A couple of comments were left yesterday regarding the financial stress among Carmel Valley homeowners – people who are under-employed and burning through 401k accounts to survive.
How many homeowners are stressing in 92130?
The data isn’t readily available, so you have to use your imagination.
Doom, Level One:
This article states that about twice as many people are delinquent as those who are in foreclosure (defined as more than 30 days late but haven’t received a foreclosure notice):
http://www.dsnews.com/articles/past-due-mortgages-6298000-2011-11-18
Let’s extrapolate – there are 68 SFRs in 92130 that are currently on the NOD or NOT lists. Doubling that makes another 136 who are delinquent, and 68 + 136 = 204 houses in trouble today.
If there are a rolling 200 houses or so on the distressed list, we should be fine. There were 58 detached short-sale or REO listings that sold in 2010, and 61 have already closed this year. So if we’re ramping up to 70-90 distressed sales per year, and we keep selling 300+ total houses each year, the blend should be tolerable. The servicers will dole out the free rent as needed, push for short sales, and regulate the flow to keep the balance. Hopefully. If a renegade servicer floods the market, then we’ll get to test my theory that prices could go up.
According to the tax rolls, there are 9,647 SFRs in 92130, so the 204 makes for roughly 2.1% of Carmel Valley homeowners that are now at risk of losing their house.
Doom, Level Two:
What about the under-employed that are still making their payments, but whose time/money is running out? Plug in your own guess as to how many people are in that category, but first let’s note that probably 10% of the houses don’t have a mortgage – so let’s use 8,682 for those SFRs with mortgages.
Unemployment in San Diego County is roughly 10%, but counting the under-employed, let’s use an arbitrary factor of 20% who will have to sell (assuming none of them can find enough work in the coming years).
8,682 x 20% = 1,736 houses with mortgages that could be distressed.
To predict how long it could take to clear 1,736 distressed sales, let’s examine how many of the recent sales have been distressed, or somewhat-distressed.
A review of the 72 detached MLS sales closed over the last 60 days:
Brand new: 2
REO: 8
SS: 8
Less than 10% equity: 9
More than 10% equity: 45
There were 35% of the total sales that we can call distressed, but just because you had equity doesn’t mean you weren’t feeling it. There were 32 of the 72, or 44% who sold for a loss, so even if they had plenty of equity they must have had some duress to sell for less than they paid.
I think we can say that at least a third, and probably half of the current sellers are under some pressure to sell.
There have been an average of 35 houses sell per month this year, so let’s call 17 of those at least somewhat-distressed. If there are 1,736 to work through, then 1,736/17 = 102-month supply – or 8.5 years to clear the market.
Homeowners in CV tend to hang on as long as possible, and with the generous free-rent programs being employed by the can-kicking lenders, will the next 5-10 years be an orderly marketplace? I think so – I think half of the recent sellers probably needed to sell, and not only have sales been orderly, the pricing has held up too.
Once the stronger hands have replaced those forced to move, it will leave a solid marketplace full of long-term residents who probably won’t be thinking much about selling.
Doom, Level Three:
An interesting note while counting the number of houses – 64% of the carmel Valley SFRs were built prior to 2001. Generally there is no correlation between age of home and distress, but CV is known for it’s long-time owners. How many of those with plenty of equity will be leaving town in the coming years, and add to the supply?
Doom, Level Four:
Are there enough buyers who are willing and able to keep paying this year’s average $329/sf?
Of the 72 buyers, there were 17% who paid all-cash, which is about the same as it’s been lately. Financing terms today are extremely attractive, and the relative shortage of quality inventory could be masking actual demand. Will the troubles around the world permeate into the better markets and undermine sales and pricing, or drive a flight to quality?
Doom, Level Five:
Natural disasters, civil unrest, political ineptitude, etc. could all cause a meltdown, but just a slow, but steady descent in pricing could cause more defaults by those who are comfortable now. If you are the type who worries a lot, you can let your imagination go crazy in Level Five.
Summary
As long as there are buyers willing to maintain the current levels of sales and pricing, we should be able to work through the distressed sales as they are dripped out to us – keeping us at Level Two.
Should the servicers cut loose and increase the foreclosure activity by 25% or more, and flood the market with additional short-sale and REO listings at very attractive pricing (under today’s), we could see a surge in sales – if there is pent-up demand. But who knows how crazy it could get with today’s political climate – did you see the opinion piece in the WSJ suggesting that Obama should decline a second term, and let Hillary Clinton be the candidate?
