WSJ: Where Housing is Headed
Looks like as of yesterday Seattle had the lowest rate (1.65%) of loan payments overdue in the 28 major markets that the WSJ tracks. The national average is 3.41%.
How can we expect a significant downturn if it looks like the vast majority of people are so far clearly able to afford their mortgages?
Source: http://online.wsj.com/public/resources/ ... -sort.html
How can we expect a significant downturn if it looks like the vast majority of people are so far clearly able to afford their mortgages?
Source: http://online.wsj.com/public/resources/ ... -sort.html
Comments
a) They can refinance, cash out, get HELOCS that enable them to remain current.
b) If they get in trouble, or think they're going to get in trouble, they can always sell for more than they bought the house for including all the costs of sale.
Note that both of the above rely on ever increasing house prices.
Foreclosures are *not* a leading indicator. Foreclosures in San Diego were also low, before prices leveled off (then fell), and then foreclosures went through the roof.
I'm not saying that Seattle will follow San Diego, or that foreclosures WILL increase dramatically. I'm just saying that you can't use this statistic in this *current* market and use it as a leading indicator.
I only found this because she had an ad on craigslist for a ridiculously overpriced rental townhome that she'd "overimproved" (using equity no doubt). This is definitely a unique case, but only in the sheer speed of refinancing. I have to wonder if the people doing this realize that equity isn't the same as income, or if it's just become a habit.
While some people definitely refinance wisely for building wealth, I can't come up with a scenario where refinancing this often could increase ones net worth in a flat or rising rate environment.
Check out DJO's recent post on the blog
Home sales plunge in September
San Fransisco has a loan overdue rate of 2.29% (the third lowest) according to the link you provided in your post above. It appears that a significant downturn in real estate can be unrelated to "loan overdue rate". Seattle is looking less and less special!
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I've been saying this for years. My exact quote, "equity isn't the same as income, it's about 20x better!"
You have a point but it will be interesting to see if the C/S data follows the drop in median. It's been established on this blog that on the way up median wasn't a good measure of appreciation and I think the same should be said for on the way down. The only real way to see what's going on is with C/S or the OFHEO index.
It's important to remember that the default rates are closely tied to appreciation. Defaults will be low if there is positive price appreciation, since the appreciation bails out anyone who gets into a tough spot (e.g. through refinancing or sales). Once appreciation turns negative, however, the defaults can spike like mad overnight.
On that note, the appreciation rate for Seattle area real-estate has been dropping significantly, and if the trend (i.e. of drops in real-estate price appreciation) continue in the Puget Sound, we will be entering negative territory sometime in the next year. This is when our region will start catching up with the foreclosure wave already gripping most of the nation.
To put this another way, low default rates in an appreciating environment don't really tell us anything about the fiscal health of home-owners. Now, if default rates remain low EVEN when real-estate prices are falling, then we could conclude that the home-owners must be in good financial form.
C/S and median generally do track over time - for King County it's about 99% correlation over time and 88% for the Y2Y number in any particular month, and 72% for the M2M figure (those are "r", not "r^2" as shown below) - the issue being the volatility of median vs. C/S in any particular month.
C/S for SF is down about 4% over the last year, and if the median price drop persists I'd expect C/S to follow suit.
And as Sniglet points out - Foreclosures are probably an outcome of dropping prices, not a predictor. If prices are going up, you sell the house and make money, not lose it to the bank.
Just a small nitpick, but I would reword that as "foreclosures currently taking the nation by storm ...". Even during prolonged periods of 4% annual appreciation, forecloses are still a common event. They just normally stem from unexpected events, like losing a job, or divorce.
Other than that, nice graphs regarding the gap between median and CS this last year or so.
Agreed. Although I would like to also suggest that an analysis be done on the periods during which the correlation is higher. The theory would be that during inflection points (whether up, or down), the changes in median would be less reliable and less likely to mirror the C/S numbers. Why? Because these are the points where the *mix* of housing sold changes.
Just a theory...
Here's some additional data on SoCal's foreclosure rate. Check out this chart (from Calculated Risk):
Chart
Back in 2005 (and early 2006) the local SoCal media and California Association of Realtors were touting the low foreclosure rate as great news. After all, how can we have price pressure in the downwards direction while foreclosures are so low?
Anyway, you can see what started to happen in 2006, and then exploded in 2007.
I'm not suggesting we'll follow the same pattern. I am, however, looking to highlight that a low foreclosure rate does not predict a continuation of that low foreclosure rate. It's happening all over the states.
Of course, it won't happen here.
interesting observation. I'd be willing to bet that foreclosure rate is actually inversely correlated with appreciation, in any specific period - but of course most real estate pros "know in their bones" that because the rate is low that the market is healthy. Can't do much with data. nope. I guess that's why the MLS hoards it!
Many of the defaulting loans right now are ARM loans, and surely a certain percentage of them will be pay option, interest only, negative amortization ARMs.
These loan products are how lowermybills.com (owned by credit repository Experian) comes up with the low monthly payments quoted on their wildly successful banner ads.
Negative am loans means the homeowner is losing equity as time moves forward at an even faster rate when compared with loans that amortize.
Defaults and foreclosures in the Seattle area will increase. We are not special.
I always do an unscientific poll at the beginning of this class to find out why the Realtor chose to take this class topic. Two, three, four years ago, half the Realtors were taking the class because their investor clients wanted the Realtor to help him/her purchase pre-foreclosures. The rest of the students and were there to learn how to capitalize on working with the homeowners to list and sell the house prior to the foreclosure.
Now, usually only a few hands go up for help with investors, the majority are there because of an increased need for education on dealing with homeowners in default.
They don't teach foreclosures and short sales in the pre-licensing real estate classes.
True. But if there is postive price appreciation even the struggling home-owners with negative amortization loans get bailed out. Decreasing real-estate prices is what causes foreclosures to rise, and those with neg-am loans will likely be the first on the chopping block when prices head south.
Not only that, the difference between what strapped borrowers would have paid on the normal schedule vs. the neg-am schedule IS BOOKED AS CURRENT INCOME by lenders under the Capitalized Interest GAAP rules. A massive chunk of income reported by banks each quarter, including WaMu, is comprised of this fake money.
The ramifications of this make my insides gurgle.