How Low Will They Go?

Here is an observation from the Irvine Housing blog:

It takes at least 300 days from the time of mortgage reset to the time the REO is listed on the open market. This process can drag on much longer if the borrower attempts to make payments on the new schedule. Borrowers may drain other resources such as credit cards or retirement savings to postpone default.

Once the property becomes REO, the lender may not quickly and efficiently prepare it for sale. Most lenders do not have sufficient staff to deal with the large number of REOs they currently have, and the numbers are growing daily. Plus the loss mitigation procedures often demand higher prices for 90 days before the price cuts get more aggressive. Basically, it will take at least one year between the reset and the final sale in the open market, and 18 months is probably a more realistic timeframe.

The current REO pool is composed of those who gave up even before their loans reset. The huge number of resets and ensuing foreclosures is just now starting to hit the market. Today, we are beginning month 15 on the chart, but the impact on the market is at best in month 3 and more realistically, it is just now starting.

Note – emphasis mine.

Anyway, my mostly uneducated guess (what little I know comes mostly from Calculated Risk and the Irvine Housing blog and my own limited observations about the market) is that there’s a long way to go. Across the street from our hovel apartment is another hovel a tiny home – one bathroom, two bedrooms, on a small lot. Sure, it was nicely remodeled, but this is Silver Lake, about ten minutes from downtown Los Angeles – a somewhat artsy bohemian community not located atop a newly discovered oil deposit. The current owners paid about $800K for it, a year ago. I imagine if it went on the market now, that price would be down at least $100K.

Perhaps I’m wrong, but my mind simply doesn’t accept that the place across the street is worth more than $150K (in 2000 dollars). I figure when I see the house offered for that price, the market will be back to normal. And a lot of people are going to go through a lot of pain in the process.