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April 16, 2007

Do Californians Feel Like Slim Pickens In Dr. Strangelove?

by Brad Warbiany

Because they’re riding this housing armageddon all the way down…

Mortgage defaults in California near decade high

The number of mortgage default notices sent to California homeowners last quarter rose to its highest in nearly 10 years as home prices stagnated and rates on adjustable loans pushed higher, a report released on Monday said.

Mortgage lenders filed 46,760 notices of default from January through March, marking an increase of 23.1 percent from the previous quarter and 148 percent from the year-earlier period, according to a report by DataQuick Information Systems, a real estate information service.

The first quarter’s default level was the highest for the most populous U.S. state since the second quarter of 1997. It came amid a sharp rise in defaults on mortgages held by subprime borrowers, or borrowers with blemished credit, across the United States.

The low introductory interest rates on the their mortgages have been expiring, replaced by much higher rates that have made monthly mortgage payments too expensive for many households to maintain. Additionally, their options for refinancing their mortgages have been limited because home prices in many markets have been largely flat or slipping.

California has been a white-hot market for the last 5-6 years, and now the time has come for a correction. I can’t say that I haven’t seen this coming, and in fact, a portion of it is playing out exactly like I expected.

I used to live in Irvine, which is dead smack in the middle of Orange County. I noticed prices in Irvine skyrocketing, but what was really surprising was the prices in the Inland Empire (Riverside & San Bernardino counties) going up, while builders were putting homes up as quickly as they could do it. At the time, I said that when the downturn came, places like Irvine, most of LA, San Diego, and similar towns wouldn’t get slammed too hard. After all, people have been fleeing those locales to head inland where they could afford to buy, and people looking to head back to where the jobs are will move back out if prices appear to level off or decline slightly, keeping pressure up. But for those folks inland, it’s getting very ugly, very fast:

According to DataQuick, mortgages were least likely to go into default in Marin, San Francisco and San Mateo counties, three affluent coastal markets with a tight supply of housing that has helped prevent home prices from slipping.

The likelihood of default was highest in inland Sacramento, Riverside and San Joaquin counties, where prospective first-time home buyers rushed in during the housing boom in search of relatively affordable housing.

Squeezed from pricey coastal markets, many Californians moved to such interior areas and used adjustable-rate mortgages to purchase houses in scores of new-home developments. They now are facing higher interest rates on their loans and rising mortgage payments while home values in those markets decline.

Now, you need to watch for the next shoe to drop. We’ll enter a recession later this year, as the tight credit market and the downturn in the housing/construction trades push unemployment up, coupled with light consumer spending as interest rates rise. Irvine, particularly, will be very hard hit due to the high number of subprime lenders located there, much like Silicon Valley was hard hit in the wake of the tech implosion 5 years ago. When that happens, the pain might spread to those nice beach communities. It’s unclear how heavily it will be felt, but it will be felt.

For those of you outside of California, keep your eyes open. If you’re in an area that’s seen both overbuilding and quickly rising prices, this storm is headed your way. Best get your cowboy hat ready.


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