One is a tragedy, a million is a statistic

With a coworkers permission, I'm going to blog about his mother-in-law. No, it has nothing to do with my wedding (soon), but instead real estate.

Let's head down to Oceanside to a near ocean condo.
The statistics:

Year of purchase: 1995
Purchase price $64,000
Current mortgage: $350,000 (after 7 cash our refi's)

It was purchased to fix future housing expenses at 1995 rent levels at her son-in-laws request. It also had the benifit of moving the mother-in-law closer to retail, nicer location than her previous apartment, and get her into a slightly larger place of her own back when price/rent screamed BUY!

The other details really don't matter. What does is this woman called her daughter to see about getting some help with a new cash our mortgage. Since the daughter is a Realtor (tm), she helped mom by arranging to have a good appraiser sent over to the place to do a really quick look at the properties values. Daughter even got in touch with a mortgage broker who could set up the mom with a good and fair cash our refi. They check the mother's income (mother-in-law of co-worker) and its fine for this level of loan (not my standards, the mortgage company's).

The appraisal came back: $284,000.
In other words, LTV is currently at: 123%

Even a subprime Heloc will max out at 125%

Once refinancing fees are considered, there is no-equity to extract in any form from this property. None.

The daughter freaks out. Not at the appraisal (she knows it is fair), but at her mom's debt. She daughter also knows the place appraised for much more a year ago. (I'm unsure of the past appraisal, so we'll leave it at "more" for now.)

My coworker is resigned to having the mother in law move in.

The mother in law? She's livid! "My place will be worth $1million one day and they have to give me my money!" "How am I supposed to pay for X, Y, and Z without my money?"

I loved the mother-in-laws exit strategy. "Oh, I'll just sell the place and rent again."

I'm serious folks... this isn't made up.

Its sad... someone will lose their home due to "buy it now" greed. Not a bad person... Just someone who didn't watch their spending and was caught up in this mania.

Got popcorn?
Neil

Implode-o-meter count at 62

If you're reading this blog you probably know about the implode-o-meter.
http://mortgageimplode.com/

Since so many regions have home prices far disconnected from fundamentals, I honestly expect this list to break 100. Easily. Heck, its peak will probably be around 250. Yikes!

Florida and Michigan will take the worst hit. But California, Phoenix, and Las Vegas will certainly "enjoy the same hangover."

Got popcorn?
Neil

Coworker to Jacksonville Florida

A coworker has announced his and his wife's transition to Jacksonville Florida. Why? Just no hope of buying in California. Not to mention there are engineering jobs there (for the Navy, working destroyer retrofits).

What interested me is that when he mentioned the relocation, toward some family, for the purpose of affording a home... everyone took that as the most natural thing to do. No one expects a young engineer to stick around California and buy...

Oh, my company is buying down points and doing whatever they can to retain young talent... but since a 70% wage increase isn't about to happen... people leave.

I did chat with the coworker and believe that our conversations are a small part of why he is going to lease for a year instead of buying right away. I do expect him to buy within that year; but any delay over six months should save him a bundle.

Now to find the link from the NYT that hints that illegal labor is leaving the state in droves (due to the construction slowdown). Question: how long until the yuppies at the cocktail parties notice? I still think by June everyone will know that real estate is dropping. But when will they know its recession and people do leave California en mass? I think that realization won't happen until August to October. (Sorry for the wide window, but predicting when people recognize something isn't always easy.)

A quick comment on real estate emotions: we're still not in fear. Not in the crowds I rotate in. That includes the flippers I know, the blue collar machinists, the engineers, the doctors (family friends), etc. Soon enough.

Oh, expect fewer posts from yours truly. Today is T-minus one month to my wedding!

Got popcorn?
Neil

WSJ on retail

The latest article on retail points to strong overall sales, but weakness in boats and:

"If a company sells something that a significant portion of its customers can't buy without borrowing money, watch out."

http://online.wsj.com/article/SB117668148589570733.html?mod=todays_us_money_and_investing

or

http://tinyurl.com/3xmm9k

Do you think they see what we see? Ok, this was buried in the journal, but points to people waking up to the spread of the contagion.

Got popcorn?
Neil

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