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How much worse could the local real estate markets get in 2010?

The folks at TransUnion noted last week that approximately 10% of California mortgage borrowers were at least 60 days late in the third quarter of 2009:

Let’s try to quantify what that means for the near future, and 2010.  How many more homes are lurking in the inventory shadows?

Can the local markets handle more distressed inventory?

The city-data charts show how many people in each zip code have a mortgage.  Hypothetically, let’s take 10% of the total mortgage holders in each zip code, and compare to the MLS sales, Y-T-D:

It looks like the local markets could have to endure substantial increases in distressed offerings next year. How many have already received a foreclosure notice, and are on the NOD or NOT lists?

60-day lates – NOD/NOT = Shadows

With the truth finally coming out about how lousy the loan-mod results have been, you can’t really hope that many of these defaulters will find a way to save themselves. Even if there are a few who are just loan-mod bluffing, and are willing to go back to making their regular payments instead of being foreclosed, it can’t be many – maybe 10% to 20% tops?

For things to stay the same in 2010 as they were this year, the banks will either have to slow down the drip, or regular sellers will have to step aside to let the distressed sales through. I don’t think either one of those will happen – it’s been surprising to me how many regular equity sellers have been willing to sell these days. I’ll try to get a count of those next, but any way you look at it, next year should bring relief for buyers!

I hate these general nationwide articles, but the graph was pretty - plus I figure that Ronald McMansion was biting his tongue on this one, from WSJ.com:

http://online.wsj.com/article/SB125530360128479161.html

An excerpt:

Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.

The prime category includes so-called exotic mortgages that were increasingly used to buy more expensive homes, including interest-only mortgages that allowed borrowers to defer principal payments during an initial period. Borrowers often aren’t able to refinance out of these products because the drop in home values has left them with little equity in their homes.

Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.

Zillow estimated that nearly one in four homes with mortgages was worth less than the value of the property at the end of June. Mr. Humphries said he didn’t expect to see foreclosure volumes level off until later in 2010.

All that matters to most buyers is the flow of new REO listings – has the flood started?

San Diego County, Attached and Detached REOs:

* late-reporters should fill this out, but will it get to 200?

If anything, the REO market is slowing down a little, not speeding up.

from Rueters:

Prices of U.S. single-family homes rose for the second consecutive month in June, adding to evidence that the three-year housing slump is easing, Standard & Poor’s reported on Tuesday.

The S&P/Case-Shiller composite indexes of 10 and 20 metropolitan areas both rose 1.4 percent in June from May, almost three times the 0.5 percent increases of the month before. May’s increases were the first in nearly three years.

S&P also said its U.S. National Home Price Index recorded a 14.9 percent decline for the second quarter, compared with a 19.1 percent year-over-year drop in the first quarter.

Compared with the first quarter, though, prices rose by 2.9 percent, marking the first such increase in three years.

Don’t get too excited, San Diego’s June number was 146.09, a measly 0.67% increase from May’s 145.12 – we’re all the way back to March’s number! 

Take it all with a grain of salt, with emphasis on the local numbers. Like these from Altos Research:

Sellers gravitate towards the good news only – expect that their confidence will be artificially inflated, like a lot of other things. 

Places like Oceanside may be hot with FHA/VA buyers, causing some wild blog stories, but looking at these graphs, there doesn’t appear to be much pricing pressure in Carlsbad (or other similar areas).  The shorter-term will have some spikes, but the 90-day is the trend. 

We might see a flurry or two, here and there, but it would take a consistent string of months’ or years’ worth of improvement before many will be impressed.  

People with bigger down payments are choosier, which keeps a lid on pricing.

From our friends at housingtracker.net:

http://www.housingtracker.net/asking-prices/san-diego-california

In August 2007 there were over 20,000 homes for sale, and today there are 11,457:

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Causing sellers to be more optimistic with their list prices recently:

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Though with 22,462 houses and condos on foreclosureradar’s list of NODs, NOTs, and REOs, there has to be relief ahead, doesn’t there?  Typically in January we see the low inventory count for the year, before the spring kick. 

Let’s use the active inventory as one of our primary indicators.

We’ve seen over the last few months how frenzied up buyers can get when there are few homes for sale.  If we head into the 2010 spring kick with an ultra-low inventory and decent interest rates, it’s going to be off to the races.

If there is a surge of REOs over the next six months, and we head into the spring with a bloated inventory, then we could slog along.

We’ll probably know where we stand by the holidays. 

Housingtracker’s average for last December was 15,116 homes for sale, and today’s count is 11,457 listings. 

If the active inventory is rising by the holidays, then trouble is brewing, because normally the inventory declines towards year-end.  If there are fewer homes on the market in December than there are today, then the spring kick should be lively – any increase in REO inventory could correspond with the usual seasonal boost.

Where do you think we’ll be?

Guess how many attached and detached active listings there will be on the morning of December 1st, and the closest guesser will receive two tickets to a Chargers game!

We’ll have an instant winner too – the best explanation for a guess will receive four Padres tickets for Saturday August 22nd vs. Cardinals at 7:05pm!

After the display of quarterly sales, reader ’propertysearch’ asked about the pricing curve.

The cost-per-sf measurement is an imperfect tool when analyzing individual homes, there tends to be a complexity of other factors that weigh into the buying decision.  But here it charts the trend fairly well of the quarterly detached home sales from Carlsbad to Carmel Valley:

Was last quarter just a blip in the downward trend, or is the trend looking for the floor?

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How much do the higher-end homes skew the chart?

Of the 506 houses that closed last quarter, 130, or 26% were over $1,000,000.

Below $1M = $309/sf

Above $1M = $533/sf

Maybe I should split them, and do two charts?

There has been discussion about San Diego home prices reverting back to their ‘normal’ trend, but what is normal?  3x income?  4x income?  5x income?

The few times I’ve spoken up about the income question, I’ve said “Who cares about the median income for the county, what counts is the income of the potential buyers”.  Not everyone who lives in the county is looking to buy a home, and at this point they are most certainly a minority.

But comparing the trend is noteworthy, because over time there should be a statistical ‘norm’.

Harvard has charted the affordability index for each metro area, the comparison of median household income to median home price through 2006.  I used the city-data report of median household income ($61,793) to their median home price ($556,500) for 2007.

For 2008 and 2009 the income used was $60,000, and the Dataquick median home price for May ($380,000 and $295,000).  This is the chart of median price/median household income:

Since 1980 the number has never been under 4.0. 

Yes, today’s median sales price is skewed artificially low due to the hot lower-end markets, but overall it looks like the relationship has gotten somewhat back in line.

Yes, the higher-end is screwed up, and has a long ways to go.  The median sales price so far this month for the 126 detached sales from Carmel Valley to Carlsbad is $800,000.  But as more higher-end sellers sell for less (instead of not selling), this number should trend higher if the median sales price rises, and incomes stay the same.

What if the median income goes down at the same time?

Example: Median sales price trends up to $350,000 due to additional higher-end sales, and the median income drops to $55,000.  New ratio is MSP = 6.36 x income.

I’m not sure we’ll depend on this relationship to tell us much in the future.

The Harvard Excel spreadsheet for metro USA areas: metro_affordability_index_20071