What Happens Next to All This Bad Debt?

The idea of the "tsunami of foreclosures" not coming would obviously be good news. Agents have been telling their buyers recently that the inventory is shrinking and the market has turned. In the 90046 zip alone there is already an inventory of 12-14 months worth of unsold homes and 152 REOs( about 12-15 months supply) which will eventually come back on the market. How can increasing inventory not put downward pressure on prices?

Depends on what market. In Redondo Beach, a single family home in a good area will run you about 5000 PITI, while rent in the same area is under 3000. Manhattan Beach single family homes have only fallen 10% at most, while DT has fallen 50%.

I agree that on a monthly mortgage payment basis (vs equity) this is a great time to buy in a fully corrected market like DTLA or Sacramento.

ImNotPOTUS writes:

I would like to ask how some salient facts correlate to the opinions expressed above?

1. "The FDIC will close 200-300 banks next year" in spite of the fact they went broke closing just 129 so far this year. Good thing they are collecting 3 years worth of fees next year in advance, that should be good enough to close 200-300 banks, hopefully. (for some perspective to the 30's, one bank today does not equal one bank in the 30's. The notion of branch banking was not commonplace then. 1 failure today is an order of magnitude larger than in the 30's) How do they plan to fund the closures the year after that? My guess is they will socialize the losses, like they have done up til' now. The PPIP plan has only managed to clear out a pathetic 4.5 billion so far and they have no one asking for more. The risk on capital is less than 3% and no one is taking them up on it? Success for the FDIC might happen, but only on the backs of taxpayers who will finance 97% of the losses.

2. "If a loan is servicing the debt, they will modify it to keep it in place." This statement makes good theory but banks are only holding on to these homes because they are allowed to mark the value at any price the see fit to choose, as long as they leave them alone. Cure rates for all delinquent loans are less than 1%, 1/2 of the "modifications" do not reduce the monthly payment and almost all of the mods increased the principal and fully half re-defaulted in a matter of months. Once a loan is modified they have to recognize a loss on re-default. So if a mod only results in the recognition of a loss why bother doing it in the first place. If you look at the number of mods and the rate of change, you will see that they are not choosing to mod the loans at any pace close to being effective. The tsunami is only being held at bay by the consent of the government to extend and pretend. This delay can go on until it stops working. Then what? The fire exit is only so big.

3. No argument with this statement. I think they should call it "if it ain't working, don't fix it."

4. "not fall as aggressive seller financing drives value accretion by 10% to 20%." Who is this aggressive financier you speak about? If you mean the FHA your accretion is limited to how much cash you can squeeze out of John Q. Public for that 3.5% down payment. And the only participant in the market is the Federal Government at over 100% of this years value of mortgages being purchased by the FED. All of the front door keys to every home sold this year and not ultimately financed by the federal government would not fill a mailbox. The only reason you have bidding wars now is because the enthusiastic "investors" and AGENCY loan qualifiers exceed the supply of non-organic "for sale" properties. I'm not a betting man but I hanker to guess you run out of the former before you run out of the latter.

What is more likely to happen is just #3. The continued expansion of the FED's balance sheet, ZIRP (zero interest rate policy) and the Treasury happily issuing short term debt to all of the addicts trapped into buying more and more of our IOU's, just so they can all kick the can down the road.

Jeremy:

DT has fallen 50%? I think you really have to look at the individual buildings. My loft has dropped maybe 10% max in my building and I bought it 3 years ago...and I think I could get close to what I paid for it based on my what I have seen. It really depends on the quality of the building. Loft are selling. It also helps if you have the Mills Act. Downtown is the greatest opportunity for home ownership. Let's hope they extend the first time buyer's tax credit!

ASKING prices in Downtown have fallen about 50%, but the market is so new that there is not enough history to ground those numbers in reality. I personally think the market is correcting to the right price for condos, not the ridiculous, inflated prices that were never realistic in the first place.

Robert, I was making a broad statement. I was merely rebutting the fact that housing prices are the best they have been in decades. MB is a great place to live (for some people) but it is hardly a bargain simply because of low interest rates.