2007 Version: The causal relationship between home prices and foreclosures is two-directional: high foreclosure activity can both cause and be caused by home price declines. Home price declines can cause foreclosures by decreasing the equity homeowners have in their properties. Mortgagors are much more likely to default on their loans if the current value of their property falls below the outstanding loan balance (i.e., their equity is zero or less). Declines in home prices will increase the frequency with which homeowners find themselves with no equity and thus may be motivated to walk away from the property and the mortgage.
2004 Version:
The causal relationship between home prices and foreclosures is two-directional: low foreclosure activity can both cause and be caused by home price increases. Home price increases can reduce foreclosures by increasing the equity homeowners have in their properties. Mortgagors are much less likely to default on their loans if the current value of their property rises above the outstanding loan balance (i.e., their equity is more than zero). Increases in home prices will reduce the frequency with which homeowners find themselves with no equity and thus may be motivated to walk away from the property and the mortgage.
From what I understand the bankruptcy bill of 2005 has made it harder to declare bankruptcy (and therefore easier to fall into foreclosure b/c of lack of bankruptcy protection). That could lead to an even greater amount of foreclosures as prices fall than a time-series like CR's would indicate, no?
I unfortunately have not seen any quant studies to see how material an impact the law has made, but I'd imagine it's a significant one.
ac, the weekly claims graph will return when we see 2 weeks above 350K (the 4 week moving average is what matter, and that is still well short of 350K).
We are very early in the foreclosure game. Yet, I keep hearing analysts saying that we are getting to the bottom of the mortgage problems and write downs. Although companies may be "proactively" writing down assets, I doubt that the losses from next year's forecloses have been any way near accounted for. Can anyone with a better background than me (no formal training) explain this?
"Translation: There are large price declines coming."
They are saying price are coming and that their statistics won't properly reveal the magnitude until much later.
I wonder where their model breaks down in that kind of enviroment?
The fact that the sales that are happening are just the few wealthier people able to buy homes? The bias is that it is only the sales that have occured and that isn't representative of normal activity?
Paulson et al continue to say housing will rebound in Q208 or some vaguely "out there" timeframe that's not really too far away. There's a lot of momentum building up in the wrong direction for a quick turnaround.
In the 1990s, job losses led to both home price decreases and foreclosures. This time, the foreclosures, or at least the insane lending that caused them, led the way to price decreases and now, probably, losses to employment...
Your conclusion may be correct, but I'm not sure that data supports it. I think a lot depends on employment.
Having seen firsthand the last two housing busts here in Southern California, I have been, since 2004, the most bearish of the bears when it comes to a housing bust here in California. I've been warning people that 40-60% off overpriced L.A. houses was a sure thing. That said, those 2008 foreclosure numbers are scaring even me. I'm beginning to wonder whether I'm being too conservative in my estimates. I'm thinking 60-75% off may be more likely here in in L.A.
I think that just a couple of days ago was the touchstone plot you need to make the correlation between price declines and foreclosures quantitative: the distribution of equity.
It seems to me that what foreclosure rates are likely most strongly correlated to is in fact fraction of borrowers with negative equity. The plot from the G-S report CR posted a couple of days ago allows you to see how many people go underwater as a function of the price decline.
A simple model would look at, say, Q307 foreclosures as a fraction of Q406 negative equity (assuming it takes about 9 months to really finish the proceedings.) It suggests that once you lag by 9 months, about 10% of negative equiti-ers get foreclosed in any one quarter.
(You could make a more sophisticated model with two populations, those who go under more or less right away after the 3 quarters, and those who have a longer tail; it hardly matters to the final total numbers.)
Take a forecast of 15% price declines, shift the G-S graph to the left by that much, take 10% of the underwaters per quarter, and you get some scary numbers for the total foreclosures through 2010.
Can you imagine how horrible it would get if they did that ac? We bought our first house in Foreclosure City, OK in 1989, and many of our neighbors who paid twice as much would have walked if there had been no repercussions. At the very least there was no way in hell you'd buy another house again for 7 years.
Long time reader, first time poster. CR & Tanta you rock, great stuff! Also, many of the posters here are insightful and humorous.
Since these are dangerous financial times I would like all to consider my "boys in the hood" portfolio: gold (aka bling), guns and pit bulls. It may sound like a joke, but compared to the current alternatives, it may well be the a safe way to store wealth. Its also contrarian, as no major investment house is pushing these assets. Never, ever stand in line to buy real estate and never buy what wall street is selling. Wealth is for all.
The foreclosures cause price declines the price declines cause more foreclosures (round one) and then the process repeats.
So now we are in round two and the prices are lower than in round one however this causes a greater number of foreclosures than we had in round one and a greater drop in price declines.
And as the rounds increase everything gets worse and until we absorb the excess inventory that all the foreclosures have caused we could see housing prices drop at a level that was previously unimaginable. Remember we had mortgage underwritning that was previosuly umimaginable.
So now we look at a typical banks balance sheet and we say "there is really not that much stock holder equity" to protect the company because there will be some other negative hits to the economy.
So my bottom line most if not all the major banks lose their stock holder equity and require new equity from the government.
