Tuesday, April 10, 2007

Weaker dampening force





Bubble markets inventory has a great article on San Deigo foreclosures. (fair use of image)
http://bubbletracking.blogspot.com/2007/04/wow-look-at-me-go.html

Compare the rise of foreclosures in the 90's recession and current event shown in the graph.

Notice two things:
1. Steep slow in 2006/2007 (18 months rise time versus 48 months).
2. Jagged increase in the 1990's recession.

These to quantities imply two things:
1. Stronger driving force propelling foreclosures
2. Weaker dampening force (ability of people to avoid foreclosures)

Driving forces?
We've barely had ARM resets
Jobs are strong
Credit is still easy, just not supper easy.

So Driving forces haven't played much of a role yet.

Dampening forces?
The savings rate is gone. IIRC 3 years of savings versus 3 months.
"Equity extration," Too late, already done. LTV's are far too high.
"Investment in the home." What down payment? What equity to defend?

I believe the spiking foreclosure rate is due to weak dampening forces. We have not yet seen strong driving forces. Sadly, between now and the fall the driving forces build in intensity.

What can we expect?
1. Massive layoffs: Construction, mortgage brokerages (recall, the Warren act has kept *most* from going without a paycheck... yet), realtors (business is still churning), retail, etc. I expect 1 million jobs lost by September. Boy do I hope I'm too pessimistic. This month (April) is supposed to be the first month of strong layoffs... lets see. I credit this as one for stronger driving forces. But its also a weakening of dampening forces. So if layoffs become large, this is a double zinger.
2. ARM resets. If you haven't seen the graphs from the Credit Suisse report... google for it. Its scary. This just starts to build this summer and continues for years. This is the largest increase in driving forces.
3. Job relocations. Some this summer, I expect more next year. Why pay California salaries once its easy to pick up workers out of the worst of bubble land? I put this as a further weakening of damping forces. Probably a minor impact.
4. Oil (gasoline). I put this as a driving force. People are strapped.


I've been telling friends that they can consider me insane until June about my housing predictons. My thoughts? My sanity won't be questioned in June.

Alas, this is only making me more bearish. Still recession bearish... but I'm conceeding more and more of the nation will hit depression (Michigan, Florida, ???)

Got popcorn?
Neil

10 comments:

baddriver said...

Interesting analysis of the increased foreclosure rate. I didn't think to separate the driving and damping factors on foreclosures. Thanks for reminding me this is only getting started, as a renter my only concern is that I still have a job in a year.

HK said...

Does it make sense to you that in FL (and other places) housing prices should at some point in the next few years be CHEAPER than just before the bubble(2002?).

All this overbuilding will have effects for years to come. Also FL is apparently permanently more expensive due to insurance rates.

So if this is true and FL prices reset to year 2000 then the forclosure tsunami could depress prices further still.

TJ & The Bear said...

hk,

I've always maintained that prices will overcorrect, and dramatically so.

I can't overstate the effects of excessive equity borrowing on future home prices; people now own less of their homes than they did pre-boom! When prices revert, the average homeowner will have *zero* equity. How do you support home prices higher than 3x income when there's no equity to roll over and credit is tight??? You don't.

---

Neil,

The staggering dollar losses in California combined with it's dependence on REIC jobs will surely bring depression here, too.

wannabuy said...

hk,

I've always maintained that prices will overcorrect, and dramatically so.



Yep... well said. They always overcorrect.

The staggering dollar losses in California combined with it's dependence on REIC jobs will surely bring depression here, too.


You are more bearish than I. ;)

I just know too many people who will start buying properties in bulk if it drops below a certain point. People with money in solid conservative contra-cyclical investments. So I do see a bottom. For example, if prices drop 60% or more by the beach, my grandmother will buy herself another beachfront property. If it drops 65%... my parents will buy themselves one.

But I agree California is going to have its inflated equity train broken. Due to the *huge* MEW over the last few years, no one will be able to upgrade. So as those fine Redondo, Manhattan, RPV, Beverly hills, etc. homes come on the market... they'll be bargains that linger as too few will be ready to snatch one up. quite a few people will decide that the cost of maintaining the "California lifestyle" simply isn't worth it.

Oh, I expect to bump into fellow Ben's Blog posters at the open houses in late 2008/2009. But that's it.

The neat thing about California is that we'll export our pain back to Mexico. Note: I do expect *bad* race riots a la the King riots. Why? The working class is going to be desperate for work in six to twelve months.

But I've seen how quickly California reinvents itself (partially via high population turn-over).

But let's say you are right. TJ, I'm not buying until certain indicators show we're within $100k of the bottom. We have *at least* until Fall of 2008 before that happens. So you have plenty of time to make me more bearish. ;)

Got popcorn?
Neil

TJ & The Bear said...

You're getting there!

I'd like to lend you a few books to further your "bear studies", but between the marriage, new digs, and mandatory overtime I wonder when you'd really have time to read them.

---

I guarantee you that the number of financially conservative and capable people out there aren't nearly enough to stem the decline. Agree on pretty much all other points, though.

wannabuy said...

I'd like to lend you a few books to further your "bear studies", but between the marriage, new digs, and mandatory overtime I wonder when you'd really have time to read them.

No time! I shouldn't even be on the blogs. My boss is out and I'm doing his job too! (But if you want to move ahead, one must learn to do the boss' job.)

Yea... the number of fiscally conservative people is punny.

I'm betting a lot of used "bling" will be found cheap next year on E-bay.

Now TJ, if this were to become a depression, what would it be called? I vote for "Great Squish down."

Neil

sm_landlord said...

Hey Neil,

I know if beach property goes down 60%, I'll be a buyer. I've been wanting to buy in Malibu again for a long time now, but only at a price. I know what it costs to maintain a beach property... but I also know that you can rent those places out for high dollars and generally get a good class of renters. And I miss going to sleep at night with the waves crashing outside...

wannabuy said...

And I miss going to sleep at night with the waves crashing outside..

I miss that too. Until we moved to California, that was what I was used to...

But first we have to get through the cleansing... We're not going to enjoy this. Even as bears. (We'll see people we care about hurt.)

Neil

tj & the bear said...

"The Great Squish Down"? LMAO!

p.s.: I expect to pick up beachfront at 75%+ off. It will happen, but you're right that it'll be real ugly getting there.

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