Good rant, Tim. I saw that article in the Union this morning and wondered about how the number of loan defaults really compared to historical numbers, so you read my mind. If we hear enough bad news (or bad spin), we will eventually start to see everything from a negative perspective. Thanks for the perspective check.

Tim,
What a well thought out posting. It was rationale, without emotion or “spin.” Unfortunately, reader’s of articles remember and “quote” the headlines and tend to believe what they read is truth…..or truth as far as they read in an article. It is a different market, and hopefully, as realtors, we’ll be able to provide information, data, and insight to our clients and future clients which will allow them to evaluate our current real estate market without emotions and be able to see for themselves, the sky is not falling, the market is simply adjusting. Good information, thanks Tim.

By May of this year, NOD’s total’d 3255 compared to 1984 NOD’s for the same period last year. A 64% increase. Still below historic levels.

But the percentage that went to Trustee’s sale also increased, from 7% of NOD’s in 2005 to 15% in 2006. (and check out this, in January only 10% went to Trustee’s sale, in Febuary that went to 12%, in March that went to 15%, by April and May we are at 18% of all NOD’s going to auction!)

The result is Trustee’s sales in Jan to May 2006 is 232% higher than in Jan to May 2005.

But the important thing is the overall numbers are still below historic average. So how long will the above trend continue?

btw. Lennar over at Eureka Springs in Escondido was going to offer their 2700 sqft homes in the mid-600′s before their models were completed in 6/2006. Now that the models are completed in 7/2006, the prices are starting $550,000. what is going on here?

i’m glad that Jack chimed in with the stat’s for actual NOD’s that go to auction as this is a more meaningful measure to me than the NOD itself. Having said that, I would also say it is not surprising. Why? Because over the past year or two many buyers were motivated to purchase a property NOT necessarily for the purpose of long term enjoyment / investment, but with the expectation (hope) that prices would continue to appreciate and they could “flip” the property in a year or two and pocket the $$ or buy up. Many of these buyers overleveraged themselves with little or no down payment and/or with Adjustable Rate or Option Arm loans. In an appreciating market, this investment strategy may be successful. However, as prices moderate and interest rates on their loans increase, there is no “margin for error” and some of these owners, who have little or no equity (or whose mortgage debt may now actually EXCEED their current property value), are forced to bail out, primarily due to increased mortgage payments, negative amortization piling up on the principal debt or both. The increase of NOD’s may also be due to those who purchased earlier but who have refinanced too much equity out of their home and who see their current position as a losing proposition.

I should also mention that their is probably a certain number of NOD’s being filed on owners who actually purchased for the more traditional purpose (long term investment) but who, through no fault of there own may have been forced to sell due to job transfer, loss of job, divorce, etc. Again, this is likely limited to those who have purchased over the past year or two with little or no down payment or those who have refinanced too much out of there home.

With regard to Lennar’s project in Eureka Springs, I can only speculate that they had an enormous margin for error built into their profroma. Typically, a large public company like this will need to show their lender (and their Board of Directors) a proforma confirming at least a 10-15% (or more) annual Return on Investment (ROI). That they were able to reduce their list prices (as Jack suggests) by approx. 18% suggests to me that they originally had proforma numbers reaching 30% or more, ROI. Of course, I could be wrong…

currently there are no resale homes in the 92027 zip code above 2,500 sqft selling for less than $650,000. Lennar’s pricing is going to really tie up the hands of those sellers.

Jack: I agree that many resale markets in San Diego, especially the newer communities have to compete with new home sales (i.e., many new home projects in 4S Ranch competing with resales, Stonebridge competing with resales in Scripps Ranch, etc.). However, buyers also have to factor in the cost (or difference in cost) for Mello Roos, which are generally higher for new homes, landscaping and upgrades. I know Lennar is a builder who provides more “standard” upgrades than most builders, but as you know there are always more options and the builders charge a significant premium for these. Combined these could easily add an effective cost of $50,000 – $100,000 for the new home. as you know, astute buyers (and agents) are generally aware of this. But your point is a good one. They do compete and affect the overall market, especially when inventories are up as they are now.

