August 31, 2009

Look away. Hide the children.

At one point, for the majority of people in America, it will no longer make economic sense to keep paying their mortgages.

What happens when the homedebtors of a nation simply walk away?

Hint. You'll need more popcorn.


No matter what the NAR, CNBC and realtors on commission tell you.



[image source]


As homeowners head 'underwater,' another housing crisis looms

Almost half of homeowners with a mortgage could be underwater by 2011, says Deutsche Bank.

I think the surprise is prime quality mortgages. That's where the biggest deterioration could take place in the next leg. Right now about 16% of those borrowers are underwater. If our home price forecast is correct, down another 14%, we could have 41% of borrowers underwater in the prime mortgage space. That's what happens when another 14% decline occurs.

Does this lead to a new wave of foreclosures?

Well, we don't think that the wave has stopped in any sense. But the wave is clearly building. That is evident by looking at serious delinquencies. If you look at a chart of how many borrowers have missed more than two payments, a large portion of those people are going to end up being foreclosures.

Well, that rate of serious delinquency has been rising rapidly and continues to rise, pretty much in tandem with unemployment. As long as you have serious delinquencies going up, you know for the next year and a half, a large portion of those are going to turn into foreclosures.

Of subprime and Alt-A (Alternative A-paper) borrowers, about 33% of those borrowers are seriously delinquent. If you look at prime jumbo, the highest quality mortgages, 6.2% are seriously delinquent. That sounds like a low number. But two years ago that number was 1%. It's a very straight trajectory from September 2007, pretty closely mimicking unemployment.

At what point of being underwater do homeowners start falling into foreclosure rapidly?

Once you get to the point where negative equity is significant -- for example, 25% or more -- there have been studies that suggest you get more strategic defaults.

People say, "I bought my house for $500,000, it's worth $250,000, there are 10 available for sale in my neighborhood. It makes no economic sense to spend the rest of my life trying to pay off a $500,000 debt when there's no reasonable likelihood to expect this house to go back up to $500,000."

32 comments:

Anonymous said...

That doesn't look too bad.
With the green shoots sprouting and the stock market boomin..........
we'll all need Mcmansions again.

Pull the trigger NOW !!!!!
They ain't growing any more land, yew know. lol

Dr. Huxtable said...

Monday 8/31/09 7:30am est

US stock market is so rigged. Govt must be propping it up. China market falls 6.7% on Monday, down 22% for August.

And what are US futures this a.m.? Down 0.62%. This confirms the market is totally rigged.

A rational investor will be destroyed in this market as a result of this.


http://bloomberg.com/apps/news?pid=20601087&sid=aNrN81cy0BqI

Anonymous said...

Very happy for you being back!

I happen to read the deutche bank report in its entirety and its projected that 93% of the Fort Lauderdale area will be underwater by 1st quarter 2011. Miami & West Palm Beach are projected to be at 90% underwater. How can this be stopped when there are no real industries here?

I need a popcorn machine for this timeframe! :)

rich in fl

Anonymous said...

I love ya man, but what happened to that extended vacation?

ocho cinco said...

I have heard there is a feeding frenzy in s. california in the low end.The people there are obsessed with real estate.The people with prime loans are really starting to throw in the towel as they see there property value tank.So much for having good credit.

Mad As H*** said...

Why buy right now especially in the worst markets. You can rent for so much less:

One of my friends is leasing a 5 year old waterfront Spanish style home in a gated community in Naples:
2900 square feet, 3 car garage, 4 bedrooms, 3 1/2 baths, sitting on a canal that leads out to the ocean,
pool with screened enclosure, 2 boat slips one is a lift to raise your boat out of the water, golf, clubhouse, tennis, walking trails.
This house was originally $975,000 back in 2004. They tried to sell it listed at $750,000 then $550,000 -- no luck.
They listed it for rent for $1950 per month, then $1700, then $1,500 if you agreed to a year lease.
My friends are renting it for $1,300 a month. ------- that barely covers the taxes, insurance and homeowners association fee!

If they bought that house even for $500,000, their house payment would be over $4,000 a month. So they are saving $3,000 a month and not taking the risk of dropping values. The $100,000 down payment they would have spent is sitting in CDs.

And if a hurricane comes along-- just pack up the valuables and who cares what happens to someone else's house.

Lady Di said...

It is clear Suzanne did not research this.

