Los Angeles County has witnessed every facet of the housing bubble. From historically lower priced areas such as Compton having homes sell at $500,000 to higher priced areas like Beverly Hills seeing homes sell in the multi-millions. We also were at the vanguard of interest only, option ARM, and other exotic mortgages […]
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Los Angeles County has witnessed every facet of the housing bubble. From historically lower priced areas such as Compton having homes sell at $500,000 to higher priced areas like Beverly Hills seeing homes sell in the multi-millions. We also were at the vanguard of interest only, option ARM, and other exotic mortgages that made there way into every corner of the nation that are now dragging the economy into the gutter. There are very few people that now doubt that what we had in this decade was a housing bubble.
In looking at Los Angeles County with 10,000,000 people living here, we get an excellent representation of the housing mania. We have cities such as Lynwood, Paramount, South Gate, and El Monte that witnessed astronomical price jumps while the local family income remained stagnant and didn’t come close to keeping up with housing appreciation. We also have areas such as Santa Monica, Beverly Hills, Rancho Palos Verdes, and Brentwood that also saw amazing jumps in prices and even those with higher incomes had to stretch their dollars for these homes. Every market niche went up with little discrimination to the quality of the home, local area incomes, or any practical economic fundamentals.
Now that prices are quickly correcting and are trying to find a bottom based on fundamentals, the reality is such that the market has a very long way to go before we hit a bottom. The purpose of this article is simply to arrive at an educated figure of how many Los Angeles County homeowners are now underwater with their mortgage. We know simply by the massive price decreases and the rising tide in foreclosures that many homeowners now find themselves in the precarious situation of having a larger mortgage than the market price of their home. But how many people exactly? This of course is a difficult number but we’ll try to look at multiple indicators to arrive at an educated number.
Case-Shiller Los Angeles
As we showed in a previous article highlighting the drop in Los Angeles home prices, prices in Los Angeles County have now reached levels that were seen in June of 2004. According to the Case-Shiller report which came out earlier in the week, Los Angeles now has a number of 207.11 which is nearly the price reached in June of 2004 (206.3). The base year of the index is January of 2000, which starts at 100. So even at today’s price, Los Angeles has still doubled in slightly over 8 years.
Amazingly, now that prices are quickly aligning with fundamentals even data from other sources is coinciding with the above. For example, according to DataQuick the median price of a home in Los Angeles County in April of 2008 was $435,000. If we look at the price in June of 2004, the median price of a Los Angeles County home was $414,000. So for the purpose of this article we are going to use the following data points:
June 2004 start date: Assuming data from Case-Shiller
June 2004 start date: DataQuick Los Angeles County Sales
The way we’ll construct our model will include sales from June 2004 to present. We’ll then assume the following:
2004 Sales: 50% of homes sold during this time are underwater
2005 Sales: 60% of homes sold during this time are underwater
2006 Sales: 75% of homes sold during this time are underwater
2007 Sales: 55% of homes sold during this time are underwater
2008 Sales: 25% of homes sold during this time are underwater
A couple of points regarding the assumptions above. If we look at the median price alone, we can say that all homes sold at median market value in 2005, 2006, and 2007 are underwater. What we are assuming is people with down payments that have a cushion, those that underpaid market value and have some room, and those in areas that are still holding strong. Also, we are giving a higher percentage to 2005 and 2006 simply because of the sheer amount of sales during these years. Even though Los Angeles County did not hit a median price peak until May of 2007 of $550,000, sales had already fallen drastically.
Let us now look at the data:
Total Sales Per Year:
2004: 121,695
2005: 119,050
2006: 100,206
2007: 74,772
2008: 16,145 (*data up until April of 2008)
Total Homes sold in Los Angeles County Since June of 2004: 431,868
So that gives us a raw number of sales. If we are to apply our formula from above, then we can assume the following:
Homes Underwater Purchased in:
2004: 60,847
2005: 71,430
2006: 75,154
2007: 41,124
2008: 4,036
Total homes underwater in Los Angeles County: 256,617
From this number, we’ll also have to cut it down and eliminate 20% simply because of homes being resold. That is, one household buying a home, selling it, and buying another in that same timeframe. As we are constantly told by the realtors out there, the “typical” family will only stay in their home for 7 years. So that will still give us 205,294 homes that are underwater.
Now keep in mind that we are being conservative here. First, this model is assuming that price drops will not continue. What if the Case-Shiller Index decreases further which all signs are pointing to? What if prices go back to 2003 or 2002 levels? Even with these conservative measures, we can assume that over 200,000 current Los Angeles County homeowners that bought since June of 2004 are underwater. The next issue is that many homes in distress are now going into foreclosure. The number is startling:
Notice of Defaults for Los Angeles County:
First Quarter 2008: 20,339
First Quarter 2007: 8,843
In one year, notice of defaults have gone sky high for Los Angeles County. Yet the more disturbing trend is how many of these notice of defaults are going into foreclosure. What this tells us is being underwater is a key factor in people losing their home:
“(DataQuick April 2008) Of the homeowners in default, an estimated 32 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 52 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes ‘work-outs’ difficult.”
That number is startling. What that tells us is 68 percent of these notice of defaults will become foreclosures. Just for a frame of reference, let us look at some California numbers:
California Notice of Defaults and Trustee Deeds
Q2 2006: 20,752 NODS / 1,936 Recorded Trustee Deeds = Raito of 9.3%
Q2 2007: 53,943 NODS / 17,408 Recorded Trustee Deeds = Ratio of 32.2%
Q4 2007: 81,550 NODS / 31,676 Recorded Trustee Deeds = Ratio of 38.8%
Q1 2008: 113,676 NODS / 47,171 Recorded Trustee Deeds = Ratio of 41.1%
These numbers do not bode well. In a matter of two years, we saw statewide only 9.3% of notice of defaults going into foreclosure jump up to the current rate where nearly 68% of the current notice of defaults will go into foreclosure. Interestingly enough, that 113,676 NODs being sent out is quickly approaching that 200,000 underwater estimate that we arrived at.
This is a very rough estimation of course since it is nearly impossible to get a hard number of the actual homes underwater in Los Angeles County. But given the rise in NODs and foreclosures, we have a lot more homes that will flood the market soon:
The only thing that can stop this tsunami is for the housing market to go into bubble mode again but that isn’t likely. What are your thoughts about this? How many people do you think are underwater on their mortgage?
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Related Posts:
■Living Large on $25,000 a Year in Southern California.
■Double Bubble: California Compared to the United States. Vacancy Rates up Homeownership Down.
■Southern California Housing Numbers Exposed: The Bottom Falls out of the Housing Market, Again.
■The Genesis of the Credit Bubble: Advertising, Deception, and $163 Billion in Subprime California Loans Resetting in 1 Year.
■Are you a Debt Slave?
Via [DrHousingBubble]
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