February Defaults

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During the month of February, San Diego saw 1,386 new notices of default (NODs), which are filed when homeowners neglect to pay their mortgages. As the first graph shows, this is more NODs than were delivered in any month during the housing downturn of the early 1990s.

Notices of trustee sale (NOTs) are also running high compared to recent years, but they lag NODs and are not yet at their early-90s heights. It is because of this lag that I focus on NODs as a more timely, if still quite approximate, indicator of how much "must-sell" inventory is out on the market.

Given that purpose, it doesn't seem fair to directly compare last month's defaults with those that occurred more than a decade ago. San Diego has been growing that entire time (most of it, anyway) and the comparative effects of distressed borrowers could be better measured by adjusting for the growth that's taken place.

Ideally, I would like to compare the number of defaults to the number of home sales that took place during a given month, which would tell us how the approximate supply of must-sell inventory stacked up against the demand for housing. Less ideal but still interesting would be to compare defaults with available inventory in order to roughly determine what percentage of overall inventory is of the must-sell variety.

Unfortunately, I have not found monthly home sales nor inventory data going back to 1991 or anywhere near it. (If any readers know where I could find such a thing, please contact me!) The best I can do, in this case, is to express NODs as a percentage of San Diego labor force, which the Bureau of Labor Statistics makes available on a monthly basis going back to 1991 and beyond. This, at least, allows us to compare how many people have defaulted in a given month compared to how many people live in San Diego overall.

The second graph displays the results of this effort and, somewhat surprisingly, doesn't look all that different from the first. Even adjusted for population growth, the number of NODs last month was higher than at any time throughout the prior housing bust except during the brutal spring of 1993, which was the only year not to experience a springtime rally.

The number of adjustable-rate loans subject to reset is expected to rise throughout 2007, according to asset management firm Credit Suisse. Many borrowers with resetting loans will lack hoped-for home equity gains, and all will face lending conditions that are tighter than they've been for quite some time. Expect more defaults ahead, and with them more must-sell inventory.

Correction: The original version of this story referred to BLS population data rather than labor force data and included a mislabelled Y-axis in the second graph. We regret the error.

-- RICH TOSCANO