The coming tidal wave: Bank sees 6.5 million foreclosures

The investment bank Credit Suisse is now predicting that 6.5 million American homeowners -- that's one out of every eight that has a mortgage -- will end up in foreclosure over the next five years.

In a report this week titled "Foreclosure Trends: A sobering reality," Credit Suisse predicts home prices will continue to fall throughout 2008 and 2009, causing a huge wave of foreclosures.

"... We estimate a total of 6.5 million loans will fall into foreclosure over the next five years, with the peak in 2008," the report says. "That estimate includes about 1.2 million loans currently already in foreclosure ... The coming flood of new foreclosures could put 8.4% of total homeowners, or 12.7% of homeowners with mortgages, out of their homes."

Other key points in the report:
-- The report predicts housing prices will fall by 10% in 2008 and 5% in 2009, and then grow by 3% in future years.
-- The report concludes falling prices -- and resulting negative home equity -- is "a primary driver of default and that the walkaway effect is alive and well." In other words, some people who have been paying their mortgages on time, and are capable of continuing to pay, will instead stop paying and walk away once they realize their home is no longer worth what they owe on it.
-- Likening the foreclosure crisis to a baseball game, the report says, "We are at best in the third inning ... global real estate investors are in the early stages of meltdown."
-- By 2009, the report predicts, 63% of sub-prime borrowers will be "underwater" on their mortgages -- owing more than their homes are worth.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
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Comments

[Joseph...The Real Estate Guy]

I will never listen to banks again!

Real estate in the four "Bubble-Ridden" states will never be the same. Maybe 7-10 years before prices go up!

Next 5-7 years, expect prices to keep going down. I have been in the business nearly 20 years. I have been doing research for about 30 years.

Most salespeople are taught to repeat "Platitudes".

[MyLessThanPrimeBeef]

I saw an interesting documentary just recently thought it's been around for a while, called 'Cane Toads: An Unnatural History.'

These are ferocious creatures introduced into Australia years and years ago from Hawaii. The 'scientists' (notice a pattern here? it's how all the smartest people are always involved in the biggest disasters in the history of the world.) thought these toads would get rid of a little nuisance known as cane grub/beetle infestion. As usually the case involved scientists and their solutions, the toads became a bigger problem today than the beetles, for these horny guys are prodigious breeders.

How prodigious? The male cane toad would even make love to a dead female cane toad...in the middle of the road, during the day for hours and hours.

Now, it just seems to me that people like Bin Lackey, Paulson and Dodd, they are like cane toads trying to impregnate a dead female toad with their Sisyphean attempts to manipulate and distort the market.

It's NOT going to happen!

And it's unnatural, gross and pornographic.

I have to go take a shower now. I feel dirty just thinking about it.

[LeftLA]

puckhead: 6.5 million, not 65 million.

[AMerica]

America is a great country. Where else in the rest of the world would an illegal alien such as myself am able to buy a $800k house in South Central LA with 0% down and making only $8 a hour.

Although I can no longer make payment on my house today, I can still live in my house without making a payment for the past 5 months.

I hope everyone vote for Hilary Clinton so she can help illegal aliens like myself live in my house. I would vote, but I'm not here legally.

[Figgins]

Credit Suisse's prediction paints a very bleak picture indeed. However, do we really know the true motivation behind the author's pontifications?

Has CS already written down everything they can, and are looking to push prices further down, in order to buy on the cheap?

Or is their judgment so colored by their financial wounds, that they can't see anything but gloom-and-doom?

Either way, I don't trust them or their report.

[IToldu2CashOut]

There is a lot of denial on this forum. A lot of people are going to be surprised in a few years when they try to sell there house. People really believed that their house had made them rich and was their golden ticket to the upper class. The few smart people who sold and understood what was going on have possibly realized that jump, but for most people, best case scenerio is they end up with a normal rise in value of a their home. Which is the price they bought it for plus inflation. Everyone nowadays is looking to get rich quick, for a lucky few this will happen, but for most people it is a long slog of hard work and patient investing, and then maybe after you die your kids might actually get rich in their lifetime if they do the same thing.

