Thursday, April 15, 2010

Tsunami, or Preamble to More Government Intervention?

I used to be in the camp that believed a "tsunami" of foreclosures was about to hit the market, creating an influx of supply and thereby putting significant downward pressure on prices.

But that tsunami never came. And despite month after month of extremely limited (and declining) supply of bank-owned properties, anecdotal evidence would continue to emerge, typically from "a cousin's friend's fiancee's vacuum-repairman's niece," insisting they had it on good authority that banks would start stepping up foreclosures any day now.

And once one bank starts dumping properties on the market, other banks in the cartel will have to follow suit to get ahead of the rapidly declining prices. It'll be a bloodbath!

Yeah. Whatever.

Long ago I gave up on the idea of free markets in this country, and wrote the foreclosure tsunami off as more wishful thinking from buyers (like me) who simply wanted to buy a reasonable house for a reasonable price. A flood of new inventory -- priced to sell -- would certainly do the trick in returning prices to realistic levels, so it made sense for buyers to cling to such a hope. Alas, the government machine was too powerful, and would apparently stop at nothing to keep home prices artificially inflated and out of line with typical household incomes.

But interesting little info nuggets -- not quite hardened fact, but more than just anecdotal -- have popped up recently. To wit:

Calculated Risk: San Diego Surge in Foreclosures

Irvine Housing Blog: BofA to Increase Foreclosure Rate by 600% (hat tip SR)

Breitbart: Foreclosure Rates Surge, Biggest Jump in Five Years

RealtyTrac: March Foreclosures Highest on Record

And this from Redfin:

Long Beach March trends:
Inventory up 8% vs. Feb
Inventory up 9% vs. last year

So, what do you think? Is this the "tidal wave" of market-clearing REOs beginning to crest, or is this just another excuse for the .gov to create another acronym-laden program to keep deadbeats in their (our) homes?


  1. Even assuming that the banks foreclose, they also need to sell the REOs, not rent them out while they trickle out the inventory.

    I am hopeful they are going to start clearing the decks, but so far all I have watch them do is rearrange the deck chairs.

  2. Well said, Walter.

    Some commenters on the linked articles are saying there simply is not enough manpower at the banks to actually process that kind of inventory and get it on the market, lest anyone get too excited.

    However, I bet there are an awful lot of underemployed realtors who would love to help get some of that inventory to market.

  3. el bee,
    We have at our fingertips, irrefutable information about certain realities that at some point MUST influence the market trend:
    1. Shadow inventory build up that is easily seen
    2. A large amount of Option ARM recasts happening this year and into 2012 with little to no chance of avoiding foreclosure
    3. A historically high 12% plus unemployment that EVERY forecast that I can find should not significantly improve for several years
    4. No more junk loans (which ensures that a prospective buyer must now make at least a 3.5% down payment and then QUALIFY for a real mortgage repayment schedule!)
    5. Rental prices that seem to be influenced by larger inventory out there - a house that last year might have commanded 3K is now 2.4K

    Fundamentally, the current LB pricing is absolutely unsustainable at its current levels and I don't believe there's enough stimulus money in the world to stop the inevitable return to prices that match the buyer's ability to buy. The term "dead cat bounce" has been bandied about and I believe that it describes the little uptick that we've seen in 2010 so far. However, I can't help but visualize this tiny rise in pricing in a cartoony way: the coyote has run over the edge of a cliff in pursuit of the roadrunner and seems to be able to defy gravity - until he looks down...

    yer ever-lovin' Yikesboy

  4. All great points, Yikesboy.

    I'll take the bullish position for a minute. Most of the factors you mentioned have been in play for a while now...yet the government has (so far) kept them from significantly affecting the market (i.e. A return to fundamentals). In fact, now we're seeing somewhat consistent price INCREASES (you and I know what a dead cat bounce is, but most buyers probably just see: prices up = bottom in).

    The shadow inventory, for example. It only matters if it comes out of the shadows. I have yet to see a signal that the government intends to change its current stance on allowing banks to keep non-performing assets off of balance sheets. Plus, didn't the government buy a bunch of garbage loans from banks? Banks may not be able to keep distressed homes off their balance sheets forever, but there are no restrictions on the government doing so and creating a government rental agency.

    However, I agree with you about unemployment. That plus declining wages will be a significant factor that the .gov can't seem to do anything about.

