dano, in addition to your listed delays between when the borrower and bank jointly ‘give up’ and start down the foreclosure path (8 months to market, your estimate), it occurs to me that in many cases there will be a delay between when the reset hits the fan (and the house is not really ‘affordable’ based on income) and the time when the borrower really gives up. Consider that many folks who bought are the ones in disbelief that they won’t be able to refi if they can just hold on a bit longer. In that case, they will borrow on credit cards, extract 401k money, scrimp on spending, maybe even underwithold taxes until the end of the calendar year (to avoid penalties) or even until April filing (when the money is due). Lots of tricks to pull, if you are desperate and/or in denial. This path may not be the one of choice for the 100% LTV flippers who had no skin in the game, but it may well be the choice for many others.

I look at the two sets of peak resets: the first being the subprime and alt-A, lasting through the end of 2008, and the second being the option ARMs. All of these are likely to see high percentages of defaults, for different reasons that have already been discussed. Since the second larger wave of option ARMs have a high likelihood of high rates of default (esp for places such as southern California, where it was the only way that buyers could take on the size of the debt required to purchase a ‘modest’ 600-900k home and fit it into their monthly cash-flow), and since that really only hits in 2010-2012, and then factoring in the delays you and I have both listed, it would not surprise me to see the true bottom in the market not appear until after 2012, all things considered. That’s 5 years away….. When the ball really starts rolling downhill next year and the year after, due to the huge overhang of REOs and spec home monetization ‘fire sales’ by the builders (who in OC can often drop prices to 50% of peak levels and still break even, due to low land cost), THEN we will see the effect of constrained borrowing (all fully-doc’d, financed at 30yr fixed, and fitting within budget more reasonably) ability of the pool of potential occupier buyers, together with cash-flow profit investment analysis (not assuming capital gains, but requiring profits from rent after factoring all expenses and depreciations, etc.), as setting a 50%-off-peak ceiling for maximum offer prices. We may likely see overshoot to the downside as there will be panic, fear, and other emotions coming into play. All told, there is no reason to even consider buying in places like socal for at least 3-5 years, on a value basis. Naturally, people often have other reasons, but in times of fear they will tend to be more fiscally conservative.

Addition: Implicit in the above are the LTV distribution and the distribution of ‘loan payment percentage of income’ that the bulk of the last few years of these three loan categories comprised, for areas such as socal. In summary, many of the loans were near 100% LTV and alt-A or option ARMs. This information is significant in order to appreciate the consequence of the resets, and the percentage of people who will have no options available other than foreclosure, here in socal. I anticipate that number being far higher than has even been floated as a trial balloon in the MSM.

I will add that anecdotally, all the buyers from that period that I have met had no ‘inflated cash-out equity chit’ to roll over from a prior sale, to fund a move-up; rather, these were first time buyers - hence they all went nearly 100% LTV and did options - and cannot afford the resets coming - but bought nonetheless, having been fed a diet of complacency concerning risks and greed concerning compounded gains stretching to infinity.

Lots more fun to come!

Already happened to many properties in FL & Vegas…..check out the businessweek article on folks who lost $150-200K of equity in just a few months…….and this is early in the housing “correction”, “bubble bursting”, “downturn” (you can pick the term)……..Why is it that people have no problem watching houses appreciate 300% in just few years, but a 40-50% decrease seems outlandish?