First American Study on Foreclosures
Submitted by
CalculatedRisk on Mon, 03/19/2007 - 7:54am (25 comments)
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First American study, register to get pdf
Real Estate, Property Information Data and Records
Linear thinking at it's finest.
As a casual observer I can point out that only one of these studies can be correct. However, they could even more easily both be wrong. If the housing market takes a nose dive and corrects 10% this year I am confident we'll see numbers worse than either of these studies suggest...
"It's part of the business cycle and it's not going to be dominant."...unless you are one of the 1.2-2 million homeless living under a bridge...
I guess both of these reports are good news for the owners of rental homes and apartments.
coruscation, thanks. Ahh, now I need to find some time for some reading!
Best Wishes.
Oh yeah, see, all these losses won't be a big deal, see, because lenders have all this capital to aborb them, see, because we said so, see, on our balance sheet, you know. And we wouldn't, like, ever just state our income and assets--that would be silly!
Are we still working on that head-banging pillow?
I "see" what your saying
Interesting this:
"Cagen's study noted, however, that 1.1 million foreclosures amounts to 13.3 percent of all adjustable-rate home loans issued nationwide from 2004 through 2006.
The study assumes that home prices remain unchanged over the next six to seven years. If prices change, the number of foreclosures would increase or go down. A hypothetical 10 percent price drop, for example, would result in 1.9 million foreclosures, vs. 1.1 million, or 22 percent of the adjustable loans issued in the 2004-06 period."
1.9 million is closer to the 2.2 million from the center, which seems to assume a drop in house appreciation.
It's debatable how bad the first order effects will be, but doing an analysis that leaves out the second (and third) round impacts of what those foreclosures mean to housing, jobs, etc, is just willful ignorance. Bunch of hacks.
Order two pillows for me - I can already envision the lumps on my forehead that are about to emerge.
I was in Oklahoma City in the mid 1980s when the "oil patch" collapsed. My house went from $115,000 to $60,000 in less than 18 months and it took over a decade to recover in value. Admittedly the economy in Oklahoma City was largely driven by oil and gas so the local economy struggled for quite a while, hence the slow recovery in real estate.
If one combines a weak local economy with the a real estate market similar what happened in the "oil patch" in the mid 1980's, it is going to be a very rough ride for a very long time. Detroit is having this same experience now.
I watched the discussion of the First American Corp. analysis on CNBC this morning. Their analysis was suggesting a recovery period in real estate of 6 to 7 years. This period is dependent on the local economy, but I do not think this period of time is unreasonable.
What a minute:
They aren't taking into account those forclosures that are due to divorce or job loss?
What happens to jobs as the construction industry slows?
What happens to jobs as MEW is eliminated.
What happens to relationships (marriage and dating who got together to get the house in the first place quite often) when money problems arise?
And what are odds that housing prices stay flat?
Linear thinking indead.
I think based on the same linear thinking I should publish a paper "Economic impact of asteroid collision with New York City" and conclude that
"Since New York City generates only 3.5% of US GDP, the economic impact would be mild."
Roubini's on a rip this morning on the subject of bailouts.
RGE - Who is to Blame for the Mortgage Carnage and Coming Financial Disaster? Unregulated Free Market Fundamentalism Zealotry
Cagan has been a guest a couple of times at the OC Register RE blog.
Forecasting may not be his forte.
In the last 12 months his estimates doubled and will likely double again.
Lansner on Real Estate : The Orange County Register
OC Business News : The Orange County Register
I've been thinking about Cagen's study and the CRL work since seeing him quoted in BusinessWeek last week.
The article wasn't as good as I usually expect from them and I was thinking about writing a letter to the editor (I'm so stuck in the 20th Century) about that and a few other less significant issues.
BTW CR, knowing your looking at it will make it very easy for me to come up with all kinds of excuses for why I'm not.
I look forward to whatever you come up with, and once again I thank you for putting the info out there and leading this little discussion group, it's all but impossible to make clear how much what you (and Tanta!) do is appreciated.
Didn't the CRL report only deal with "subprime" home owners? In that sense, the projected forclosure number would be very conservative.
