It’s difficult to forecast a bottom of the housing market because of the “shadow” market and government and legal issues that thwart foreclosures.
While some markets are firming up and foreclosure sales are trending down, there is this:
Lender Processing Services tracks performance on 40 million mortgage loans in the country. According to a preview of the LPS mortgage report, 9.22 percent of those loans are more than 30 days delinquent. A total of 6,984,885 loans were noncurrent. They report that foreclosures registered their first year-over-year decline since 2006. “January 2009 the percent of seriously delinquent loans that were current six months prior peaked at 2.92 percent vs. 1.65 percent in August 2010.”
In data published by Dr. Housing Bubble, CoreLogic is quoted as reporting that 11 million U.S. homes are underwater. Other articles have said that 25 percent of all mortgages are underwater.
Dr. Housing Bubble presents the following chart to show the distribution of negative equity among that 11 million base:
On the other side of the equation, foreclosure sales are declining. LPS reported that “the August delinquency rate on U.S. mortgages fell 5.1 percent from last year.” This is borne out by other data:
“CoreLogic said tax credit-induced sales helped push distressed sales to a seven-month low in June, but the share of distressed sales is expected to bounce back in coming months, according to the firm’s inaugural U.S. Housing and Mortgage Trends report. The bimonthly report will track housing sales, valuation, negative equity and foreclosure activity. In June, the distressed sale share fell to 24 percent of overall sales, down from a peak of 35 percent in early 2009, according to CoreLogic. …
“Since the peak in home sales in 2005, nondistressed sales have dramatically declined, and there is a clear relationship between the decline in nondistressed sales and the level of negative equity.
“The firm said nondistressed sales fell nearly twice as much in high-negative equity ZIP codes in comparison to low-negative equity ZIP codes.
“Las Vegas with 61 percent and Riverside, Calif., with 59 percent continue to lead the nation in distressed sales for the largest 25 metropolitan markets, according to CoreLogic. Phoenix, Ariz., Sacramento and Orlando, Fla., were the only other markets to have distressed sales account for more than 50 percent of home sales.”
Also, from RealtyTrac:
“(F)oreclosure filings in August fell 5 percent from a year ago, the third straight month of declines.
“The last time foreclosure filings increased was a 1 percent uptick in May, when 322,920 properties received either a default notice, scheduled auction or bank repossession. Since then, foreclosures have dropped 6.9 percent in June and 10 percent in July. …
“‘On the front end, seriously delinquent loans are rolling into foreclosure at an unusually slow rate, while on the back end the dammed-up inventory of properties already in foreclosure is moving to REO in steady stream rather than a flood — presumably to prevent further erosion of home prices,’ said James Saccacio, CEO of RealtyTrac.
“Florida notices fell 46 percent from last year but still held the second-highest foreclosure rate in the country. In Arizona, one in 165 properties had a foreclosure filing, the third highest. California foreclosures accounted for 20 percent of the national total in August with more than 69,000 receiving a foreclosure filing in the month. It’s a 9 percent drop from last year.”
These data came in before the news about banks, i.e. Bank of America, suspending its mortgage foreclosures in order to review documentation validity. The class-action lawyers will make a killing on this one. No one loves banks (as in, “the bank took my home”). But that doesn’t change the underlying reality of the market.
“One in 10 mortgages in 100 largest metropolitan area were seriously delinquent as of March 2010, according to a study done by the nonprofit Center for Housing Policy.
“Working with the Local Initiatives Support Corp., the Urban Institute gathered and analyzed delinquency data on 366 U.S. metro areas. Seriously delinquent mortgages are behind on payments by 90-plus days or in foreclosure. According to the study 10.2 percent of all mortgages in the top-100 populated areas were in this category, up from 7.7 percent in March 2009.
“According to this latest study, the severity of delinquencies vary widely across the nation. Austin, Texas, had the lowest share of seriously delinquent mortgages in March at 4.4 percent, while Miami had 26 percent of its mortgages in serious delinquencies.”
As the above paragraph tells us, it depends where you are. If you are in Miami, Phoenix, Las Vegas or the Inland Empire (California’s desert counties: Riverside, San Bernardino, Imperial), then the excess supply of homes is still being worked off. But I think that is changing. More in a moment.
The other reality is that sales are increasing:
“(T)he National Association of Realtors’ index for pending sales of used homes in August increased 4.3 percent to 82.3, the industry group said Monday. Economists surveyed by Dow Jones Newswires had expected pending home sales would increase 3.8 percent in August. Year over year, the pending sales index was 20.1 percent below its level of 103 in August 2009.
“Home prices rose for the fourth-straight month in July, but at a slower pace than in previous months, and they could start falling again as the expiration of government homebuying incentives has put a brake on sales.
“The S&P/Case-Shiller 20-city home-price index rose 0.6 percent in July from the prior month and was up 3.2 percent from a year earlier. That marks the sixth time in a row prices rose, compared with the same month a year earlier, an important distinction in an industry where sales vary sharply according to the time of year.
