So, Where Will Housing Double Dip?

I’m going to spend today’s column presenting the results of some ad-hoc research I’ve recently been doing, looking at where we can expect a double-dip in housing to hit the hardest — and whether it’s enough to matter in the context of the national mortgage market. But before I do, this past weekend, famed economist Robert J. Shiller came out and suggested U.S. housing faces an increasing likelihood of a double-dip — something regular readers know I tend to view as more of a foregone conclusion at this point. As HousingWire reported last week, fresh data from First American Corp. [stock FAF][/stock] business unit CoreLogic clearly shows why: distressed sales are on the rise again, reaching 29 percent of resale activity in January. With that in mind, let’s take a look at where housing’s pending double dip is likely to have the most impact. To do this, I used data from Lender Processing Services [stock LPS][/stock], who this morning released updated delinquency data. Among other ways of viewing the data, LPS’ data stratifies non-current loans by state as a percentage of all loans. Not surprisingly, perhaps, Florida leads the nation in non-current loans with 23.8% of all loans in the state delinquent or in foreclosure status. But I wanted to see the data slightly differently, comparing each state along its delinquency and foreclosure inventory percentages. I ranked each state by its delinquency and foreclosure inventory percentages — and then looked at the difference between the two. In other words: By assessing the volume of properties in delinquency status (but not yet in foreclosure), and comparing that to the volume of loans already in foreclosure, one can calculate a relative measure of the amount of pain that can be expected in each state as delinquent loans move through the pipeline. Put in more plain terms, a state with a 1% foreclosure rate and an 11% delinquency rate should be expected to feel the impact of distressed properties moving through the pipeline far more than a state with a 5% foreclosure rate and a 5% delinquency rate, for example. The reasoning is simple: distressed property sales (short sales or REOs) are a drag on retail home prices. In markets that have seen comparatively less foreclosures relative to the volume of delinquencies stuck in the pipeline, the impact of those delinquencies will be felt proportionately more strongly as they are finally dealt with. Drum roll, please: the results The result of ranking states in this way lead to some very interesting findings. For one thing, some very large states appear to yet have some significant shocks to their system ahead — while other states that may have done comparatively better thus far appear set to find themselves in some pain on this next downward leg in housing. In particular, as the table below shows, Southern U.S. states appear to have some surprises ahead, with both Mississippi and Georgia boasting the largest discrepancies between foreclosure inventory and delinquencies.

These are the top 15 states, in terms of the difference between foreclosures and delinquencies. I then matched these states against HMDA origination data for 2007 — as a proxy for loan origination trending — and found that the top 15 states listed above represented just under 43% of all loans originated that year. Why’d I do this? Because if states like West Virginia (0.45% of 2007 originations) had comprised the entire top 15, I’d suggest that while the impact of distressed sales within the state would be comparatively stronger, it would matter less to the overall housing market in general. But that’s not what I found. Instead, what I’m seeing is some large states that seem to have escaped the first round of housing shocks, now staring at being pulled directly into round two — and I’m also seeing already-battered states, like California, that surprisingly have more pressure yet to come. In fact, the fact that California and Arizona made this list should be frightening. So, too, should the fact that Texas is here as well. You might be surprised, too, to find out which state ranked dead last in this sort of exercise: Florida, one of the nation’s hardest hit states thus far, which came in with a meager 1.0 percent difference between foreclosures and delinquencies. That said, this is still only one way of looking at the data and shouldn’t be seen as gospel by anyone — it’s an attempt to make sense out of where we’re headed next. Florida, for example, despite an 11.4 percent foreclosure rate, still has 12.4 percent in delinquencies (and in terms of delinquency percentage, FL is ranked 5th in the nation). So expecting Florida’s woes to be behind it is probably an exercise in lunacy. But the point here was to try to find those states that will feel the impact of outstanding delinquencies comparatively harder, and looking at the differences between foreclosures and delinquencies strikes me as good a path to get there as anything else I’ve seen. So, if this exercise has any merit, it’s time to buck up, readers in Southern states: your turn to feel housing’s bite might be just around the corner. Paul Jackson is publisher at HousingWire.com and HousingWire Magazine. Follow him on Twitter: @pjackson