Add in the commercial real estate walk aways, and damn, it's going to be ugly.

Anonymous said...

I did the math, and let's see, in Jan 08 there were 6% of all mortgages foreclosing, and a year and a half later, foreclosures are "way up to"--7.6%. GEE, the sky is falling.

Anonymous said...

In the tony northern suburbs of Chicago, I've noticed the Lis Pendens have jumped significantly in the last two weeks.

Flood gates opening here. Washing away scrappy little ranches and million dollar lakefront properties alike.

Glad you're back. Hold that lantern high for me.

Angry Leprechaun said...

Keith when are you going to wake up? Obama sued Citi? To force them to float these bad loans!

http://www.mediacircus.com/2008/10/obama-sued-citibank-under-cra-to-force-it-to-make-bad-loans/

Angry Leprechuan said...

Oh, and we taked about this months ago. You said Obama had some answering to do. Seems you forgot and let this slide.

http://www.youtube.com/watch?v=w_BB3HYWJfY

Nick said...

Hi Keith, how the heck are you? And how is everyone else on this blog? I hope all of you are well, happy and healthy. I mean that sincerely.

Anonymous said...

Home Prices will go backup even more than what they were 3 years ago! You can count on it! The reason, INFLATION!

This is Bernanke's plan, do not sell your house! Mark my words! If all goes according to plan , Bernanke's Plan will be a success for homeowners and of course will all suffer because of inflation.

Bernanke understands that housing is what drives the U.S. Economy! He will do everything in his power to create the artificial prices by destroying the value of the dollar.

It will suck for those who save and work hard but everyone is at fault, until you get new leaders in power, you deserve to be screwed by your Government.

PUSSIES!

SeattleMoose said...

Here in Seattle there is more and more "happy talk" by the RE "profession".

What a shock.....

Prisoner No. 6 said...

When it becomes a matter of simple economics, that even a high-school dropout can do (remember, due to the failure of the U.S. education system, more than 50% of the idiot Americans can't figure out what fraction corresponds to 50%), then we will see people acting in their self-interest.

If enough people start sending in the "Jingle Mail," then yes, we are going to see the whole shebang implode. But I'm guessing the long-term strategy of pumping trillions into the economy *will* result in inflation. Thus, the aggregate prices of everything (including houses) will rise, so that even though the house will be worth less in absolute terms than what everyone paid for it - in sheer dollar terms, it will be the same or more.

Of course, we'll all buy pushing wheelbarrows of American Pesos to the corner bodega to buy moldy potatoes by then, but no matter.

Mitesh Damania said...

Sibel Edmonds interviews Joe Trento, former . Did you know the Lockerbie bombing was retaliation for blowing up a Iranian passenger jumbo jet or that Libya was made out to be a scapegoat to coverup US's involvement with Iran and the Middle East? There's a lot of stuff that I didn't know that's covered in this interview.

LINK HERE

Anonymous said...

Don't forget to add Greg Swan's walk-away to that pile

ContraryRiches said...

Keith, I think u should give us a post about your travels this summer...many inquiring minds wanna know.

Anonymous said...

Don't leave us hanging again man. Its very difficult to maintain sanity without you and your readers.

euonymous said...

Keith,

Man-up and slowly slide in that admittance thing, in little pieces here and there, so we'll hardly notice...

That you See...

That your man Obama ain't helping matters. To say the least.

There are more important things you could do with your blog/audience than continuing to pledge your allegiance (even if just implied by ommission) to a failing leader (at best).

Anonymous said...

One of my friends is leasing a 5 year old waterfront Spanish style home in a gated community in Naples:
2900 square feet, 3 car garage, 4 bedrooms, 3 1/2 baths, sitting on a canal that leads out to the ocean,
pool with screened enclosure, 2 boat slips one is a lift to raise your boat out of the water, golf, clubhouse, tennis, walking trails.
This house was originally $975,000 back in 2004. They tried to sell it listed at $750,000 then $550,000 -- no luck.
They listed it for rent for $1950 per month, then $1700, then $1,500 if you agreed to a year lease.
My friends are renting it for $1,300 a month.


Sounds like a dream. I don't believe that. Nice try.

Anonymous said...

Home Prices will go backup even more than what they were 3 years ago! You can count on it! The reason, INFLATION!

This is Bernanke's plan, do not sell your house! Mark my words! If all goes according to plan , Bernanke's Plan will be a success for homeowners and of course will all suffer because of inflation.