“The index is based on a three-month moving average, and analysts noted May and June saw larger price increases than July.”
The table clearly shows where the action is. As you can see coastal California is doing well. People still want to live there, and there is lots of money floating around. Quite a bit of the money flowing into the coastal California market is from speculators who have put a floor under the foreclosure market. This causes competition for homes, and prices have been rising, also bringing in other buyers who think we’ve hit the bottom.
This is not the case elsewhere. Things are changing in the poor markets as well:
“The Viceroy, a swanky condominium complex in downtown Miami, gives the impression that the United States is in another real estate boom. The sales office is strangely exuberant. Buyers gush about the glam condos — designed by hipster tastemaker Kelly Wearstler — and their hotel-like amenities: poolside libations, daily housekeeping and room service food stirred up by a celebrity chef.
“Since January, 262 of the Viceroy’s 372 units have sold. But there’s a twist: Almost 90 percent of the buyers are foreigners. And they all paid cash.
“The Viceroy’s story is playing out across Miami. Individual investors from as far as Argentina, Canada, Colombia, France, Israel, Italy, Norway and Venezuela are swarming the city’s sales offices to get in on what they see as one of the greatest real estate fire sales in the history of the United States.”
There are two factors to this. One is cheap prices. The other is a cheap dollar. For example, the Canadian dollar is at parity with the USD:
“For foreigners with cash, the deals can make them money from day one. Jim Chuong, a 38-year-old Novartis sales manager from Toronto, buys two-bedroom condos (in Phoenix) for less than $40,000 ($50 per square foot) in low-crime areas. He only picks up units that already have renters. After paying association fees and taxes, he walks away with $300 a month, pre-tax, on each. The deals are now easy to do, thanks to the cottage industry of companies that has grown up to manage virtually everything for foreign buyers, down to badgering renters for the monthly check.”
Another bit of data worth watching is the status of RMBS from Alt-A and subprime mortgages. Moody’s just downgraded tens of billions of dollars of these residential mortgage-backed securities:
“The lower ratings are due to the rapidly deteriorating performance of the mortgage pools that back the securities, in conjunction with macroeconomic conditions that remain under duress, according to Moody’s. In February, the ratings agency updated the loss expectations on Alt-A and subprime pools issued in 2005 to 2007.
“Of the 2005 vintage alone, Moody’s rates more than 5,600 tranches of MBS and has adjusted ratings on nearly 2,000 tranches already this year with another 119 on review for possible downgrade.
“Moody’s also now expects housing prices to continue to fall until the third quarter of 2011, analysts said in the most-recent ResiLandscape report from the firm’s structured finance group. The agency previously expected housing prices to stabilize in the first quarter of next year.”
You should understand that Moody’s was spectacularly deficient, along with S&P and Fitch, in rating these securities in the first place.
This is all supply and demand stuff. I thought things were going along well down the foreclosure path at last, despite HAMP, HARP and legal issues to delay the process. And then the Bank of America robo-signing scandal hit last week and they suspending foreclosures. MAC Home Mortgage Inc., a unit of Ally Financial Inc., and J.P. Mortgage Chase & Co.’s home-loan unit followed suit.
This will impact the market by reducing the quantity of homes on the market. Ivy Zelman expected big price declines in the fourth quarter of 2010. In Florida, one estimate is that it will reduce supply by 15 percent.
All this does is delay the inevitable. I’m even reading mainstream articles that agree with me that:
“But economists say the delays impede recovery of the U.S. housing market.
“They argue the best way to heal the market is to let banks foreclose quickly, allowing homes to be resold at lower prices to qualified borrowers. That would clear the market and help stabilize prices.
“‘If foreclosures slow down dramatically now, from a months supply perspective, the length of time it takes to work through all of it gets longer,’ said Sam Khater, senior economist with CoreLogic, a real estate research firm.”
And, even from the New York Times:
“Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
“When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
“‘Housing needs to go back to reasonable levels,” said Anthony Sanders, a professor of real estate finance at George Mason University. ‘If we keep trying to stimulate the market, that’s the definition of insanity.’”
One wonders why this recession is lasting so long and unemployment stays so high. The government has done everything it could to delay the corrective market forces in a failed attempt to make things better. They have failed on all fronts and now fellow Democrats are even attacking the Obama administration (well, he is a Clinton man):
“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”
Of course, we all know that.
The bottom line for the housing market?
Areas that are firming up will continue to firm up. We haven’t hit bottom in problem markets, and while the suspension of foreclosures may give a but of a temporary price bump, prices will stall out or continue to decline (depending where you are) until we’ve worked through the bad loans. Unfortunately, this could take some time.
I look at the overall economy to make my forecasts here because a rising tide would help many homeowners who are upside down but don’t wish to move. I see stagnation ahead, so it could be several more years before the weak housing markets turn around.
— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.
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