Saturday, April 25, 2009

Second Tidal Wave of Foreclosures to Affect the Westside, Later This Year

Notice of Defaults (NODs) in California hit an alarming 135,431 during the 1st quarter of 2009. An all time high. That's up 80% from 75,230 during the 4th quarter of 2008. This is primarily due to a foreclosure moratorium by banks, to keep their losses from snowballing. Now we are back to normal, with excess homes piled up in the foreclosure pipeline.

What is different now however, is the type of loans that will be heading toward foreclosure. Up through 2008 we saw the Subprime Wave hit the lower tier of housing . Mainly the outlying areas of Los Angeles were affected like Riverside, San Bernadino, Palmdale, and Lancaster, where lenders could prey on subprime buyers. The proverbial bottom of the Real Estate Food Chain. Many of those homes are now selling at a 50% discount or more . The next wave to hit will be concentrated in the Alt-A, Option ARM and Prime arenas. These loans are much larger in size and include mainly higher end properties. $300,000,000,000 alone are in California and begin resetting in the 3rd and 4th quarter of 2009. The peak of loan resets will be from December 2009 through August 2010. Even though the peak will last through next year, it will remain highly elevated until 2012. This is disaster waiting for the Westside. Many of the Westside loans made from 2004 and on, are Alt-A, Option ARM or Prime and begin resetting in 2009. Especially those 5/1 ARMs that became so popular. As prices have already sunk to 2005 and 2004 in some places, homeowners will already be underwater once their payments increase. If they bought with little or no down payment, walking away from a mortgage becomes a no-brainer.

In addition, we are now seeing accelerated layoffs and some will be forced to sell. With many Westside households requiring 2 incomes, the job loss threat is magnified. Sure, you will hear pundits, realtors, banks, economists preaching now is the time to buy while interest rates are 4-5%. And some will think, they want to get "in" before prices go back up. Don't make that mistake. It is better to buy when prices are lower and interest rates higher. Then you have a chance of rates coming down. Can you imagine trying to sell a property at bubble prices with higher interest rates?

The Westside is down about 20-25% and the downside risk of losing another 20-25% is increasing every day. Smart money is waiting for 40-50% declines before buying. If you read between the irresponsible headlines, you can see that. The bulk of the sales activity is distressed sales. They're few "organic" sales right now. With down payments of 10-25% required to purchase property, you stand a good chance of losing your entire down payment in a year or two.

Now is the time to clean up your finances, get familiar with areas you like and watch the Westside market change this summer. Take a look around during late summer, after the traditional selling season for signs of distress. Later this year should be a possible entry point for some properties on the Westside.

Above all, be patient. There is absolutely, no hurry now.


Anonymous said...

I'd agree, and perhaps be even more cautious about entering the market.

Given that the Westside underwent some of the most excessive price escalations during the bubble, with many areas in SM and Brentwood going up as much as 300% between 1997-2007, it is entirely possible that we will see declines far in excess of 40-50%. In fact, it would take a 75% decline just to hit 1997 levels, and given that the perfect storm appears to be approaching, an overshoot of that magnitude seems more and more likely.

Based on historic trend levels, prices should currently be where they were around sometime between 1999-2001, depending on how much price increases diverged from tracking the rate of inflation in a given neighborhood. In all likelihood, prices will remain flat once a bottom is reached, and they might even drop more if (or rather when) mortgage interest rates rise. This "L-shaped" recovery scenario is supported by the Anderson Forecast, and it seems more likely than not in the wake of the tremendous shock to the collective psyche that would be brought on by a calamitous price decline.

So I'd guess that really smart money is on waiting not for any arbitrary percentage decline but rather for an actual sustained bottom. You probably won't lose by waiting, but the consequences of jumping in too fast could be catastrophic.

Anonymous said...

I don't trust UCLA Anderson school. They totally missed the recession in 2008 and now the collapse in 2009 and 2010.

UCLA experts don't buy recession
By Peter Y. Hong
March 11, 2008

Brushing aside conventional wisdom, UCLA economists say California and the nation will survive the housing slump and job losses without plunging into recession -- although it will still be miserable for many Americans.

Anonymous said...

the slump is over..americans are trained to shop. now that the news is saying the coast is getting clear they will start buying again because they can't help it. hyperinflation here we come!

Francis said...

If you look at the Case-Shiller graphs, we are only about halfway down the curve, and the West side is lagging behind, so there should be much more to go. Prices are predicted to fall to around 1998 prices or so - now just take a look on Redfin and see what they were selling for back then.

