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:
| Zip Code | 60-day lates | MLS Sales YTD |
| 92009 | ||
| 92024 | ||
| 92130 | ||
| 92067 |
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
| Zip Code | 60-day late | NOD+NOT | Shadows | MLS Sales YTD |
| 92009 | ||||
| 92024 | ||||
| 92130 | ||||
| 92067 |
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’m waiting with baited breath. Having a reprieve from the housing insanity would be a welcome change for “average” buyers.
Thanks for printing the truth. Hopefully it will pan out.
Jim, you say you’re surprised to see so many equity sellers selling right now. I might be wrong…but isn’t it a good time to sell right now? Especially if prices are expected to continue declining next year? Sellers can take advantage of low inventory, the tax credit and low interest rates.
We’re forgetting one major “X” factor here – the Federal Gov’t. Barney Frank was up to his old tricks again yesterday proposing new legislation that would shift $3B in TARP funds to emergency mortgage aid.
I’ll give you a prediction of where things will be if you can answer this:
Will the government stop their fiddling with HAMPs failure, or will they move on to principal reductions?
If they move on to principal reductions it’s GAME OVER within two years.
Jinx,
I think he’s surprised about how many are thinking rationally.
After the irrationality of 2007-2008, one would have thought that “they’re not gonna give it away!”
Chuck
Art is right, maybe even more than he/she realizes.
If principal reductions come, that is opening a pandora’s box that can never be closed without bankrupting the US banking community.
It sets a precedent that if any bank does it for one, it will have to do it for ALL. This would mean MASSIVE write downs to market. I can imagine lawyers would be chomping at the bit to sue for everyone to get a principal reduction, even those not underwater. It would be a godsend for that entire lawyering industry, and a total complete and utter collapse of contract law in the US. People seem to forget that we have the oldest 2 forms of principal reduction available to each and every homeowner: Foreclosure and Bankruptcy. It works perfectly in harmony. Foreclosure takes care of 1st liens and non-recourse debt while Bankruptcy takes care of second-liens and all other creditors.
Of course, I wouldn’t be surprised if in the future, banks or individual borrowers will be offered a kind of insurance that protects against negative equity, but that’s a separate contract.
I promise you, if any bank offers any kind of modification that permanently affects collectible principal (not just modifying the interest rate), its days are numbered. Other borrowers can immediately argue that their loan requires at least an equal write-down, or they sue for unequal treatment in lending. It will not turn out well. If FNM/FRE do it, it’ll impact all of their bonds.
Very, very slippery slope, or perhaps drop-off?
Chuck
Jinx/Chuck,
Yep, surprised to see people thinking rationally, and not letting their ego talk them into wanting what used to be, price-wise.
If the principal reductions start, it will be the FDIC who starts it, not the banks.
“Of course, I wouldn’t be surprised if in the future, banks or individual borrowers will be offered a kind of insurance that protects against negative equity, but that’s a separate contract.”
Historically, that was provided by a sizable down payment. Starting equity has apparently been replaced by mortgage insurance like FHA. Borrowers are protected from negative equity by foreclosure if loans are non-recourse (like first mortgages in CA).
Keep an eye out for Shelia Blair making this announcement. I would agree with Kingside regarding the FDIC making the first move on the principal reductions.
Principal reductions would definitely start before the November elections for sure if the are going to happen.
Those votes are important to the politicians!!!!
CASH IS KING: Federal tax rates are on fire sale now for those of us that OWN (not rent from the bank, dream or post BS on the net) investment properties, especially those fully depreciated. Do you think Dunce toe-tapping stupid and corrupt bough-off creatures in congress, or Barney Boy Frank and his imbecile numbskull amoral crooked ‘colleagues’ will allow us ever again a 15% federal long-term gain rate? I doubt it. Once those crooked, scamsters realize what they are missing out on from people like me that are closing sales this year with BIG gains involved, just watch them get on their knees to bow down to their masters and raise those long and short term rates. Guaranteed. Yes, the sales prices are not at peak levels, but one thing JTR taught me is that “there is nothing price can’t fix” -Thank you, JTR.
Thanks Nevada, 0% state tax. Thanks MaObama for 15% Fed Rate. Cheers. Now, which banking institution can I trust with my cash? Looks like FDIC coverage for interest bearing accounts may be in Jeopardy for ’10. Think about that.
To answer JTR ?. It WILL get Much, Much worse in ’10. Think Russian bread lines and multitudes of people sleeping in their vehicles. Worse like That.
December 8, 2009
Hey 3-G,
The 15% LT cap gain rate is already expected to go to 28% starting in 2011 (goes up once when Bush cuts expire and goes up again with the health care sur-charge, totaling 28%). So your thinking is correct on capital gains tax going much higher.
New items 2010 buyers should consider: is there sufficient land to grow enough food to feed the family; and can the land be easily defended against armed poachers.
ps – you can trust gold. That’s all you can trust.
I bet many sellers have friends bragging about what good deals they have gotten buying recently. When they go to a friend/family member/coworker’s new pad, and ask how much they paid, the answer will make them wise up double quick like.
Funny thing is legalizing weed my bring us out of this depression, in CA anyway. Think of the resources it will free up and the tax revenue it will bring in.
New items 2010 buyers should consider: is there sufficient land to grow enough food to feed the family; and can the land be easily defended against armed poachers.
