If Juveniles Were As Delinquent as FHA Borrowers, We'd Have a Teen Crime Wave On Our Hands

(This Chart gives new meaning to California as a "Blue State". Darker shading indicates a higher level of mortgages that are 90+ days delinquent. Source: NY Fed Q2 2009.)

The weak job market has sapped homeowners of their ability to pay their mortgage. The situation is bad. Several years into the housing crisis, the US is still being roiled by record homeowner delinquencies and foreclosures. Consider these statistics:

1. "One out of every six FHA mortgages was late by at least one payment and 3.32 percent were in foreclosure, the highest for both since at least 1979"

Implication: FHA loans are backed by the US government and are subject to rigorous underwriting requirements. More than 30% of new loans being underwritten in California are FHA loans. But the bottom line is -- no job means no salary and no ability to pay a mortgage. And with many borrowers putting down as little as 3.5% (with a possible 6% seller credit), these delinquent borrowers become prime walk-away candidates. No downpayment = no equity = no downside of going into foreclosure except the collapse of one's credit score.

2. "The delinquency rate for prime fixed-rate mortgages, considered home loans with the least risk, rose to 5.8 percent and the foreclosure inventory rose to 1.95 percent, the highest since at least 1972."

Implication: Again, no job means no salary. And with many prime borrowers' nest eggs decimated by the collapse in the financial markets, no reserves means no ability to pay a mortgage once the paycheck stops. Now that prime borrowers are going into default, the whole housing spectrum, from low end to high, is under stress.

3. "The share of all types of mortgages with one or more payments overdue climbed to a record seasonally adjusted 9.64 percent in the third quarter. The foreclosure inventory increased to 4.47 percent from 4.3 percent. Both were the highest in 37 years of data."

Implication: 10% of mortgages are delinquent -- and we're in a housing 'recovery'!?! Yikes! It's impossible for recovery to take place without a wave of government-backed loan workout and forbearance programs. The "Making Home Affordable" program initiated in 2009 is a travesty and banks are doing everything in their power to avoid helping homeowners. And although the high level of foreclosed inventory presents buying opportunities, it also puts downward pricing pressure on existing homes for sale. See you at the bottom.

4. "Builders broke ground on 529,000 homes at an annual pace in October, down 11 percent from the previous month and the fewest since April’s all-time low, the Commerce Department said yesterday."

Implication: Horrendous news on the job front. In California, job losses in the construction industry have already been staggering. No building means no jobs means no recovery. Long-term, the lack of housing units in the pipeline (particularly in the multifamily - rental sector) will lead to a housing crunch after the housing crash. Look for high rental increases in major metropolitan areas (Los Angeles, especially) by the middle of the decade.

5. "The FHA’s insurance reserve ratio fell to 0.53 percent, the lowest level in history, and more steps are needed to shore up the agency that guarantees one of every five single family loans, Housing and Urban Development Secretary Shaun Donovan said Nov. 12."

Implication: The FHA will be the next federal bailout. Although Fannie Mae and Freddie Mac are close contenders.

6. The U.S. economy returned to growth in the third quarter after a yearlong contraction, the Commerce Department said in an Oct. 29 report. The world’s largest economy expanded at a 3.5 percent pace from July through September. Household purchases climbed 3.4 percent, the most in two years.

Implication: Hope. There are many, many signs that the nation is on the mend. However, during this recovery period the housing sector nationwide will be under pricing pressure as foreclosures, short sales and homeowner walk-aways shape the market.

Source: Bloomberg.com

The Good News: LA Times, "Housing Market Shows Signs of New Life"; The Bad News: Dr. Housing Bubble: "Option ARMs...The $189 Billion Recast Problem"

The Southern California housing market shows signs of resilience -- green shoots that are turning into sprouts, that seem to be leading to a full-blown recovery. First, let's point out the very good news.