I also live in Carmel Valley. After going trick or treating with my daughter last month I had an opportunity to see 40 or 50 of the neighbors in the area( We did lots of walking). One common thread among all of them.
They can not afford furniture or it is all from IKEA!
The owners(not renters) are barely furnishing the house. When my friend pulled the title information for kicks on the neighbors we saw how how many are underwater. These houses were built in 2001 and not at the top of 2007.
I also can not imagine how you would see a surge in sales when you do not have enough buyers chasing too many sellers(banks dripping them out and underwater homes)
There seems to be significant pressure due to the negative equity and bank inventory that has yet to hit
I never heard of Mark Hanson until you discussed it on your site. I went to his site. He has some interesting views that negative equity was at 30% of homes “before” we increased the negative amortization numbers and before the drop in prices in the last eight months
http://mhanson.com/archives/375
http://www.cnbc.com/id/42957613
I also have good friends in the area that are draining their retirements to pay for a house that is underwater. They feel it will come back. I can not talk to him about it or he gets upset.
The emotional attachment to a home for many people is so overwhelming that logic could never prevail.
In the end it seems that we will see a reversion to the mean value of homes(price to income and not price to payment) but not before we overshoot the mean by 10%.
I agree with the comment on price to income and price to payment.
Because of low rates, everyone keeps talking about “payment to income” being at historical lows. It should be “price to income”.
It is the credit card generation saying price or value is irrelevant as long as you can afford the payment.
It is the mortgae brokers selling a loan for the wrong reasons.
I’ll wade in with other ideas why homeowners will endure the pain:
1. If you blow out, but stay in the CV to rent, then all your friends, and your kids’ friends, will know what happened.
2. If you rent in the CV, it’s still expensive – probably $4,000 or more to rent a similar house.
3. Banks are going to be flexible, and those suffering could probably work this system for years without getting the boot.
4. If you leave town, you have to start over – and probably without the wife and kids.
5. Lotto tickets are cheap.
4.7% mortgage interest is about $47k/year, or about $4000/month in interest cost. Add in T&I and tax deduct, it’s about the same in ITI to rent or buy in CV.
Man am I glad I don’t feel compelled to live in CV !!
I am sure I would hate it, I Don’t like HOA’s and I don’t like small lots and neighbors with vanity issues.
Jim,
What’s the main draw for people in CV? Is it the proximity to mid-SD County (i.e. Sorrento and Mira Mesa?) Are the schools that awesome?
Also, as Michael in Post #2 points out, what have you seen is a good general price to income ratio for people making it work if payment to income theory is flawed?
Why aren’t you addressing the fact that the homes in CV are owned by people that have additional assets that can be used to pay the mortgage. Tough to measure but still a risk
This will delay the reporting of lates and the foreclosure process and cause homes not paid with cash and have less than 20% equity at risk for strategic default.
The resets are still there. What will happen with resets and when rates rise on the adjustables as laid out in the LPS article.
Seems that strategic defaults are still on the horizon
I thought 2011 would be the year when it came to a head due to it being 5 years from 2006 (when adjustable loans would reset from buyers who bought at the height). Some people bailed out and sold for a loss, but there were buyers for the homes as long as they were fairly priced. Many all cash buyers. Many multiple offers for a desirable, fairly priced home in CV. If you look in property tax records, you’ll see that many CV owners (espeically those in the higher priced homes) own more than 1 home. People live in CV mostly for the schools, and it’s not worth living in a cheaper place because then they’d pay private school fees which can be tens of thousands per child. A CV mortgage is cheaper. And if the market bounces back, I think CV will be in the front of price gains.
Strategic defaults? In Carmel Valley?
Are you married?
The Wives of Carmel Valley don’t allow strategic defaults – they’ll live with no furniture and 5-year old SUVs before they give up the house.
We’ve covered the resets – with rates so low the impact is minimal, and not enough to cause defaults by themselves.
The doomers always gravitate to the bad-news theories, and ignore everything else.
Name the last time you saw a house stolen in Carmel Valley? Where you said to yourself, “they stole that one”.
Or just a good deal?
When you see several of those happen in a short time frame, then you’ll know the next leg down is forming, and we’re running out of buyers.
Until then, you will be like the rest of us, in complete amazement how CV does it.
@smbeechtree
“What’s the main draw for people in CV? Is it the proximity to mid-SD County (i.e. Sorrento and Mira Mesa?) Are the schools that awesome?”
yes…and yes.
People get all torqued up about Carmel Valley with regards to whether or not it is overpriced and if it is destined to crash. Those people are just wasting their time.