Seriously though, there isn’t enough land in the US for this. I also can’t buy that land and continue to have a job. If your concern that the US is going to devolve into anarchy, you might as well just blow your money on a good time now.
How about we send every hard working american a check for 50k?I wonder how much each crook on wall street got?Time to help the avg joe and quit throwing money at wall street when they threaten to tank the stock market.Wall street has the govt by the balls.they were the ones that created the bogus cdo market and then they get bailed out when it fails?Now you are going to have to pay more taxes so your neighbor can get an 8k tax credit to buy an overpirced shack in s. california.
buy a house and get rich,
You nailed it on the head.
Let the banks burn to the ground. There will be others begging to take their place in the marketplace.
What 3rd Generation said is spot on. If they don’t extend the LT gains tax rate, then it’s very likely we’ll see a lot of selling of all kinds of assets next year.
This is why I sold all of our remaining investments that had LT capital gains this year. We are now 100% in USD cash (after being short the dollar for the past couple of years). I think the dollar is going to strengthen and sellers are going to step up to the plate next year.
It’s not surprising to me that the long-term owners are selling. They are still sitting on gains that were unimaginable before the credit bubble. Smart sellers are going to lock that in before they hit retirement.
As mentioned all year long, this is a seller’s market. I’d be selling hand-over-fist if we had any remaining RE this year.
I can see maybe liquidating stocks to avoid the higher tax rate (because you can’t exchange stocks, but Sell Real Estate? Maybe if you have the wrong property with dead equity. Everything we hold provides us an excellent Cash-on-Cash return (at least 10%), plus we can write-off the depreciation. Let’s say we sell, don’t exchange, and just pay the tax–don’t forget that depreciation is taxed as ordinary income–where do I put it my roughly 70% (after tax and selling expenses) of equity–I would then need at least a 13% cash-on-cash return. Keep in mind that during inflationary times (yes they are coming) you want to hold tangible assets, not cash–Please Advise.
Sure there is huge shadow inventory. But the banks do nothing.
I saw well over 100 homes schedule for auction in the OC zip I’m looking at. Say 50% got loan mods. There were maybe a dozen that either went back to the lender or were purchased third party.
So there’s a good third of these homes that just get rescheduled and kicked down the road.
JTR was thinking a few weeks back that the banks were going to start getting fed up with the loan mods and waiting and start actually pushing these things to foreclosure. If so, I’d sure like to see it. My take is that as long as banks are making money off of carry trades and the mark to market doesn’t require them to book these things at FMV, banks are not going to do anything but sit there and make money off of low government interest rates.
Only thing that makes this market move to a buyer’s market is an increase in interest rates. Stops banks from making free money and focus on their business. I don’t see much changing in 2010. Anyone see differently? If so, please share why.
Thanks
LB,
In your situation, I might hold on to some RE as well. There are always exceptions to the rule. Still, if a long-term owner can cash-out right now, I think it’s a pretty good time to do so.
You are very right about cash, too. There is no place to put liquid cash at the moment. I’m a contrarian investor who tries to take a very long-term, macroeconomic view of the situation, so am willing to take some short-term pain if I believe it is the right move in the long run. I’m a deflationist because I think the underlying current is deflation. That’s why the govt/Fed are so very, very panicked. They are worried about deflation, not inflation. We have already experienced the inflation over the past few decades, with a parabolic move over the last decade. IMHO, we have reached the climax, and they are doing everything they can to prevent things from finding an equilibrium. If you think we haven’t seen inflation as a result of their printing, witness the prices in stock market, commodities, bonds, real estate, etc. over the past year — always keeping in mind this is supposed to be “the greatest recession since the Great Depression.” I think things are about to turn, probably around Q3 of 2010, but maybe sooner.
Feds and Local boy both have correct assumptions.
The dollar carry trade, no panic selling( by banks or equity sellers)and the continued long pain in the a** drip will continue into 2010, maybe even until 2011.
I do expect the buying power of the dollar to decline, and consumers to get squeezed into taking risks to get a return. We are clearly setting ourselves up for another bubble when this drip manipulation game along with huge goverment spending/State debt crisis takes hold.
Right now the mantra is “delay and pray”.
Do you think the low end is at another peak? We’re trying to decide if we should sell our “low end” home (approx 400K in Oceanside, 150k equity after costs) this spring and rent in a good school district for a year or two and wait for the mid/high end to drop some more. We’ll lose our tax write off for this house, but our kids will be in better schools so it might be worth it. Suggestions?
To answer Jinx, redo you taxes without the homeownership deductions (easy if you have tax software) and compare the difference. Also add in 12k for a maintenance fund (new roof water heater etc). Using the info you give, it looks like mortgage interest should be 15,000 so it saves between 4200 at 28% and 5k at 33% neither is more than the maintenance sinking fund you should have. So rent. In fact if the rent is about the same as the mortgage plus taxes save the insurance costs, as well as the maintenance fund. You will likely have more after 20 years than owning the house than the equity in the house.
Thanks Lyle! I just needed to hear it from someone else. It will be hard to go from being a homeowner to a renter, but I think we’ll probably do it. Our PITI is about $1700 and we figure we’ll have to pay about $2000 – $2500 to rent. Add in maintenance and we’d probably be about even (our costs are low – we do the work ourselves).