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Homeowners Going Into Default
By Bill Bonner | Published  10/20/2006 | Stocks | Unrated
Homeowners Going Into Default

All we need are marshmallows.

Billions of dollars of American housing wealth are going up in smoke so fast, we feel as though we were watching the great Chicago fire.

You only have to read the headlines to get a good view of the blaze.

â,"More Homeowners Going Into Default,â, says the LA Times:

â,"The number of Californians who are significantly behind on their mortgage payments and at risk of losing their homes to foreclosure more than doubled in the three months ended Sept. 30, providing the latest evidence of trouble in the housing market, figures released Wednesday show.

â,"Lenders sent out 26,705 default notices - the first step toward a foreclosure - during the July-to-September period, up from 12,606 during the same quarter in 2005, according to DataQuick Information Systems.

â,"â,˜We were putting buyers in homes with loans they could not afford to sustain over the long haul,â," said Bob Casagrand, a San Diego real estate agent. â,˜If you're a marginal buyer with an adjustable mortgage, you're rolling the dice on the future.â,"

â,"â,˜Whereas a year ago, people could have put their house on the market and sold their way out of the problem, now they're stuck with the house,â," said Richard Pittman, housing services coordinator for credit counselor ByDesign Financial Solutions in Los Angeles.â,

Homeowners have been rolling the dice for the last ten years or so. Until then, they mostly counted on getting rich the old fashioned way - by making sure outgoing expenses were less than incoming revenue. The difference was compounded as savings.

But this is a new era, in the sense that, now everyone seems to think that every day is his lucky day.

Another headline:

â,"2007 home prices expected to fall,â, comes from the Orange County Register:

â,"California's 2006 sales slump is expected to last through 2007, resulting in a â,˜modestâ," drop in single-family home prices in the state next year, a top industry economist forecast Wednesday.

â,"Leslie Appleton-Young, chief economist for the California Association of Realtors, is projecting that home sales in the state will decline 23 percent this year, followed by an additional drop of 7 percent in 2007.

â,"That will result in a 2 percent drop in the median price of a single-family home â,“ from $561,000 this year to $550,000 in 2007 â,“ the first price decline in 11 years, she said.â,

Well, there it is again - the 2% figure. Alan Greenspan opined recently that he thought the worst of the housing slump was over, with prices down less than 2% nationwide (the figures are still a little fuzzy.) Now, here is the Abby Joseph Cohen of the Golden Stateâ,"s housing industry telling homeowners not to worry.

â,"â,˜It is relatively modest, a 2 percent decline,â," she said at the association's annual conference at the Long Beach Convention Center. â,˜You can't have prices appreciating 15 to 20 percent forever.â,"â,

No, you canâ,"t have prices going up 15% to 20% forever. But how can you have a correction of 2 measly percentage points? Itâ,"s as if Field Marshall von Kluge had warned the Fuhrer before the battle of Stalingrad: â,"Donâ,"t worry, the worse that could happen is that some of our men will stub their toes.â,

And here we have a little note that tells us just how good Ms. Appleton-Young is at foretelling the future.

â,"[She] conceded that last year's forecast missed its mark in predicting a â,˜soft landingâ," for the state's housing market. She had expected sales to decrease about 2.5 percent (not 23 percent) and price appreciation to settle at 10 percentâ,¦â,

She was projecting 10% growth in property properties!

Meanwhile, from the other side of the continent, the New York Sun guesses, â,"Housing Correction Just Getting Startedâ,:

â,"Don't get relaxed about the housing industry,â, writes Liz Peek, â,"because it's going to get much, much worse. That's the message from Gary Gordon at Annaly Capital Management, a firm [that] invests in mortgage-backed securities. Mr. Gordon is looking for substantial further declines in housing starts and sales, which will result in a recession beginning in 2007.

â,"The real issue is: How much consumer spending has been funded by rising home prices and how vulnerable is the economy to a fall-off in home values? Bears argue that the consumer has used his home ownership as a piggybank that is now ominously empty. They point out that mortgage equity withdrawals have climbed almost without pause since the early 1990s. Today, these borrowings are plummeting, a development that the folks at economics consultancy ISI call â,˜unprecedented.â,"â,

From the Economist comes a chart that shows how great those Mortgage Equity Withdrawals were. In 2004 and 2005, people â,"took outâ, amounts equal to 10% of personal disposable income - of which an estimated 50% was converted to consumer spending.

How was the American consumer able to continue spending more and more money even while his income went nowhere? Why did he not have to cut back when energy and housing costs soared? How come he didnâ,"t collapse under the weight of so much debt? The answer is right there - the housing industry didnâ,"t let him. Every time he was about to give in, they found a way to lend him more money.

But all that lending was founded on a swindle - that higher house prices meant homeowners were richer and could afford to borrow more. Now, the game is just about up, because homeowners can no longer â,"take outâ, any more money. So now they actually have to pay the debts theyâ,"ve contracted. Many are finding it hard to do, which is why default rates are going upâ,¦and smoke is pouring out of residential housing all over America.

And now the mortgage lenders are pulling fire alarms too. Poor Washington Mutual, the nationâ,"s largest S&L said its income dropped 9% in the 3rd quarter - because of softening in the mortgage business.

Of course, Alan Greenspan, the Realtors, and Wall Street insist that the fire is under control. Maybe theyâ,"re rightâ,¦and maybe theyâ,"re not. You can never be sure.

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.