"Empirical evidence has consistently shown that homeowners are hesitant to sell their homes for losses, often leaving their homes on the market for long periods awaiting the right price."
That's what we call "Phantom Inventory": patrick.net
House price 'stickiness': A lot of the predicts for future house prices is based upon the premise that historically house prices have been sticky on the way down. But as the following blog points out, that isn't necessarily true this time.
For some reason the quote on house stickiness didn't get posted. Here is another try:
In prior housing bubbles, prices have been sticky on the way down as as bid/ask spreads widen and transaction volume withers. We have certainly been seeing this phenomenon, but prices on many properties have been showing a surprising lack of stickiness in the initial stages of this decline. It seems to be different this time. The reason: 100% financing.
Sellers loath to take a loss. That is the main reason prices are supposed to be sticky. Those that bought late in the rally hold to peak prices while the bids decline. However, this time around, there was a plethora of 100% financing deals like todays property. These sellers are not going to take a loss they are passing the loss on to the lender. In short, they dont care what the property sells for because they no longer have a financial interest in the outcome.
Bail-out is near! Banks, U.S. near deal to freeze subprime rates: report
| Reuters
"the coalition [called the Hope Now Alliance] and the government have largely agreed to extend the lower introductory rate on mortgages for certain borrowers who will have trouble making payments when their mortgages increase.
2007 Version:
The causal relationship between home prices and foreclosures is two-directional: high foreclosure activity can both cause and be caused by home price declines. Home price declines can cause foreclosures by decreasing the equity homeowners have in their properties. Mortgagors are much more likely to default on their loans if the current value of their property falls below the outstanding loan balance (i.e., their equity is zero or less). Declines in home prices will increase the frequency with which homeowners find themselves with no equity and thus may be motivated to walk away from the property and the mortgage.
2004 Version:
The causal relationship between home prices and foreclosures is two-directional: low foreclosure activity can both cause and be caused by home price increases. Home price increases can reduce foreclosures by increasing the equity homeowners have in their properties. Mortgagors are much less likely to default on their loans if the current value of their property rises above the outstanding loan balance (i.e., their equity is more than zero). Increases in home prices will reduce the frequency with which homeowners find themselves with no equity and thus may be motivated to walk away from the property and the mortgage.
Ahhhh karma.
ot- we bears are good guys
MBIA, Ambac Bear Ackman to Donate Profit to Charity (Update6) - Bloomberg.com
abk and mbia paid rent for me this month
CR,
I'm upset that you've abandon the jobless claims graphs just as we've broken the "magic" 350,000 level.
P.S. It's not safe to go outside without riot gear anymore.
translation 2 - people are waking up 2 the feedback mech
From what I understand the bankruptcy bill of 2005 has made it harder to declare bankruptcy (and therefore easier to fall into foreclosure b/c of lack of bankruptcy protection). That could lead to an even greater amount of foreclosures as prices fall than a time-series like CR's would indicate, no?
I unfortunately have not seen any quant studies to see how material an impact the law has made, but I'd imagine it's a significant one.
Robert Coté, great find!
ac, the weekly claims graph will return when we see 2 weeks above 350K (the 4 week moving average is what matter, and that is still well short of 350K).
Best to all.
O T ... but... possible influences on the equities market...
huffington post is reporting that Venezuela claims to have intercepted communication regarding us sponsored coup attempt on chevez
Stan Goff: The CIA plan to destabilize Venezuela...
and
fire on Canadian pipeline shuts down 20% oil imports across that boarder to us...
Page Cannot Be Found
second story confirmed...first story may be chavez propaganda or given our history of overthrowing socialist governments maybe not
We are very early in the foreclosure game. Yet, I keep hearing analysts saying that we are getting to the bottom of the mortgage problems and write downs. Although companies may be "proactively" writing down assets, I doubt that the losses from next year's forecloses have been any way near accounted for. Can anyone with a better background than me (no formal training) explain this?
"Translation: There are large price declines coming."
They are saying price are coming and that their statistics won't properly reveal the magnitude until much later.
I wonder where their model breaks down in that kind of enviroment?
The fact that the sales that are happening are just the few wealthier people able to buy homes? The bias is that it is only the sales that have occured and that isn't representative of normal activity?
Paulson et al continue to say housing will rebound in Q208 or some vaguely "out there" timeframe that's not really too far away. There's a lot of momentum building up in the wrong direction for a quick turnaround.
CR,
In the 1990s, job losses led to both home price decreases and foreclosures. This time, the foreclosures, or at least the insane lending that caused them, led the way to price decreases and now, probably, losses to employment...
Your conclusion may be correct, but I'm not sure that data supports it. I think a lot depends on employment.
Having seen firsthand the last two housing busts here in Southern California, I have been, since 2004, the most bearish of the bears when it comes to a housing bust here in California. I've been warning people that 40-60% off overpriced L.A. houses was a sure thing. That said, those 2008 foreclosure numbers are scaring even me. I'm beginning to wonder whether I'm being too conservative in my estimates. I'm thinking 60-75% off may be more likely here in in L.A.
OT, and apologies if someone already posted this.
