It doesn’t come as a surprise that the Fed cut interest rates yet again this week. As the asset backed securities market is freezing up in tandem with falling home prices, the Fed is trying everything it can to inject any sort of liquidity into the housing market. The major policy shift that did occur is their rhetoric of potentially holding off on anymore rate cuts for fears of inflation. We have inflation? I thought $800/ounce gold and $94/barrel oil is simply minor cost of living adjustments. Of course there is inflation that is vastly underreported by the Bureau of Labor and Statistics.

Another trend that is emerging is in the short sale market. Even as early as July of this year, the number of short sales in Southern California was approximately 5,000. A large jump from 2006 since we were in the double and triple digits then. So where do we currently stand? In a few short months we are now at a whopping 10,972 short sales. We’ve doubled the amount of short sales in only 4 months. As it stands, short sales are quickly approaching 10 percent of the entire Southern California inventory. But where are these short sales happening? Take a look at the chart below to see the breakdown of the 10,972 short sale homes:

Keep in mind that larger counties such as Los Angeles will obviously take a larger share of the market share. Let us break down the numbers even further for each respective county:

County Percent Short Sale to Overall County Inventory
Los Angeles 5.59%
Orange County 2.80%
San Diego 8.78%
Riverside 11.19%
Ventura 3.41%
San Bernardino 6.54%

For all the chatter that the Inland Empire is the land of foreclosures, other counties are quickly catching up. Housing bulls are now starting to argue that only certain counties will be impacted from the oncoming housing downturn. However the trend in the data tells us something very different. What we are seeing is simply the canary in the coal mine. This doesn’t imply that other counties are immune it simply means that they are a few months behind the overall curve. Like my previous prediction of every single county in Southern California going negative by the end of the year, my foresight wasn’t based on simply guessing but following leading indicators. For example looking at massive drops in sales in 2006 and future rate resets, we were able to easily predict this downturn. The next prediction I will make is by the middle of next year, every single county in Southern California will have double-digit short sales rates in proportion to the overall inventory.

Resetting into the New Year

This will happen for various reasons. First, we have an alarming number of mortgage resets that will occur in Q1 and Q2 of 2008. In fact, by most estimates this will be the largest amount of mortgage resets ever recorded. With the bulk of 2/28 loans being issued in August of 2005, we are hitting the wall of mortgage resets. It would be one thing if your payment increased by $200 a month and you had to layoff the cable to make up for the bill. It is another thing when your payment jumps by $1,500 or $2,000 a month. Unless you got a generous end of the year bonus or a significant raise, this will cause a lot more strain on the budget of many homeowners. There is also the lack of refinancing options. After all, the reason many people took these high risk loans was to cut down on their monthly payment. Even a 30 year conventional note with a low rate cannot compare with a 1 or 2 percent teaser loan.

The Housing Santa Clause isn’t Flying This Year

Next, we are entering the fall and winter doldrums. Fall and winter are always slow selling months. That is why having a horrible spring and summer is a shock for a housing market that for the past 10 years has always seen healthy times during these 6 months. The slow down during these times only creates pent up demand that will be hitting the market at the worst time of the year. Why is it that fall and winter are slow? For one, a large group of buyers are families with children in schools. They don’t want to take their kids out in the middle of the school year. Another reason is the shopping season and the oncoming hangover during January and February when the bills come due. There are other various psychological reasons such as temperature but suffice it to say that the next few months are never ideal for selling a home. On the flip side, whenever you are looking to buy a home winter is the absolute best time to go house shopping. If you can pick a rainy weekend day to attend an open house, even better. This tactic also works for buying new and used cars.

Tighter Credit and a Falling Market

It also doesn’t help that getting a mortgage is a lot harder now. Even early in 2007, you were able to get dangerous mortgage products that for all intents and purposes made no financial sense. In fact, these products were equivalent to buying stock on margin and making a speculative bet. The bet was hoping that before your rate reset, you would be able to sell and profit a nice sum of equity ala Donald Trump. Plus, we had a hard selling real estate complex that used absurd housing mantras that much of the public ate up like strawberry cheesecake. “Housing never goes down!” or “Renting is flushing money down the toilet” became battle cries for the lieutenants of the housing machine. Try digging up an article from a housing bull showing that incomes and local area prices make any economic or fundamental sense. That is why hyperbole become the rubber stamp of moving homes. There were many participants in this credit and housing orgy. Now that the market is falling, all rules predicated on pure appreciation need to be thown out the window. It turns out in this decade long Pollyanna of housing there was no room left for the mere option of a declining market.

Shorting it Out

The house is now making a margin call. The music is fainting away in the background and the piper is looking to be paid. Interestingly enough I have talked to a few people in the industry that have lived through a housing bear market and they are doing well. They are able to convey to their clients that they need to lower prices or risk not selling a home. They also have the knowledge of working with foreclosures and short sales, something many newbie agents have zero knowledge about. The brokers that are doing well have the ability to be realistic and adjust to the current market. Pining for the yesteryear housing bull market is only going to raise a sense of false expectation. Looking at the data, we are in for a long and drawn out housing bear market that most likely, will lead the country into recession. You can look at the current GDP numbers and think all this is irrelevant. This however is tantamount to driving forward looking backward because that only tells you were we have been, not were we are going. Don’t sell yourself short used to work in the past but we are in a different ballgame now.

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This entry was posted on Thursday, November 1st, 2007 at 11:51 pm and is filed under Real-estate news. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.