California Housing Forecast/Fidelity Pacific Real Estate

This is one of the most important stories I have ever written, and it is an exclusive to CaliforniaHousingForecast.  It shows that rising debt has permeated the formerly most financially secure sector of society:  the boomers and the long-time homeowners. 

It is in response to a feisty comment from Bill in a column I wrote earlier this week about the credit crunch.  He argued that many Californians bought their homes decades ago, and have a wealth of equity stored up.  I responded in the comment section, but since Bill's argument is a myth believed by so many,  and never discussed on any housing blogs or media or government sources, it deserves its own column.  This is a unique California Housing Forecast story.  It dispels the myth that longtime homeowners are sitting on tons of equity, that they are financially solvent, and their homes will not impact the housing market.  This story does not even consider those folks' dependence on real estate related income, and only looks at their home equity as a source of albatross instead of nest egg.

Using foreclosure.com, the MLS, and the First American Real Estate database Realist (which combines property tax and lien information),  I've been noticing since last summer that plenty of long-timers end up in foreclosure.  Looking through their loan history, the reason seemed clear:  that home-equity credit card, aka The Cash-out Refi Craze, caused rising debt levels begining in 2001.  That debt became impossible to repay.  So tapping that home equity ATM was not limited to youngsters.  I've been writing about this issue on various housing blogs since at least last summer, but it was Bill's comment that reminded me this issue needs more exposure.

Many homeowners who bought before 1990 have little or negative quity.   Their rising debt levels and shrinking home prices are shriveling up what remains of their equity.  Soon, these people will join the ranks of subprime borrowers in regard to foreclosures, lender losses, and REO filings.   This very important fact is little understood even by housing analysts, and I have never read any mention of this on any housing blogs, let alone by politicians, regulators, bureaucrats, economists, or Wall Street. 

The truth is, many many folks who bought a long time ago caught the Liberation Frenzy, or "The Refi Craze of 2002-2005".  I will feature 2 folks who often volunteer their home equity situation, who bought before the boom, and who should have tons of equity.  But they are either underwater or close to it.  Other examples were provided here.

Another important fact:  people lie about their home equity.  The following two people were selected solely because they lied to me twice about the amount of home equity.  They lied a lot.  Several times.  Do not believe anybody when they tell you about what they owe on their home.  I haven't met a single person who was honest.  People do not include their cash-out refis in their calculations, because they are deeply embarassed.  They lie to themselves, and they lie to me.   

Engineer Guy

This is a guy I run into often.  He's a software engineer and has the misplaced perception that all of San Diego is earning $100K per year, just because he is.  So he is bullish on the economy and thinks GDP will never fall below 2% in his lifetime.  Dow 160000.... this economy is growing, etc.  Today, I suggested he sell his house before prices drop further, but he said, "I'm not worried.  I owe only $175K on my house."  When people offer their home equity information to near-strangers, I often wonder what is their motive.  Maybe by lying to me and to themselves they make themselves actually believe they have all that equity?  Once people divulge their home equity information, I feel I have the right to look it up, to check the facts as it were.

So I looked him up.

Engineer man should be loaded with home equity:  this guy bought from the builder, in an exurb of San Diego in 1981 for $105,400 (numbers slightly changed to protect this person's anonymity).  The site I use to look up property liens only has 4 fields, so I can see only the last 4 liens this person got.  The 1982 purchase lien is not on there anymore, because he was too busy taking out those loans after 2001.  I have no idea how many loans he took out before 2001, but here is what we know about his last 4 loans:

Sept 2001:  $224,000 , 2 loans from ditech.com
March 2004:  $164,320 from GMAC
February 2005:  $100,000 from a credit union

If he had refinanced to get a lower interest rate and pay off the prior loan, we would see each new loan of the same value or slightly higher than the last loan.  But what we see is a pattern of taking more and more equity out of the home.  So now this guy owes at least $ 488,320 on the house that he thinks is worth $550K.  Meanwhile, he goes around blabbing to people that his house is almost paid off.

Now, let's see how much his house is probably worth.  Mr. Engineer Man's house is 25 years old.  In the last 6 months, his street has 4 sold, 4 active, 2 cancelled, 4 expired, and 1 withdrawn.  This is not good news for his neighborhood, since the number of sellers giving up is fairly high.

The last sale of a similar sized home about 6 months ago, at $535K.  Of the four homes listed:  1 is vacant, 1 is an REO ($572K), and the other two homes were occupied only a couple years each.  All except the vacant home are larger and much newer than Mr. Engineer's house, and are priced between $569 - $599K.  I would guess Mr. Engineer's house is worth $520K if he sold it today.  After 8% for realtor fees and closing costs, he is actually $10K underwater.

Single Woman Lawyer

This lady bought her $170K home in 1996 right after she graduated from law school.  She caught the refi craze at the same time as Mr. Engineer.  She told me that recently, she refinanced her purchase loan into a 15 year mortgage, into which she bundled some consumer debt including her car.  These are the loans that she took out.

2003:  $260K  (probably the 15 year loan)
2004:  $107K
2006:  $ 60K 

Now she owes $427K on a house worth $550K.  As housing prices fall in the next 2 years, she will actually be under water.  Her dreams to sell this house and buy a bigger house with her fiancee, in preparation for having a family, are sure to be shattered, since they cannot even afford the house they are in now. 

All booms end when you have more sellers than buyers.   This is where we find ourselves today.  And the idea that a bunch of long-time homeowners provide a basis to support the housing market and the economy is just an illusion.

Stay informed, stay ahead of the curve.  Don't fall for the myths perpetrated by people like "Bill", who try to downplay the severity of the housing bust.  This website has written several exclusive stories, including the explanations of why foreclosures are a lagging indicator, why foreclosures are not lowering home prices, why the median is a poor indicator (originally published on piggington, but my work).   Please support this website, so we can keep bringing you the best housing stories on the web.  You will be "in-the-know", as we continue tracking the Southern California market for you, with unique data not available anywhere else.  Sign up here for CaliforniaHousingForecast premium content.