Beware our shadow banking system
by Bill Gross, who is not exactly a tinfoil hatter
The ABX indices certainly staged a rebound this week. Seems like there is definately some big buying interest in the higher rated tranches.
Yet, as prices fall, foreclosure activity will probably continue to increase - the activity will be literally off the chart!
It's hard to imagine that happening without the government stepping in to intervene in a big way.
The question is whether this will actually make things better or worse.
Maybe the US GOVT will buy the homes facing foreclosure and lease them to the formerly distressed owner at a discount to the prevailing market rate.
I'd be the first in line to buy a home and foreclose for a cheap government-sponsored rental rate.
"The best empirical estimates will only become available after the market normalizes and excess inventory has been sold."
Well gee, thats a brave prediction, "We'll know what happened when it's over."
I think that just a couple of days ago was the touchstone plot you need to make the correlation between price declines and foreclosures quantitative: the distribution of equity.
It seems to me that what foreclosure rates are likely most strongly correlated to is in fact fraction of borrowers with negative equity. The plot from the G-S report CR posted a couple of days ago
allows you to see how many people go underwater as a function of the price decline.
A simple model would look at, say, Q307 foreclosures as a fraction of Q406 negative equity (assuming it takes about 9 months to really finish the proceedings.) It suggests that once you lag by 9 months, about 10% of negative equiti-ers get foreclosed in any one quarter.
(You could make a more sophisticated model with two populations, those who go under more or less right away after the 3 quarters, and those who have a longer tail; it hardly matters to the final total numbers.)
Take a forecast of 15% price declines, shift the G-S graph to the left by that much, take 10% of the underwaters per quarter, and you get some scary numbers for the total foreclosures through 2010.
Can you imagine how horrible it would get if they did that ac? We bought our first house in Foreclosure City, OK in 1989, and many of our neighbors who paid twice as much would have walked if there had been no repercussions. At the very least there was no way in hell you'd buy another house again for 7 years.
Long time reader, first time poster. CR & Tanta you rock, great stuff! Also, many of the posters here are insightful and humorous.
Since these are dangerous financial times I would like all to consider my "boys in the hood" portfolio: gold (aka bling), guns and pit bulls. It may sound like a joke, but compared to the current alternatives, it may well be the a safe way to store wealth. Its also contrarian, as no major investment house is pushing these assets. Never, ever stand in line to buy real estate and never buy what wall street is selling. Wealth is for all.
I believe in a spiral effect.
The foreclosures cause price declines the price declines cause more foreclosures (round one) and then the process repeats.
So now we are in round two and the prices are lower than in round one however this causes a greater number of foreclosures than we had in round one and a greater drop in price declines.
And as the rounds increase everything gets worse and until we absorb the excess inventory that all the foreclosures have caused we could see housing prices drop at a level that was previously unimaginable. Remember we had mortgage underwritning that was previosuly umimaginable.
So now we look at a typical banks balance sheet and we say "there is really not that much stock holder equity" to protect the company because there will be some other negative hits to the economy.
So my bottom line most if not all the major banks lose their stock holder equity and require new equity from the government.
"Empirical evidence has consistently shown that homeowners are hesitant to sell their homes for losses, often leaving their homes on the market for long periods awaiting the right price."
That's what we call "Phantom Inventory": patrick.net
the activity will be literally off the chart! CR
oh CR, stop being so glum!
I made some nice plots of the OFHEO HPI for all MSAs and states here:
OFHEO Housing Price Index for Lancaster
Regarding the California House Price and Foreclosure chart: Are the NODs adjusted for population?
Sebastia
House price 'stickiness': A lot of the predicts for future house prices is based upon the premise that historically house prices have been sticky on the way down. But as the following blog points out, that isn't necessarily true this time.
See:
Irvine Housing Blog - Irvine Real Estate and Resale Homes
For some reason the quote on house stickiness didn't get posted. Here is another try:
In prior housing bubbles, prices have been sticky on the way down as as bid/ask spreads widen and transaction volume withers. We have certainly been seeing this phenomenon, but prices on many properties have been showing a surprising lack of stickiness in the initial stages of this decline. It seems to be different this time. The reason: 100% financing.
Sellers loath to take a loss. That is the main reason prices are supposed to be sticky. Those that bought late in the rally hold to peak prices while the bids decline. However, this time around, there was a plethora of 100% financing deals like todays property. These sellers are not going to take a loss they are passing the loss on to the lender. In short, they dont care what the property sells for because they no longer have a financial interest in the outcome.
I made some nice plots of the OFHEO HPI for all MSAs and states here:
OFHEO Housing Price Index for Lancaster
poguemahone
póg mo thóin-Irish for Kiss My Ass
Love your handle!!
Bail-out is near!
Banks, U.S. near deal to freeze subprime rates: report
| Reuters
"the coalition [called the Hope Now Alliance] and the government have largely agreed to extend the lower introductory rate on mortgages for certain borrowers who will have trouble making payments when their mortgages increase.
Disgusting. So, the crooks get to keep their houses while the prudent are priced out and have to pay for the crooks via tax-payer bailout.
Disgusting indeed!