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Monday, August 07, 2006

San Diego RE Update

At Piggington's, I ran across Big House Bob's figures:
July 2006: San Diego Housing Market - single family attached & detached homes: Homes sales continue to decline, sales for July were 2,396 versus 3,779 for last July. This is a drop of 37% from last year and a 19% decline from this June. July Pending sales were a dismal 2,310, which is a predictor for a continuing decline in home sales. The sales in August 2005 were 3,927 and it looks like we will come in 35% to 40% below this level.
There's more at the link. What struck me was the 19% decline from the previous month and the bad pendings. The estimate is about 10 month's worth of houses on the market.

This Piggington's thread by a mortgage lender explains how this happened:
Bottom line is that first low supply low rates drove prices up, then interest only and neg am arms helped push them up and finally, when all else failed, just put someone in a stated income, no ratio or no doc to get them qualified. oh I forgot about 100% financing, of course no one buying a house these days has any money saved. Since we can now do 100% to $1M who needs savings. Basically, any one who could fog a mirror could buy a house. This created a massive pool of buyers with a limited supply of homes. Any one who took Econ 101 can tell you what happens with large demand and low supply. Let me give you some examples of crazy loans:

100% to $800k, 1 day out of bankruptcy, credit score 580

95% NO DOC to $700k and some lenders were doing 100% NO Docs: again, no job, no assets needed.

Anybody, anybody could get a loan. Here are some reasons why most major markets are in a bubble:

1) price/rents are way above historical averages

2 price/income way above historical averages

3) look at mortgage volume: interest onlys went from being almost non-existent to 40% of the market and higher in certain areas.

4) Neg am arms again almost nonexistent to a huge percentage of loans, 100% financing a huge percentage. I believe 40% of first time buyers used 100% financing last year.

5) Subprime loans made up 5% of the market in 2000 or so and about 25% now. The majority of subprime loans are 2/28s meaning the rates will adjust in 2 years, these borrowers are finished. The easiest sale in the world for an LO is to say, oh just take this 8% loan and in two years your credit will improve and I will refi you to a standard, loan. It never happens, these people never fix their credit.
It's a long thread with a lot more. Fasten your seatbelts, because this roller coaster ride has the potential to be truly scary. I cannot see the ground at this point. I expected about a 5-6% drop in SD from June to July, not 19 percent! The bottom line is that in quite a few areas, about 30% of the loans written in the last two years would never, ever have been written 10 years ago. And I DO mean 30%. The Dr. Demento school of mortgage lending wrote loans that were stated-income AND 100% financed AND interest-only or neg-am. In some neighborhoods 40-50% of the people are living in homes they will not be able to afford by the end of 2007.

I'm stunned- really truly stunned.

"...any one who could fog a mirror could buy a house."

I don't know who to blame first- idiot buyers or idiot banks.

Then again, the banks may have found a way to get into the RE biz.
A lot of this is not banks, but other finance companies. Within the last five years, the traditional mortgage packagers have lost control of the markets, so a lot of this is due to new packages of mortgage securities being created by people who don't know what they are doing, for sale to investors who don't know what they are buying.
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