Apr302012
8.7 years to clear Orange County distressed inventory at stable liquidation rate
Lenders are withholding inventory across the Southwestern United States in hopes of creating a shortage of supply to reverse the downward spiral in home prices. Lenders constantly try to balance two competing forces. First, lenders need to get their money back. Dead money tied up in non-performing assets does not contribute positively to their bottom line. Further, this money also cannot be used to fund ongoing operations. This puts enormous pressure on lenders to liquidate and put their capital toward a productive use. On the other hand, if they liquidate too quickly, house prices go down which reduces the amount of capital they recover. Taken in the context of all their holdings, declining asset values wipes the equity from their balance sheets whether they choose to recognize this fact or not.
If lenders liquidate non-performing loans and REO too slowly, many will go broke from the collective weight of their expenses and other overhead. Back when banks paid depositors interest on their accounts, interest expense drained bank resources. The bank bureaucracy also drains cash reserves. If banks don’t obtain interest payments to cover expenses — and non-performing loans don’t providing interest payments — then banks eventually go broke. Lenders avoid this problem by booking phantom interest on non-performing notes, and borrowing the rest from the federal reserve. This smoke and mirrors approach to solvency cannot go on forever. This pressure to liquidate is alleviated somewhat by mark-to-fantasy accounting and loans from the federal reserve, but reality compels banks to liquidate despite the impact this liquidation is having on resale home prices.
REO liquidations caused a two-year decline in home prices since the expiration of homebuyer tax credits in 2010. So far in 2012, lenders have abruptly curtailed foreclosure activities across the Southwest, but this slowdown comes at a price. The supply of distressed properties does not magically disappear because lenders stop putting it on the market. Whenever lenders slow the rate at which they liquidate their holdings, they merely prolong the agony for the housing market. Today, I want to quantify that agony and show why any market bottom will not be followed by a sustained rally to bubble peaks any time soon.
I hope this post will provide peace of mind to many who fear the lack of current supply means the foreclosure deals are gone for good. They are not. Prices will not rise quickly and sustain a new bull market. The lender liquidation process will go on for years.
Calculating lender liquidation time
In order to calculate the total amount of time it will take to clear the distressed inventory, we need to do the following:
- calculate the total number of existing REO,
- calculate the total number of future REO already in the pipeline,
- estimate the number of future REO which will enter the pipeline based on the number of delinquent loans,
- estimate the number of future bad loans which will go delinquent while the liquidation grinds on, and
- calculate the total number of REO liquidations each month.
The calculation is relatively simple once we have the data:
existing REO + REO in process + future REO (current and future delinquencies) / monthly liquidation rate = months of distressed supply.
Surprisingly enough, most of this data is easy to find, and anyone can verify its veracity.
How many REO do the banks already have?
As of March 2012, lenders are holding 3,924 REO. They have been maintaining a balance of nearly 4,500 REO for the last several years. This is clear evidence of how lenders manage their REO inventories.
How many bad loans are being processed in Orange County today?
According to Foreclosure Radar, there are 11,078 total outstanding notices in Orange County. 4367 of those are Notices of Default, and 6,709 are Notices of Trustee Sale. Those numbers are down from the end of March numbers of 5,642 and 7,360 reported above. These are loans in the foreclosure pipeline. You can verify the current numbers at RealtyTrac.
Many of these delinquent borrowers will sell through a short sale, but between one-quarter and one-third will end up as REO. Both short sales and REO are distressed sales, and both weigh down prices.
Lenders add to the filings each month to chip away at the much larger shadow inventory number.
How many bad loans are waiting in shadow inventory in Orange County today?
According to a recent report in the OC Register, 5.5% of Orange County mortgages are more than 90 days delinquent. This is the most serious delinquency category as most borrowers who go more than 90 days delinquent never recover. They are the typical delinquent mortgage squatters waiting for the bank to get around to booting them out.
A serious delinquency rate of 5.5% is about seven times the historic norm of about 0.75%
So how many loans is 5.5% of the Orange County total? 
According to the US Census Bureau, there are 1,048,907 housing units in Orange County as of 2010. Of those, 33.7% are multi-family units. That leaves 66.3% as either attached or detached single-family homes. That amounts to nearly 700,000 houses in Orange County (10,48,907 * 66.3% = 695,425). It doesn’t matter if these are owner-occupied or rental units as either one could have a delinquent loan associated with it.
According to the American Home Survey, there are 462,761 housing units in Orange County with a mortgage on it. That means 66.5% have mortgages, and 33.5% are owned free-and-clear.
If there are 462,761 mortgage in Orange County, and if 5.5% of those are more than 90 days delinquent, then there are 25,451 delinquent mortgage squatters in Orange County. We can assume these have been served notices, so if all 11,078 are subtracted, then there are still 14,373 waiting in shadow inventory.