• In October, the median home price in the five county Southern California area rose to $280,000, up 1.8% from September -- but off 44.6% from the July 2007 peak of $505,000
  
• The number of sales in October 2009 in Los Angeles County was 7,409, up 8.6% from October 2008.
• In October, the median sale price in Los Angeles County was $325,000, down 8.5% from a year earlier

But, there are also some fundamental problems with this housing market.

• Mortgage delinquencies are still rising. Nearly 10.2% of home loans in California are 60 or more days past due, up from 9.7% in the 2nd quarter.
• Nearly one in five homes in the Los Angeles area is "underwater", where the value of the house is less than the loan(s) on the property
  

[chart from Dr. Housing Bubble]

Another problem which has been explored in the Dr. Housing Bubble Blog is that California -- and especially Los Angeles County -- is the epicenter of "Option ARM" loans, which became popular during the bubble days. Option ARMs allow the borrower to pay less than the interest due for a given period, so that they "negatively amortize" -- and the loan principal actually increases as time goes along.

58% of these 900,000 loans nationwide are in California! 78% of these loans are underwater. 37% of these loans are 90+ days delinquent. And over 200,000 of these option ARM loans are in the LA Metro Area. Now-defunct WaMu (currently part of Chase) was the king of option ARMs -- and many of these loans are on high-end properties.

So, as the subprime crisis subsides on the low-end, we now face an option ARM crisis on the high-end. Many of these homeowners have no refinance options, and may do strategic walk-aways. So, how do we assess the Los Angeles housing market? "It's complicated."

Read the Los Angeles Times article, "Housing Market Shows New Signs of Life"
Read the Dr. Housing Bubble Article on Option ARMs

Westside Multifamily Market 3rd Quarter 2009: Palms-Mar Vista, West LA and Santa Monica Draw Investor Interest and Capital

In most cases, Westside Los Angeles is a world apart from neighborhoods further east. Investors are accepting returns of 10.3 - 13.8 of gross rents (GRM) in Palms - Mar Vista and West LA and 14.3 - 15.3 in the high-barrier-to-entry Santa Monica market. This compares to GRMs under 10 which have recently been recorded in areas such as Hollywood.
12449 Louise Avenue in the Del Rey neighborhood of Palms, rare new construction, sold for $6,300,000. This 25-unit building has 23,787 sq ft of living area, including 8 x 1 bedroom, 1 bath units and 17 x 1 bedroom, 1.5 bath units. GRM (gross rent multiplier) is 11.8 on current rents. The building had been sore point in the community because of its large scale in relation to the single family homes nearby. (See a Youtube video on the subject.)
Santa Monica is the neighborhood where sellers are able to command the highest prices for gross rents. 908 15th Street, with 6 large units, including 1 x 3 bedroom, 4 x 2 bedrooms, 1 x 1 bedroom, and 9,442 sq ft of living area, sold for $2,550,000 or a 14.3 GRM.
West LA is the Westside neighborhood with the lowest GRMs. 1421 Amherst Avenue, a 7-unit building with 6,845 sq ft of living area, sold for $2,000,000 and a 10.3 GRM. Unit mix is 1 x 1 bedroom, 4 x 2 bedrooms, and 2 x 3 bedrooms.

1724 Butler Avenue, also in West LA, sold for $1,500,000, and a 13.8 GRM. The building has 5,852 sq ft of living area and unit mix is 4 x 1 bedroom, and 4 x 2 bedrooms.

Another Santa Monica property, 2027 Euclid Street, also traded at a high GRM. This 8 unit building with 5,616 sq ft of living area has 6 x 1 bedrooms and 2 x 2 bedrooms, and sold for $1,265,000 -- or a GRM of 15.3.

Buildings yielding the highest GRMs and providing the lowest returns for investors are in demand as much as the lower GRM buildings in lesser neighborhoods. Santa Monica has its fans and investors are undeterred placing their bets in this prime spot by the beach.