While everyone is talking about multiple housing related issues, it seems that people are failing to report on the monumental record we set this week. Southern California, for the first time this millennium has hit a record of 10,000 short sales. The record occurred this week and we are currently riding high with 10,195 short sales. As you can see from the above chart, the trajectory is rather clear unlike the predictions many housing pundits are making. It is interesting to also note that while short sales are drastically increasing, inventory is either holding steady or dropping. Even if it is slightly down, this is a major change in the market as well. Since overall sales are dropping off the cliff we can safely assume one thing is going on. For each short sale that hits the market, we have some stuntman mortgage holder taking his home off the market thinking that housing Santa Clause will come in December. Why do people think winter is a good selling season? Clearly it is not a good selling season and this trend will only continue with rates resetting quicker than a broken down Atari.
I am amazed at some of the legislation that is being dished out by so-called housing experts. One amazing plan that I have heard is lenders should permanently prevent loans from resetting. Sounds great right? This is horrible public policy because what we are doing is institutionalizing trapeze mortgages and essentially saying that yes, the underlying housing price and connected mortgage reflects an accurate price, which it does not. Instead of admitting that we lived through an amazing credit bubble, housing X-men are trying to do everything to save the market and keep prices inflated. Show me a politician saying that the only economical solution to this is a massive correction and I’ll show you someone that will lose in 2008. Hence no one is admitting the truth even though it is so obvious.
Then we hear about the emotional pleas about people losing their homes. This may be the case in other areas of the country where homes cost $100,000 to $200,000 and people are facing employment hardships, but here in Southern California, 50+ percent of people rent and we have a healthy rental market. So if someone loses their home they won’t be on the street, they simply will be one of the renting majority. Lenders are loving this because it washes their hands clean from owning up to a piece of this mess. When they become unsuspecting land owners, they realize in some mystic form of poetic justice that wow, these homes really aren’t worth what they claim to be. Guess where all the pricing action on the MLS is happening? It isn’t from category 5 delusional sellers, it is from REO properties that are hanging like an albatross on a lender’s accounting books. They realize what many amateur landlords face when they own a property that becomes an alligator; that is, a property that eats up your cash-flow each month and at a certain point, eats you alive.
These short sales are a last step. What once was a thing of housing lore, we are now hearing about housing auctions. Builders and soon to be owner/lenders here stories about auctions in Florida where properties sold for 50 percent off. Trying to avoid this mortgage beat down, they try every last thing to unload properties. They have become what is known in the industry as very motivated sellers. I’ve suddenly started seeing 3 percent rebates, closing cost covered by sellers, and other kick backs. Another tipping point here; no longer are we hearing about the free Benz or trip to Tahiti, now we are having rock solid nominal price decreases. Builders loved giving away free trips and upgrades because this artificially inflated prices. So they can give you a $30,000 car and jack up the price by $30,000; what do you care if you need a car? But in terms of macro housing economics this inflates the price in all reported data. That is why housing pundits quoting absurd Wizard of Oz data are scratching their head wondering what happened. You were heading east looking for a sunset amigos! Here is an obvious indicator of how off the housing data is; last month, Los Angeles County hit a record median price of $550,000. I won’t go into the median price analysis since I’ve discussed this ad nauseum and how horrible an indicator this is for true market sentiment. Even raging housing bulls admit flaws using this indicator. In fact, sales dropped by an amazing 50 percent in Los Angeles County last month. Simply put, high priced premium homes are selling while Real Homes of Genius are sitting on the market. You don’t hit homeruns if you don’t swing and you don’t show up in housing data if you don’t sell.
Finally, we have the massive credit crunch. The perfect storm has hit. First, we have credit standards that are now being enforced although you can still find mortgage renegades that’ll fund your cat tanto with a 5 percent down mortgage. But these are now a very small segment of the market. Second, we have a massive glut of homes. Take your choice. There is no sense of urgency instilled in buyers because if they buy today or tomorrow, prices aren’t going anywhere. In fact, buyers are facing a fascinating anti-bubble psychological phenomenon which is catching a falling knife. Logic will tell you that at any point that you catch the knife, you have a potential of being harmed. On the other hand (no pun intended), what fed this hyper bubble was hearing over and over how if you don’t buy now, you’ll be priced out forever. And for a few years, these folks got it right. Not because of market or economic fundamentals but because bubbles follow typical patterns.
Where do you think the short sale number will stand at the end of 2007?