How many loans will go bad in Orange County before the inventory is cleared out?
Conservative estimates put the number of underwater loan owners at over 100,000 just in Orange County. When factoring in transaction costs, this number rises to over 125,000. Many of this cohort will want to sell and move before they get above water, and many of them are barely hanging on with loan modifications in houses they really can’t afford. Whether this group sells as a short sale or defaults and becomes REO, the sale will be distressed, and it will put continuing pressure on prices.
Estimating the number of short sales or REO from this group is very difficult. Studies estimate strategic default at 17% of overall defaults, but the definition used in that report is very narrow. In reality, any loan owner who struggles with burdensome payments and chooses not to continue paying the mortgage may go through a short sale or modify their loan only to default later. They aren’t picked up in the strategic default statistics, but their choice to quit paying the mortgage while underwater was certainly carefully considered and strategic. Plus, how many short sales are strategic defaults in disguise? Selling short while deeply underwater and buying again at the bottom sure smells like a strategic loan exit.
Another source of future bad loans are the loan modification programs HARP, HAMP, and private programs run by the banks. Twenty-five to fifty percent of the participants in loan modifications programs redefault within a year, and less than half will ultimately survive until they are no longer underwater. Millions of borrowers applied for these programs nationwide, and several hundred thousand were initiated. I can’t find good data on the number in Orange County, but it’s safe to assume its a number over 10,000. If over half of those redefault and become REO, that’s another 5,000 REO held in reserve.
I think it’s a conservative estimate to conclude at least 10% or 12,500 underwater borrowers will be added to the pool of REO over the next few years. Many others will become short sales. The total number of REO from strategic default from underwater loan owners could easily be much, much higher.
So how many REO will need to be sold?
If you add up the above, you get 41,875 REO to be cleared out over the next several years.
(3,924 + 11,078 + 14,373 + 12,500 = 41,875).
Is 41,875 a big number? That depends on how many REO sell each month. One of the biggest fallacies promoted on the web is that shadow inventory will only take a few years to clear because if you divide the total number by the total monthly sales, the result is only a few months (CoreLogic should be ashamed of such shoddy analysis). It doesn’t work that way. To accurately calculate the months of supply of shadow inventory, the denominator must be the total number of REO sold each month, not the total number of homes sold (At least Standard and Poors knows what they are doing). The latest plausible estimate for the nation is 45 months, or just under 4 years. As your about to see, even that duration is too quick.
How many REO sell each month?
Since REO inventories have held steady at about 4,500 units (see above), the 450 units lenders take in each month must be matched by outflows of an equal number. The small decline in REO inventories over recent months has come about partly from a small increase in sales, but mostly from a large decline in the number of REO banks are picking up at auction.
Lenders had been liquidating about 450 per month since the expiration of the homebuyer tax credit in 2010. That rate of liquidation is too high to sustain current pricing, so as banks maintain this rate, prices continue to drop. Therefore, lenders decided to reduce the rate to try to find an equilibrium where prices do not decline. Until demand picks up further, expect lenders to keep REO liquidations to less than 400 per month.
At current sales rates how long will it take to clear out all the current bad loans in the system?
It’s time to crunch some numbers.
At the currently stable rate of liquidation of 400 per month, it will take lenders 104 months or 8.7 years to clear the market. (3,924 + 11,078 + 14,373 + 12,500 = 41,875 / 400 = 104 / 12 = 8.7)
At the previous rate of liquidation of 450 per month — a rate proven to cause prices to decline — it will take lenders 93 months or 7.7 years to clear the market. (3,924 + 11,078 + 14,373 + 12,500 = 41,875 / 450 = 93 / 12 = 7.7)
Let’s say you don’t agree with my assumptions on future REO based on strategic defaults and failed loan modifications. If you only include existing REO, pipeline REO, and shadow inventory of 90-day delinquent loans, it will take lenders 73 months or 6.1 years to clear the market. (3,924 + 11,078 + 14,373 = 29,375 / 400 = 73 / 12 = 6.1)
Best case scenario if you include only existing REO, pipeline REO, and shadow inventory of 90-day delinquent loans and increase sales volumes by 20% to get back to historic norms (won’t happen without a move up market), it will take lenders 61 months or 5.1 years to clear the market. (3,924 + 11,078 + 14,373 = 29,375 / 480 = 61 / 12 = 5.1)
No matter how you sensitize the calculations it will take at least five full years to eliminate the existing distressed inventory with nearly nine years a more accurate number.
Realistically, it will take much longer than five years. Running at full steam it will probably take the full 8.7 years of my initial estimate. Over the last few months, lenders have drastically reduced their liquidations to about 300 per month to get prices to go back up. At that rate, they will be selling REO for another decade or more.
