California mortgage default rate hits 15%

In contrast to recent claims that the recession is over and home prices have stabilized, the California mortgage default rate is still increasing.  In the most recent report, the rate was 15.2% which is the highest since 1972 and higher than the national level which is currently 13%.

What’s driving all these homeowners into delinquency?

The real estate market is continuing to unwind.  At first it was high risk borrowers, those who took on adjustable mortgages and bought with little or no down payment.  Then with unemployment soaring, another wave of defaults came from families dealing with lost jobs and lost income.  The problem has progressed to the point that highly credit worthy borrowers with good credit and conventional home loans are getting squeezed into default.

As more and more foreclosures flood the market from adjustable rate mortgages resetting and job loss financial distress, prices will continue to have a limited upside potential.

To read more about the California real estate mortgage default rate situation, refer to this LA Times article:

Mortgage Defaults Soar to Record 13%

In a report just issues by the California Association of Realtors, a chart was included that shows the percentage of total home sales that were distressed sales.  The percent is staggering, being higher than 80% in some counties.  With levels this high, there’s still a glimmer of good news in that the percentages of distressed sales are slightly lower than reported in March.

Distressed Home Sales as Percentage of Total Home Sales

Real estate prices have been in decline for years.  And we’ve been in an economic recession since December 2007.  Now that the economy has gotten really bad and real estate prices have tumbled to levels unthinkable  a few years ago, the  talk turns to recovery, and housing bargains.

Let me use the stock market as an example that can be applied to real estate prices.  If you remember back in November 2008, the Dow Jones had dropped to around 7500.  And then it staged a recovery, all the way back up to 9000 in January 2009.  But that was not the end of the story.  As you are aware if you watch the news, the Dow Jones has tumbled once again and is now around 6500.

Can a similar thing happen to real estate prices?

Real estate prices have dropped on a nationwide basis by about 19% last year.  Regionally, the damage was much worse.  In bubble states like California and Flordia, some areas are suffering through declines of over 50%.  With prices having fallen so far, and foreclosures becoming a large component of housing sales, many people look at today’s prices as bargains.

Throw in low interest rates and it looks even better.  But wait a minute…

The government is trying to force interest rates to artifically low levels.  Why?  They need people to buy houses to prevent further price drops.

When the spring and summer buying season arrives, many prospective buyers will step up and start looking for homes, assuming that the prices represent bargains.  Combined with historically low rates, these deals will be tempting and could spur demand and cause a bump in prices.  This is where I want to compare to the stock market.

Just because prices bump up (if they do at all) does not mean the price bottom has been reached.  Many analysis feel that prices must still drop another 20%.  There is a potential avalanche of foreclosures still looming as property values decline and homeowners come under pressure from cut-backs in their work hours or salaries, job loss, and resets on their mortgages.

In Long Beach California and all across the South Bay area, there are pockets where home prices have been slashed and other areas where the decline has been much less severe.  I foresee more trouble ahead for the economy and think that housing prices are still on the verge of another step down.

I saw a news piece today about a lady who has lost her entire $100,000 downpayment due to the decline in home prices.  She has continuted to make her payments, and has talked to the bank about getting some help with her loan.  Her income has dropped and it has become more difficult to make payments.  Do you think the bank was willing to help?

For the good person who is paying the bills, the banks are not interested in helping.  They are in business to make money and they don’t like cutting deals unless they see an upside.  For a person who is not paying, they may be willing to cut a deal.  Something is better than nothing to the bank.

What is so frustrating about this situation, to the lady in question, to me personally, and to many others who are in the same situation, is that as long as you do the right thing and pay your bills you get no help.  If you stop paying, then maybe you get a break.

I see the mortgage bailout plans as a necessary evil right now.  Foreclosures are inevitable, but maybe the rate of foreclosure can be slowed by helping a few people.  But hopefully the help will go to good people who got in over their heads and not to investors who happended to get stuck holding a property.

Real estate investment involves risk and there should not be a bailout for taking risk.  That eliminates the consequence and encourages irresponsible behavior.

When I check the multiple listings it is amazing how much some of the local properties have come down in price, while others are still a bit resistant to the price drops.

My feeling is that if prices have already dropped 40-50% (and they have in some areas), the further declines may be a managable 20% or less.  But if current drops have only been 10-20%, then it does not look good for the future.

The lower income properties have dropped the furthest as people barely able to afford them in the first place have either had their payment reset to an unaffordable level, or even lost their jobs.  Foreclosures are everywhere and until the wave of foreclosures comes to an end, there will be no support for prices.

The lower interest rates currently available help somewhat, but consumer confidence is low and who wants to buy a house if you’re not even sure about your job?

There can easily be another wave of foreclosures that will be even larger than the current wave.  But bargain hunters should be careful.  Buying at a cheap price does not mean it’s a good deal.  With so much downward pressure, I think it’s best to see how the latest assistance program works.