Bernanke understands that housing is what drives the U.S. Economy! He will do everything in his power to create the artificial prices by destroying the value of the dollar.

I think the same way. Like it or not, they will try hard to maintain house prices as high as they can.
F*** it. I pulled the trigger and I'm on the other side now.
Very good price, 4.75% fixed for 30 years. Try to get as low again. :)

patrat said...

Hey Keith, glad to read things from you.
Here's my little peon take right now - things are getting worse. I am worried because right now, I know more than 5 people who are losing homes, walking from homes or barely holding onto homes. This is in NY, California and Oregon.
I am wondering about the flash trading that is going on. It seems a huge percent of the market is that kind of trading. Does the little guy even have a chance? I actually don't think so.
I wonder when the "tipping point" will come.

patrat said...

Take a look at Japan. I know we are supposed to be "different" but they were also flying high for a long time. And now, their stock market and their housing market have been down for 20 years and are still not recovering.

To me, there is a crash going on. We are so close to it that we don't see it.

But what can one do? I really don't know.

patrat said...

And by the way, aren't the banks that were too big to fail, even bigger now?

Anonymous said...

"...continuing to pledge your allegiance (even if just implied by ommission)..."

One of quite a few; flogging that pathetic need to point out the obvious:

Yes; we get it. Obama bad.

Next we'll hear how wonderful things were Jan. 19th; won't we?

Don't peek at two years from now, though.

Nimesh said...

Anonymous Anonymous said...

One of my friends is leasing a 5 year old waterfront Spanish style home in a gated community in Naples:
2900 square feet, 3 car garage, 4 bedrooms, 3 1/2 baths, sitting on a canal that leads out to the ocean,
pool with screened enclosure, 2 boat slips one is a lift to raise your boat out of the water, golf, clubhouse, tennis, walking trails.
This house was originally $975,000 back in 2004. They tried to sell it listed at $750,000 then $550,000 -- no luck.
They listed it for rent for $1950 per month, then $1700, then $1,500 if you agreed to a year lease.
My friends are renting it for $1,300 a month.

Sounds like a dream. I don't believe that. Nice try.

September 1, 2009 4:33 AM

I am renting a nice one bedroom apartment with heat and water included for $670 in Chicago. In a nice neighborhood!

My cousin who is doing his medical residency found a two bedroom condo in the Loop for $1800. All utilities included.

Only those who are not aggressive will pay full price. The wise will negotiate, persist and won't take no for an answer.

Bukko_in_Australia said...

its projected that 93% of the Fort Lauderdale area will be underwater by 1st quarter 2011. Miami & West Palm Beach are projected to be at 90% underwater.

Rich in Fla -- today it's underwater financially. With future global warming, those percentages of Ft. Lauderdale et. al. will be underwater literally! Which will include my ex-wife's house, so it's not all bad...

Nick -- fill us in on how that foreclosure's going, mate! Having you describe your travails is like Casey Serin contributing personally to S&A.

NM said...

Hey - the US housing bubble so ancient history. Come and have a look at Australia folks, the housing index (up 150% from 2000) has staged a comeback and is about to break all time high again. And the populumps are more convinced than ever that price can only go up (they double every 7 years, don't you know). We're "special" down here and with a "special" housing market. China will save us, high immigration rates - you know the lines. Property prices are high because there's a shortage, and we know there's a shortage 'cause prices are a rising...

Keith - how about a blogging vacation in sunny Queensland? I'll supply the laptop and poolside martinis. You'll love it down here. And we need you.

Mark in San Diego said...

The local Blogs are going wild at the number of foreclosures posted in the past two days here in 92101 (and other zips in San Diego). . .

http://www.sdlookup.com/Foreclosure_Updates-24-Downtown

Looks like the foreclosure tsunami is finally hitting the fan.

Paid Off said...

Hi Keith,

Just thought I'd check, and your back. What a nice surprise! Hope you had a nice vacation, now hurry up and make some sense out of all this.

Area51 said...

There is no indication "owners" will walk away en masse.

Most will assume the value of their house will return to what it once was, similar to people who hang on to a stock hoping for a turnaround.

Some will bail of course, but most will hand on especially considering it is a roof over their head and their children grew up there and other emotional sh*t.

Besides, we are not far from the bottom, so you will see UP months like we saw last quarter on the Case-Shiller. That will motivate people to hang on.