by Calculated Risk on 8/03/2006 11:08:00 AM

In the previous post, DataQuick reported that default notices for Q2 2006 had reached a three year high in California. The following graph compares the annual number of default notices sent in California since 1992 (start of DataQuick data series) and house prices.

Notes: Price is from the OFHEO series for California (100 = Q1 1990). This is the price peak for the previous bust. 2006 is estimated for both series: Price is estimated at a 4% annual increase and default notices are double the reported notices sent for the first two quarters of 2006.

Click on graph for larger image.

During the previous bust, as prices slowly fell over 6+ years, the number of default notices continued to rise. Finally, in 1997, as housing prices started to rise and the number of default notices declined.

There is probably a vicious cycle that lasts several years during a housing bust: as prices fall, homeowners in distress can't sell and find themselves in default. And, as more homes go into foreclosure, prices fall some more.

It appears this vicious cycle is just starting for the current housing bust.