One more impact of new home projects that I would like to add (sorry I forgot to include this in my last comment). We are seeing a disturbing trend of builders requiring buyers to use a builder-affiliated agent (to sell the buyers existing home) when they are buying in a new home project. Since this issue is taking us further of the original subject of Tim’s original Post re: NOD’s, I will start another thread for this subject. I will be interested in your comments.

“If you can get into a home now in a state that has seen nothing but historic appreciation my advice is to ride with the wave, not against it.”

We definately want to catch the wave, but do you want to be catching it at its crest or its trough? We know inventory is at record high, we also know sale volume is now at its 25th straight month of slow down, July numbers will show 2nd straight month of median price decline y-o-y, NOD is increasing, but Trustee sales are REALLY increasing. As a buyer I’m looking at all of these above and I’m coming to the conclusion that waiting another year or two may be worth the tax hit and “money wasted on rent.”

Jack: While I respect your position with regard to waiting another year, the fact remains that none of us can predict the future. It’s like trying to pick the top or bottom of the stock market versus investing for the long term. Very dangerous. Yes, we are in a softening price trend, but for how long? I’ll go back to my previous statements (and no, this is not just optimistic real estate agent talk). If you are buying a home with the intention of “flipping” in a year or two for a handsome profit, then no, you should not necessarily buy now. However, if you want to enter the home ownership market for the right reasons: loving and enjoying your home every day (priceless), having the tax benefit and enjoying the fact that you are building long term equity, then this is actually the best time to buy in the last few years. Why? Prices are down from last summers peak. Add in the trend we are seeing where agents are able to negotiate seller credits (to varying degrees) to the buyer for closing costs (this does not always show up in the sales comps). Interest rates are still fabulous (and down about a 1/4% in just the past few weeks). Maybe most important are the macroeconomic factors in San Diego, which I have mentioned many times in the past. Employment is steady, the economy is growing, even if at a slower rate and land for new home developments is becoming scarce. Again, all of these factors point to long term price stability and eventually upward pressure. Even at its’ worst, I am not aware of any 10-year period in San Diego (going back to the ’70′s) where home prices did not have a net increase, including the recession of ’90 – ’96, where by 2000, home values had not only recovered but had increased substantially (between 1996 and 2000).

Because of the unprecedented amount of home value appreciation over the past several years, I think many people here have been spoiled and have lost sight of the real reason for home ownership. It is NOT an automatic entitlement to 15% year-over-year value gains and should not be thought of in this way. We’ve been spoiled by the past few years. Look at most of the rest of the country (excluding the investor markets du jour of the moment). They can only dream about what happened here, while they have “enjoyed” about an average of 2%-3% annual appreciation rate forever.

Steve, you may be right. But home prices are so high right now that one false move could prove disasterous for a family’s entire financial future. The risk vs. benefit equation just points to too much risk for now. That is just how a buyer feel right now.

I agree with you recent investors are toast. One fine example is a gentleman that purchased 4 homes in RB and San Marcos within the last year. all in the price range of $600,000. All at 100% financing. Even at the short sale pricing of low $500,000′s, he hasn’t found willing buyers, and all four will be going to foreclosure soon. There’s a lot of stories like this. With the amount of investors in SD and the amount of overleveraged empty homes in SD in danger of foreclosure, buying right now for the simple reason of having the priceless experience of homeownership is in my humble opinion putting my family at great financial risk. I hope we agree to disagree on this one.

Jack, I actually agree with you to a great degree. Part of the current “flushing out” process is, in fact, due to many so-called investors who made overleveraged purchases during the past year or two and are now trying to bail out, thus adding more homes (and competition) to the existing inventory. Additionally, you have those sellers who actually bought for the right reasons in the past year or two, but who used 95%-100% financing. Those who now need to sell (i.e., job transfer, divorce, unaffordable payments, negative amortization, etc.) are admittedly in a difficult position. However, this “flushing” process is presenting opportunities for buyers who want and/or need to buy now. Will the opportunities be better 6 months or a year from now? Maybe… I will acknowledge that if interest rates stay at present levels or lower, and prices continue to drop, your prediction may be right on the mark. I will owe YOU a Starbucks.