    In my mind, right now there is a lot of demand -- but only because there is so little supply. Once the supply is unleashed, it's a whole 'nother ballgame. I'm just not getting my hopes up that the supply, in any meaningful amount, will see the light of day.

  5. el bee,
    You do hit the nail on the head- there certainly are ways to prop the current market up. However, this does require that product continues to be held off the market artificially, the Government keeps injecting billions AND that employment starts to show signs of life...
    An almost perfect storm of luck just to turn "delusional" into "sustainable"- my money's on another correction in the next 24 months.

  6. Always wanted to tell you a 'Thank You' for maintaining an informative blog.
    It's very educating (and entertaining). I'm becoming a regular to your forum now. :)

  7. I think that the banks might be holding out for a massive devaluation of the dollar within the next couple of years to help off-set the drop in prices and keep them solvent. Either way, we are screwed.

  8. If the guys who run the banks were dumb enough to get into all this trouble in the first place why are they now super stealthy smart all of a sudden. They can't control the market. Einstein couldn't get them out of the whole they've dug. We're just in the eye of this shit storm. Remember the same morons are still running things. They can delay the inevitable, that's all.

  9. I, like you, used to believe in fundamentals. I have also been amazed at the power of the government. My last hope is the same lemming mentality that made people buy homes with no money down and add a mountain of debt will also lead people to believe they can all live for free in their debt traps forever. Once this idea gets around the cash flow to banks will stop. I think that's what you are seeing with B of A. If they don't put the fear in the remaining defaulters no one who's underwater will be paying.

  10. El Bee, I'm going to take the under on the Tsunami in CA. According to, CA Notices of Default peaked at 58K in March 2009, and were 35K in March 2010.

    Not my definition of a tsunami.

  11. The Dept. of Agriculture has a no down payment program that was designed to help farmers. But in the San Francisco area, many suburban houses somehow qualify for the program.
    This is an election year. People in power will do ANYTHING to keep this "extend and pretend" ship afloat until Nov.
    After Nov. is when we will get a better read on the market.

  12. I tend to agree with the poster who said that the banks will hold out for the massive dollar devaluation.

    Must be nice to operate when you can change the rules of the game.

  13. March Unemployment in CA - 12.6%.. Higher highs baby!!!!

    Seriously, the can only pretend and extend for so long. The house of cards that is the mid-tier Southern California RE market has to go come tumbling down, right?

    Why can't CA do to the unemployed what Huntington Beach does with the homeless, which is just move them somewhere else? Imagine the market if CA's unemployment fell to 9.9% just by moving millions of people out of the state? Maybe the CA Legislature can give current CA residents tax credits for moving out of state?

  14. Tsunami or not, at some point all the crap on the books has to come to market. All they have been doing is "extend and pretend". 1st sign of trouble is going to be expiration of federal homeowners tax credit at the end of April. That will take a lot of wind out of sails. Wifey and I recent bought in part to get that little break on our taxes, which we took advantage of this year.

    Anybody noticed that mortgage rates are creeping up? Inflation is out there, just suppressed, but at some point rates are going to go quite a bit higher.

    Combine that with continued HAMP/ Short sales/ foreclosures and the sky-high unemployment, and I'm betting that end of 2010 to at least 2014 will be a good time to buy real estate in the LBC. Prices coming down, inventory up, sellers more desperate than ever.

  15. There is one small problem. Most of the REOs were, are and will be in crappy neighborhoods, in crappy conditions. They put no pressure on home prices in the most desirable areas of Long Beach. So when you talk about real inventory, face it, the list is unfortunately very short.


  16. I want the bank to take my home back and they simply let me stay here. I don't qualify for any programs, have a 30-yr fixed, but underwater 27%. I didn't leverage the place because i couldn't and wouldn't. Tried to do the right thing. We are not all dirtbags bilking the system. I put in $100k in upgrades, which makes me a fool for sure. Wish I'd done that due diligence. Too late now. But i've learned the game the hard way and now well-versed in this scam known as home ownership. You can't build equity with property taxes like we have. You can't build equity in SoCal PERIOD. My credit score went from near perfect to almost bad, and I don't care anymore. Because I don't want to own anything ever again. It's just one big fat liability, and a money-sucking hole. Who needs it? I got wise to the tune of $150k+ out of pocket. Time to go rent and recoup for retirement.