Are a lot of the homes in CV just big stucco boxes on small lots? yes…
Are there lots of newly built big bombers with huge monthly fees (HOAs/Mello-Roos)? yes….
Are there people living in CV that are struggling to pay the mortgage? yes…..
Does any of this matter? NO…..
I have only been in San Diego since 2003, but I have concluded that people are just plain psycho about CV. There are plenty of people in line who are willing to jump right in the second it can be done.
We live in CV as well and really enjoy it. The proximity to the center of the city good for commuting and spending time in the city while being in the top school district and relatively close to the ocean is a draw.
We really enjoy living with like-minded individuals in CV who are family oriented and make education a top priority.
I think these are the reasons people live here.
As for whether this places crashes, I think anything’s possible and it could happen but I think this would be one of the least likely neighborhoods in San Diego county where a significant crash would occur for many reasons discussed already by others but including very importantly that people want to keep their kids in schools here even if they are financially strained.
Since we like it here, of course I hope I’m right. We’ll see.
…but I think this would be one of the least likely neighborhoods in San Diego county where a significant crash would occur for many reasons discussed…
Ah, CV is “different.”
I think CV just does it because of it’s close proximity to the major high paying job employment centers. As long as Qualcomm, Illumina, and UCSD (and it’s 3 hospitals) are around, CV will probably be expensive.
As for underwater it should be rather easy to tally up the total sales from 2005-2007 and maybe include some of 2004 and 2008. Then subtract out 10-20% repeat sales/cash buyers and the REO that have sold and you’ll get a number pretty close to what’s in some kind of distress. It’s probably 2000 homes in some kind of distress maybe higher maybe lower.
As I always tell my wife, our dirt is “special”.
I don’t know if the Ikea furniture people are broke. I think it’s more likely the ultra-stingy mentality of wanting to spend money on things that hold value and appreciate and not on items that don’t. Look at the cars. I see more Escalades and Benzes at affordable housing projects.
Jim you are probably right, the WOCV will not permit the strategic default of their nests. Gentlemen, Drain your 401K’s! Drive those SUVs beyond 50,000 miles! Sorry kids you can only play in 3 soccer leagues, not 5! Anybody know where I can pick up a Flow-bee?
People in CV, as elsewhere, made terrible financial decisions during boom times and will make terrible financial decisions during downturns. This will happen because many people regardless of education level or employment level make terrible financial decisions.
You certainly can’t argue that CV SFR prices haven’t held up during this mess. What I have seen in CV and the other more ‘elite’ zip codes is the first cracks appear in attached housing, which in CV has already taken a beating. Next in line for the pain are the inferior SFRs – inferior due to location, lot size, house size, floorplan, etc. Is that happening in CV? Then what’s left is the creme-de-la-creme, the last of the so-called ‘immune’ properties. Then what?
“The emotional attachment to a home for many people is so overwhelming that logic could never prevail.” Well said Still Surfing. It is an amazing phenomenon. I am admittedly emotionally attached to my home, but I would not wreck my future financial stability to stay in it.
downturn,
I don’t think any neighborhood is necessarily immune but I do think this neighborhood has some attributes mentioned here by others already that create good demand and decrease the risk of a crash.
My gut feeling is that it’s about time for a decrease in pricing in CV. It just seems overvalued for what it is and for what you get. If you work in downtown SD, then it’s great. But even still. $1.1-$1.35M+ for a regular tract home with no yard?
You could buy a lot more with that money and still have great schools.
CV has HELD up well, but I don’t think it’ll last forever.
You could take that $1.35 and go into Encinitas and get a unique home on a larger lot in the San Dieguito school district.
As we’ve seen, people have no problem paying over a million for a home in Leucadia, a lot of times more. That one on La Costa Jim showed sold for $1.38M, one on Hillcrest was $1.4M, the one story was $1.4M (first day on market) and there was a LOT that sold on Hillcrest for $800,000. Then you have Nantucket which is in the $1.2M-$1.6M range. And that’s funky Leucadia with the greenhouses nextdoor, the rundown apartment buildings and the trailer parks.
That’s a little more expensive than CV, but you have no HOA/fees and you can walk to the beach. There are also less updated homes for less money. And if you go east of the freeway? $1.2M can get you a lot. If I had $1.2M to spend, I would buy in Encinitas….when you take a shower, you’re not looking into your neighbors bedroom (in most places).
In my opinion, CV is just too tract-ish for me. It reminds me of the show Weeds. I do wonder how many people are on the verge of going under while everything looks fine on the outside.
Pricing in CV just seems too good to be true. And as the saying goes, if it’s too good to be true…