Friday, March 2, 2007

Effect of subprime meltdown?

Duckweed has a very relevant question, worth a new blog post: "Anyone has any comment on the effect of the new subprime lending guideline on LA RE? What's the exposure of this town?"

Calculated Risk's "Subprime: The impact on Existing Home Sales in 2007" is a good start - worth reading in full - although based on national statistics:

This is 2005 data, and other sources (and here) suggest non-prime (subprime and Alt-A) mortgage lending was about one third of all originations in 2005 and 2006.
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And, according to this note perhaps 25% of subprime borrowers will be unable to obtain loans in 2007:
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So if one fourth of potential subprime borrowers are unable to purchase homes in 2007, as compared to 2005 and 2006, then 25% of 20%, equals 5% of the total market. In 2006, there were 6.48 million existing homes sold, so 5% would be just over 300K homes.


The implosion of subprime lenders probably will have more effect than the guidelines. If there are few lenders left, and the market has finally made them afraid of risk, loans have got to dry up that have been propping up lower-end L.A. real estate. Which cascades onto demand for move-up properties. And then there are the Option-ARM resets coming this year.

I'm really angry about those easy lending standards, because they provided the money that drove up prices and essentially forced buyers to play by those rules to compete. Lack of regulation is the big villain behind the coming defaults and property value losses.

Let's keep this open for updates, especially on specific numbers about southern California.
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Jim the Realtor just posted (3/5) that 26% in Carlsbad and 40% in Oceanside used 100% financing of sales closed in February. A comment by oc_fliptrack said Countrywide just dropped stated-income 100% loans, that 100% is still possible down to FICO 620 but now requires full documentation.

6 comments:

Duckweed said...

Looking around for the answer over the weekend and found this map from Business week, from a pointer in a New Jersey bubble site (njrereport). While this is not strictly about subprime loans, it shows the percentage of new loans or refinancing using options.

California is proudly red, with LA pinned at 27.5%. Anyone having any load down on this map (like the article with the map) is appreciated.

http://www.businessweek.com/common_ssi/map_of_misery.htm

Duckweed said...

Sorry, the map link is here:

Here

Seen this before said...

"I'm really angry about those easy lending standards, because they provided the money that drove up prices and essentially forced buyers to play by those rules to compete. Lack of regulation is the big villain behind the coming defaults and property value losses.
"

No, it was the interference by the government into setting interest rates in the first place that caused the current problem. By keeping the Fed rate as low as they did for as long as they did, they created too much extra liquidity in the money supply. Everytime the Fed has done this, the result is always the same -- easy credit boosts consumer demand and keeps them spending -- for a while, then the market takes over and punishes those companies who over-exposed themselves. Don't be angry at the lenders, be angry at the quasi-commies at the Fed who try to manage the economy. If they didn't set the interest rates and inflate the money supply, this wouldn't have happened. Keep the regulators away, they'll only muck it up AGAIN (S&L crisis anyone? The run-up was the same then!)

Westside Bubble said...

True, "seen this before".

And what happens next, another taxpayer bailout? I'm going to follow Senator Dodd's hearings.

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