Focus on Equity

I've been telling you that I had a short sale update on tap for this week. As I've thought more about what I'm about to share with you, I've realized that this really isn't so much a short sale update. It does affect what we could have coming down the road in terms of short sales, but it's bigger than that. So it's more of a look at what our market looks like in terms of homeowner equity.

I had said some time last year (I can't remember which post) that I wanted to get a good source of data on loan activity on a local level. It's critical information to knowing what is coming in our market, especially in terms of distressed property activity. Well, I've found a couple of good resources. One of them I used a few weeks ago to project upcoming loan resets. There's another source I found, REiSoucre.com that also has some good numbers from public records. I'm using them here because of technical reasons having to do with the way they lay out their data.

The peak years for price in our market were very active years for mortgage activity. Part of the reason for that was robust sales activity, but a larger factor was the boom in refinancing. Interest rates were very good, and a lot of homeowners started to look at their property with dollar signs in their eyes. This didn't just happen in Lompoc - this was a national phenomenon. Freddie Mac estimates that we as a nation took out $75-80 Billion per quarter in 2006 & 2007. Some of that went back into homes in upgrades and maintenance, but a lot of it went to pay off consumer debt and to buy expensive toys and vacations.

I'd better not get derailed on that topic, we'll be here all day...

So let's look at what we know about the Lompoc Valley. I've seen a few different numbers for the total number of houses and condos in the Lompoc Valley, ranging from about 10,000 to 12,000. REiSource.com says it's 10,787, so let's use that number for this purpose. I took a look at the outstanding first trust deeds that are recorded against properties in our market by recording date. A couple of technical points here: These are first trust deed recordings only, no second mortgages or equity lines. They include both purchase money and refinance loans. And they don't include loans that are no longer active - either having been paid off or foreclosed. And with all of that said, here are the numbers for our peak years:

2003 - 1102
2004 - 815
2005 - 1290
2006 - 969

The total here - 4176 active first trust deed mortgages in the Lompoc Valley that were recorded during that peak 4 year period. That's about 39% of the total number of households in our market.

Not all of those loans are upside down. Most of them maybe, but not all of them. Another tool that REiSource has is a way to look at properties that they thought had negative equity - more debt than value on a property. They do this with an automated valuation tool that they have. Now I'll tell you up front - I'm not a big fan of automated valuation tools. I think that they miss the mark a lot of the time in our market, and can be wildly off value in some cases. But I think that they are too high at least as often as they are too low. REiSource estimates that we have 4410 houses and condos in the Lompoc Valley that have more debt than value. That's 41% of our market area. And I think that might be a conservative estimate.

So why is this important? Well, it tells me that distressed property sales are here for the foreseeable future. Approximately 4 out of 10 houses and condos in our market won't sell right now for enough to pay off the liens. Until we get property values back up, distressed property sales are here to stay. We'll get there, but it's going to be a long, bumpy ride.