by Bill McBride on 6/05/2008 01:31:00 AM
Thursday, June 05, 2008
Definition of Negative Absorption: The absorption rate for a community is the number of new household formed per year. If there are 100 new households formed in a community, then the annual absorption rate would be 100 units (house or apartments).
A negative absorption rate means that there are fewer households in the community each year. This is usually because more families move out of the community than move in. Since housing is durable, a negative absorption rate implies there is always more supply than demand.
I spoke with a land developer tonight (the same one involved in the 15 cents on the dollar land deal in the Inland Empire earlier this year). He told me about two deals he is working on with lenders for foreclosed land at about 20 cents on the dollar. He said the lenders are still in shock at the price.
He also mentioned that his company's analysis shows that Santa Maria (a small town about 75 miles north of Santa Barbara) is facing 5 years of negative absorption for residential real estate. This means there are a declining number of households in Santa Maria - as people leave to find jobs elsewhere - and my source believes Santa Maria will need fewer houses each year for the next five years.
Right on cue, Peter Hong writes in the LA Times: Santa Maria house bought with no money down goes into foreclosure
Prado bought a $412,000 house with a so-called 80/20 mortgage. Those mortgages are actually a pair of loans -- one for 80% of the purchase price and another for the remaining 20%.This brings up a couple of key points:
Property values, of course, began falling sharply last year. And that left people such as Prado, who bought near the top of the market, owing more in loans than their homes were worth.
She acknowledged that she stated her monthly income as $7,500 on the loan application -- nearly double what she was actually earning ... her husband ... was earning $20 an hour as a carpenter as builders turned the area's broccoli fields into housing developments.
Financially, Prado says she hasn't really lost anything, since she put no money down to get her mortgage. She's looking for a place to rent.
Houses like hers are now renting for between $1,300 to $1,600 a month ...
There is almost no bottom for prices in an area with negative absorption. Just ask the residents of Detroit.