If you are going to buy - then just wait 6 months -if it hasn't dropped more then you can buy. If it continues to drop, then wait another 6 months.
Sigh...2011-2012 is still a long way away.

Latesummer2009 said...

Yes, it seems obvious that there is little chance of prices accelerating anytime soon. On the other hand, the velocity of price corrections appears to be picking up steam. Much more downside risk than upside. The days of getting rich, or retiring from buying a house are over. It's now a greater chance of becoming a liabilty.

Besides, people are still smarting from the shellacking they took in the stock market.

Anonymous said...

Recent article from Businessweek "Good News: Option ARM Resets Delayed".

"Thousands of mortgage loans that were supposed to reset at a higher rate this spring won't be changing, putting off the grim threat of foreclosure or bankruptcy for many Americans by as much as a year. Unfortunately, the reprieve will only be a temporary one. "


Anonymous said...

This blog and others like it have been saying that "west side Alt-As/Sub Prime were going to be re-setting end of 2008...then Q1 2009, then Q2..." Now you say Dec 2009. Really, what's this based on, because this blog has been forecasting that "tidal wave" that would really bring down the westside for over a year.
Like everyone else reading this blog, I'd like to see it, but I don't know anyone who owns in Venice that is having trouble making their mortgage payments.

Dan said...

About that Businessweek article:
It seems like the people who can barely afford their mortgage will be able to hold on another year, depleting their financial assets, but ultimately, if they bought 2003-2007 then there is no way they will keep their house.
The other kicker will be unemployment, 2 income families are more at risk for this.

Anonymous said...

With the "collapse" in motion and supposed to get worse, why has the Los Angeles median price held steady at $300k for the past 3 months?

sm_landlord said...

The March DQ numbers are in today's LATimes. In Santa Monica, a few condos moved and less than 10 houses. The price in 90402 is still over $1K/ft^2, but it hard to say what that means with only 4 houses selling in that zip.

Now that the recession is really kicking in and the reset are rising, it will be interesting to see how long the prices will hold up.

I'm on record as predicting 1997 pricing (inflation adjusted), and I don't expect 90402 to suffer any less, although it may take longer because of the different loan terms and reset/recast schedules.

Latesummer2009 said...

It can be frustrating watching Westside sale prices lag behind other areas that have already corrected up to 50%. Keep in mind, we have only been through one summer selling season since the market collapse in August of 2007. It makes sense, that most Westside sellers could hold out for a year. Now that prices are off about 25%, we will see how much they can hold out, after another dismal summer selling season. Inventory is extremely high and sales volume is very low. In addition, if banks decide to unload their REOs it will dramatically affect pricing. With more and more homeowners taking on negative equity, they will be more inclined to sell. 2005-2007 are already upside down, with buyers from 2003 & 2004 next. I will go on record to say, we drop another 15% on the Westside by the end of summer, as the pool of "qualified" buyers shrinks, compared to the inventory for sale. Throw in the threat of job losses and this summer breaks the stalemate between buyers and sellers.

Naturally, I would wait until "late summer" before getting serious, as 40% off becomes a reality. Even then we drag along the bottom for years and could lose another 10-15%, returning us to 2000 or earlier.

LateSummer2010 said...
This comment has been removed by a blog administrator.
Anonymous said...

No way prices are heading way down is leveling off.

vfxdrummer said...

right on dude.

People are still in denial - unbelieavable.

We have a serious sucker rally happening right now, due to artifically low interest rates.

Once the treasury bubble pops, look out below.

Anonymous said...

gotta say, I haven't seen $#*! out there that is decent that is a bargain....really...

someone needs to get the memo there is a recession going on. 'cause the SM sellers are ignoring it.

I guess pride and deep pockets are gonna keep this market artifically inflated.

Anonymous said...

"This blog and others like it have been saying that "west side Alt-As/Sub Prime were going to be re-setting end of 2008...then Q1 2009, then Q2..." Now you say Dec 2009. Really, what's this based on, because this blog has been forecasting that "tidal wave" that would really bring down the westside for over a year.
Like everyone else reading this blog, I'd like to see it, but I don't know anyone who owns in Venice that is having trouble making their mortgage payments."

...I believe this is based on bank data that show when, which and how many mortgages will reset. You can find the chart over on

Austin Apartments said...

California is still in bad shape. I can't believe the Westside has so many foreclosures. It'll be interesting to see when the economy will finally turn around.