.

[investorguy]

Uh, GDC: Banks don't want to hold real estate, especially not at full market value. Their ability to lend is tied directly to the dollar value of the real estate they're stuck with. As their RE portfolio increases, their ability to loan decreases. That's why it's worthwhile to a bank to get that 4br/2ba liability off the books at any price.

[Cal]

But much of this REO inventory isnt really owned by a bank, it is owned by a bonholder(s) somewhere and being serviced by a servicer. The motivation of the bondholders may not be the same as what a banks would be (not regulated like banks and dont have the capitalization requirements for example).