Needless to say, any company whose best interest it is for there not to be forclosures will find that any amount of forclosures is no big deal.
Jim,
For every condo that goes into foreclosure, there is a potential renter (lost the condo) and a potential rentee (now owns the condo). One more on both sides - no net change in the balance. The change in the supply/demand dynamic all has to do with how much wealth is left over, how willing the new owner is to rent to a recent mortgage defaulter, and stuff like that. It is different for single-family homes, but not overwhelmingly so. In lots of markets, there were no buyers for the condos that are now going into the rental market, so the recent troubles turn out to be bad news for owners of rental units. As the housing glut and subprime mortgage meltdown roll on, real estate remains a local creature.
I am somewhat disappointed that this post got buried under another great post by Tanta.
I have a request of CR, after you and Tanta and other posters read the First American study, please create another thread and discuss again.
Following kharris and just cementing a notion in my head against other notions and other heads about the impact of the housing volume slow down in 2006 and developer/builders response to that: for (recent) instance
Page expired - MSN Money
A significant portion of the market will be driven by conversion to rentals, recognizing that purchases are unaffordable. Translates to lower rents and more importantly for me, lower OER numbers and serious erosion on that CPI number generating bogus high inflation rates of 3.6%.
But apparently other notions, backed by sober empirical observations and maybe even serious studies show this not to be the case. Incredibly, rents are rising still (3.6% according to the last CPI stats), perhaps because renters of older dwellings can't wait to spend more on the new digs, even if it is just more money passing to the landlord. Incredibly, most of those new unsold houses that are empty are not being rented (the non-conversion case) because the devaluation that arises from that practice exceeds the costs of vandalism and/or the security costs and insurance fees.
Hard for me to surrender some common sense beliefs immediately...
I didn't read the vast 1st Am report to the required depth, but I have to admit to being pretty confused about it. In the first place, CRL did talk about subprime foreclosures from the 3 most recent years, while this study talks about foreclosures from subprime ARM resets from the most 3 recent years, so I presume that CRL included fixed rate subprime and 1st Am didn't. Did 1st Am also not include foreclosures starting before the reset period? Did they try to parcel out foreclosures 'caused' by resets vs. other foreclosures? How did they derive their estimates of the probability of default? I can't find that anywhere in there. And the press article says 'assuming flat prices' but I can't find that assumption stated anywhere in the report. If someone else has read this beast to the required depth and has answers, enquiring minds want to know.
A tip of the bourbon to Roubini tonight!
Meanwhile, more of these scoundrels are spending billions buying up companies under the Private Equity label.
Hi CR,
The Cagan study should eventually show up here:
Real Estate, Property Information Data and Records
Back in early 2006 (when considering only 2004-2005 loans), Cagan predicted $109 billion in losses. It's hard to see why he's predicting only 112B, given the new information made available since early 2006.
At that time he wrote that 100B out of 19 trillion in asset value isn't enough to slow down the economy. I don't find that argument convincing because the amount of RE sold in a year is a better number for comparisson. 100B also seems low.
http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf
I've found some of Cagan's research informative, particularly his "Fire Burn" appreciation maps from 2004, but this time he seems far off the mark. It may be tough to be independent, given who pays for his research.
Also - the forclosures have an effect on everyone's home price, lowering all asset values. He seems to have missed that in the earlier paper.
I'm surprised that so few people have mentioned the home equity loans. People have pulled out nearly $2 trillion of equity from their homes the past 3 years. What happens to consumer spending when this well dries up because home prices have stopped going up 20%/year? The foreclosures will be like a drop in the bucket compared to this looming disaster
Rents are still rising because houses aren't being converted to rental properties at any substantial rate, and foreclosures are resulting in higher occupancy rates at apartment and other properties. When a new rental company bought my current apartment community, they let us know that they believed the market rate for the apartment we lived in was nearly 30% higher than what we were paying. They have yet to raise our rate substantially during renewals at this point, but looking around didn't seem to corroborate their story of higher rates in surrounding communities. But with a 99% occupancy rate, they don't really care what I feel the rent should be.