We're told the next big wave of bad news will follow from adjustments to the ratings of bond insurers, a concept which might put us to sleep for the night but for the $2.3 trillion (TR, trillion) size of the biz, plus the ripple effect (tsunami effect?) of the possible downgrades across banks, financials and even municipal bonds.
The conventional wisdom used to be that housing cannot cause a recession; it's a lagging effect of recession. That CW is getting a rewrite, and of course it's all about the who, why and how of the housing bubble.
Foreclosures are the leading-edge indicator of the housing bubble's collapse. Their dramatic rise in the past year, during a period of decent economic conditions, resulted from the first downturns in home values after years of double-digit growth. Here's a vital detail about foreclosures statewide in California, from DataQuick's recent press release:
Most of the loans that went into default last quarter [Q4 2007] were originated between August 2005 and October 2006. The median age was 22 months, up from 15 a year earlier, indicating that the pool of at-risk home loans is getting larger.
So, get that – "most" defaults come from folks who bought at the peak. Now, try restating that: Prices got so high, buyers couldn't really afford the homes they were purchasing, and within months of realizing that fact, they stopped paying their mortgages. Often, they stopped because the price they paid no longer made sense if they were holding a depreciating asset.
Here's how that bad attitude translated to data in Q4 2007:
Last quarter's numbers of default notices sent out were a record in 42 of [California's] 58 counties, more than double the Q4 2006 numbers statewide. (DataQuick)
The number of homes in LA County proceeding, for the first time, to a trustee's sale (foreclosure auction) rose 235% in Q4 2007, vs. Q4 2006. (PropertyShark.com; click here for PDF)
Trustee deeds recorded, meaning the actual loss of a home to foreclosure, surged 421% in Q4 2007 over Q4 2006, from 6,000+ to almost 32,000 in LA County. (DataQuick)
Remember, Q4 in its entirety followed the official onset of the mortgage meltdown in August. But the trend had already been upward before that.
In LA County, of course, things are worst now in far-flung places like Palmdale, or in hard-knocks districts like Compton. (See the PropertyShark PDF for the top 10 zip codes in LA.)
There remain comparatively few foreclosures in MB, though we've got our radar trained on at least 2 active listings west of Sepulveda that are freshly in default, and we're intrigued by some purchases over the last year on which the loans are already going bad. Among the 2 actives, one was purchased in 2005 at a fairly high LTV, while the other doesn't fit the profile, as best we can tell. More on those – and any others – soon.