About six months ago I was having lunch in Hollywood and these two woman were talking down to their friend because she sold her house and it was "only worth 500k, thats nothing", they said. Well they will most likely find their houses are worth "nothing" too when they try to sell.

[Robert D]

I mentioned to my Bud from LA another article that I read in the LA Times yesterday, the one with the pictures of 14 new homes for sale in a row in Gardena. I live in Vegas, and had no idea of where Gardena was located. When I told him that the previous $700G homes were priced in an auction at $450G, his first response was "Who's going to buy them, the gang-bangers?" I guess the closer you get to Long Beach, the worse it gets. I do remember riding the Blue line a couple of years ago, and there were people selling packages of tube socks and, honest to God, a guy selling watches. When I asked what he was selling, he opened his coat to display the watches-"Pretty nice, Hombre". There must be a movie with this scene. Amazing...

[Daniel]

It is very interesting to watch the two sides of the debate. On the one side you have those people who were priced out of owning a home in So Cal and these folks talk nothing but doom. Its not based on fact of course, its based on their own facts, that they seek home ownership and the only way this will happen is for prices to fall. On the other side you have RE agents, investors, and current homeowners who don't want to see their investments drop in value, or go underwater. These folks naturally talk about coming stability, the bottoms arrival date, and when we will see appreciation.

Both sides have major flaws in their arguments. The folks who bring out national averages and income levels and really expect houses in Southern California to cost the same as houses in Cleveland Ohio, I don't know what they are thinking. Thats the folks who think housing prices will decline until 2014 or some future date just because it happened that way in the 90s. This is not an average market, it never has been and it never will be. Housing here is always going to cost much more than the national average, because people want to live here. That is not going to change because until we have Ohio style winters, people are still going to want to live here.

I personally am one of those people who would benefit from a downturn by purchasing properties at what I feel will be severely discounted rates and renting them out. I would love for housing to continue to decline through 2012, but realistically I think the bottom is closer to spring 2009. I wouldnt get too excited thinking those million dollar Huntington Beach houses are going to be 400K in three years, its probably not going to happen.

The nature of real estate in the desirable coastal areas is for large upswings and large downturns and we will continue to experience both. When things do turn around, I would expect 5% plus price growth. If you want stability, try Nashville, TN or Chicago, IL where you will get your steady 2-3% every year, but never a year at 20%. It also wont go down 20%.

[mbob]

And.....housing is a trailing indicator.

We're just now starting to feel the first faint ripples from an economically distant event. The tidal wave is yet to arrive.

Anyone old enough to remember the Disney mousetraps & ping pong ball setup to visualize nuclear fission?

I'd reckon we're about 10 loose ping pong balls into a room full of flying spheroids.

A vanished construction trade is going to reverberate through our economy for a long time. Butterfly effect and all that.

We are so in uncharted waters.

[Rich]

First, a reminder to all you apocalyptic California readers: you are the center of the hurricane, pricing in other parts of the country are nowhere near as bad as they are for you, and the rest of the country has a good chance of real estate recovery even late next year, with or without you. The chief problem outside your market is stabilizing the lending industry, not pricing.

Sources that claim there will be vast foreclosures caused by walkaways never give us the basis for their prediction--no numbers to show that people are doing this in any appreciable numbers and the trend is increasing. People who walk away face very real difficulties in getting an apartment, given how the rental industry has gotten so picky about credit ratings and multi-month security deposits, so people trying to walk away in bubble markets may change their minds when they start to hear the horror stories about people going homeless through inability to get a rental.

If that many people were to damage their credit by letting themselves be foreclosed, it would present the market with an interesting dilemma in future years--with so many potential credit card or car loan customers wearing the scarlet "F", would lenders really withhold credit? In the '90's credit card issuers would issue to anything that breathed, so if they stay true to form foreclosure might not turn out to be the ruin it's been made out to be. And that would cause some permanent problems for the next real estate cycle if people hand back the keys as a first resort rather than a last...