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21 Responses to “The Short Sale Report: Volume 2 – Record 10,000+ Short Sales in Southern California.”
Cogent summary of a situation in many parts of the country. In the Southwest we see much of the labor in building coming from persons here from Mexico. Wonder what jobs they will have with real estate building grinding to a halt.
There have been a few reports talking about this issue. Many are simply leaving the country. Construction crews are cutting back extremely quickly and contractors are laying off people very fast. If there is nothing to build, there is no work. Hard to factor these jobs in since they are part of the shadow economy.
There is always a bit of humor –
$234900 PLEASE HELP, INVESTOR WANTS OUT!!!
http://lascruces.craigslist.org/rfs/444886977.html
There is a really good article by the WSJ. I’ve started a discussion about this:
http://www.doctorhousingbubble.com/forum/viewtopic.php?t=36
Everyone should take a look at the subprime map applet. That New Mexico property is nice but the buying group of this place is a very small niche.
Love your site and writings but I find this phrase,
“…..with rates resetting quicker than a broken down Atari.”
Does that mean rates will reset quickly or slowly? How quick is a broken down Atari? Or are you referring to how quickly Atari’s break..which I dont recall being an issue with that console…I know, I’m a geek…
Rates will reset extremely quick: http://www.doctorhousingbubble.com/forum/viewtopic.php?t=9
Take a look at the chart in the thread. It looks like Q1 of 2008 will bring the largest amount of resets. Perfect timing considering all the credit holiday spending bills come due at this time as well. A leading indicator will be holiday sales.
Thanks for the tip, Doc.
From what I have been able to gather, about 25% of the home sales in Las Cruces in the past couple of years have been made by “investors” and those were mostly Californians.
Prices may not come down much but eventually some really attractive properties are going to come on the market. That’s my thinking, anyway.
Really have enjoyed your site. Thanks.
Stupid question: Is that 10,000+ number just for this week or is it a cumulative number?
This is cumulative. If this was for a week, we would be in some serious problems. The next big jump is when we see a 500 short sale increase in one week.
Countrywide employees figuring out creative ways to make money from their company:
http://www.doctorhousingbubble.com/forum/viewtopic.php?t=40
What is your source for short sale data? I can’t find it.
ZipRealty
Surely a cumulative measure of anything always go up unless it stops completely?? Isn’t that a bit misleading?
Not at all. This number is for short sales. That is, homes that are selling for less than the current mortgage balance. A healthy market technically should have no short sales since normal appreciation that tracks with inflation should give current sellers equity. Thus short sales are a prime indicator of market distress; the more they go up, the more distress we are seeing. We aren’t talking about overall inventory here, only a subset of the market. A healthy market would have decreasing short sales in relation to the entire housing inventory of the area.
This isn’t misleading but a leading indicator of the overall housing market.
> A healthy market would have decreasing short sales in relation to the entire housing inventory of the area.
I agree 100% with that — all I’m saying is that the graph is misleading (if the number on the graph is cumulative, how can it ever go down 🙂 ?).
–S
Seth,
Sorry about the confusion. Each week is independently tallied. That is, if next week short sales went down, the chart would trend downward. Each week is an independent look at short sale inventory.
Hope this helps and yes, it can go down but won’t since we are only entering the 1st stage of this multi-year housing correction.
Hawthorne….I was born and raised in Hawthorne when it was a great place to live. Graduated from HHS in late 1970’s. I recently drove by the old neighborhood to see what it looked like after moving away 15 years ago. Since then the high schools have degraded into prison camps with bars and armed guards. I wouldn’t touch this piece of junk for less than $150K and then it would be a tear down. I rather like living in the Southeast, no bullets to dodge and you can raise a family. For the price of this piece of junk, I have a full brick, 4000 sq ft on half an acre and 10 minutes to work! I spend more time with my family in a week than my CA friends spend with their families in a month! Quality of life is worth more than quality of weather…
By the way, far less taxes, insurance is less then half, will probably retire 5 years earlier than my CA friends…all along they thought that they would be able to retire on their home sale and downsize…I feel sorry for them, living like mice caught in a wheel with no end in sight, trying to run faster and faster.
Thanks Dr HB for displaying the reality of CA realty.
Richard: That’s exactly why I was confused!
See above response.
Thanks for the explanation Dr.
wow! this was written in 07, you were right on! 2010-2013 are the years of the short sale. You really know how to read the data and graphs to see the trends that exist. Thank you DR!
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