Remember, the rate of sales lenders are liquidating will barely hold prices steady. If they sell any more, prices will go down — they proved that over the last two years. If they sell any less, their liquidation will take more than a decade.
Do you see why I say it’s very unlikely prices will embark on a sustained rally? It’s all lenders can do to hold prices steady.
The long tail
Realistically, lenders will not process REO at the maximum rate beyond the next three to five years. As they get closer to the end, they will slow their REO processing to allow prices to slowly rise. They will still be putting out enough REO to keep appreciation in check, but they won’t put out so many as to push prices lower. This changing rate of liquidation is why price recovery graphs after asset price bubbles take on the shape they do.
Most loan owners mistakenly believe prices in Orange County have crashed from their normal values. In their minds, once conditions improve, prices will quickly recover to the peak then appreciate at 5% to 7% per year thereafter. That isn’t going to happen, partly because those expectations are totally unrealistic, but mostly because of the flattening weight of overhead supply.
Prices have only now fallen back to rental parity and begun to stabilize — and that only applies to the lower half of the market. The move up markets are dead, and they will continue to crumble.
With the long tail of lender liquidations, the Orange County housing market has been put on ice.
The Great Depression in the United States was so traumatizing because it went on so long. The Great Recession in the aftermath of The Great Housing Bubble may be just as bad on those who need real estate prices to go up in order to feel prosperous. Don’t believe the bottom-calling hype. This isn’t over yet.
It’s going to take a lot longer than 8.7 yrs to clear because past/current values are being lent-to @ negative real rates and demand is increasing for cheaper US labor.
If it took 3.90% mortgage rates to barely keep the heartbeat of housing on life support in 2012. How low do rates need to be in 2013? 3.25%? 2.75%? When does the Ponzi collapse and finally start over?
I put the probability at 100% that the Mortgage Debt Relief Act will be extended, probably in perpetuity
What an Extension of the Mortgage Debt Relief Act Could Mean
According to a preliminary report released by LPS, 2,060,000 properties are in foreclosure inventory. As of the end of the 2011 fourth quarter, 11.1 million borrowers were reported to be underwater, according to CoreLogic.
That’s a lot of potential debt to be forgiven, and through the Mortgage Debt Relief Act of 2007, homeowners get a break from paying taxes on their forgiven debt – whether it was forgiven through a short sale, foreclosure, or a modification. The act though, is set to expire at the end of this year.
“The scheduled expiration of the mortgage debt relief law means a whole lot of uncertainty for a whole lot of underwater homeowners who are in the process of foreclosure,” said Lance Denha, Esq., of the Law Offices of Lance Denha.
If extended, this could lead to thousands in savings for the individual borrower. For example, depending on one’s tax bracket, every $10,000 in forgiven debt could incur as much as $1,500 to $3,500 in federal taxes. Thus, if $100,000 in mortgage debt is forgiven after a foreclosure, this could mean $15,000 to $35,000 in taxes owed for the borrower.
The Law Office of Lance Denha warned that rushing to hand over a deed before the December 31 expiration date could become a mistake though if Congress ends up extending the debt relief act, which it may.
“Obama did include it in his budget, to extend it to 2014,” said Mark Luscombe, a principal analyst for tax research firm CCH, in a statement. “Congress….. might decide it’s not as crucial as extending the tax breaks that already expired at the end of last year.”
That doesn’t mean Congress won’t eventually act to extend the relief, Luscombe said.
“Usually the only fight about these things is finding a way to pay for it,” he said.
The administration is proposing to extend the act until January 1, 2015.
The criteria to have forgiven debt excluded as taxable income is the debt must be from a primary residence and the debt must be used to buy, build or substantially improve a primary residence.
Also, the exclusion applies only to acquisition debt up to $2 million, or $1 million for married taxpayers filing separately.
The Law Office of Lance Denha is a multistate law firm that helps defend wrongful foreclosures against homeowners.
As long as the public and Congress believe that forgiving taxes owed differs from simply writing somebody a check that other taxpayers must pay for, this sort of thing will continue.
Tax credits may make for good policy, but we should cease to pretend that they represent anything else than money received from other taxpayers.
BTW, it took me a while to find this place after the move. I missed the peculiar drumbeat of depressing but crisply-presented news about the market!
If I hadn’t found my way back, who knows what would have happened? I might have even stopped renting and bought (shudder).
It’s good to see you stop by. I missed your witty and insightful comments.
Aw, shucks!
(Now I’m blushing.)
Watch … Robert Shiller
http://www.cnbc.com/id/47200513
“Shiller said that the U.S. housing market was “really hard to forecast” at the moment, but added: “The general presumption is that home prices are going down and that’s good — it’ll make them more affordable.”
Continued weakness in the U.S. housing market, including new lows for the Case-Shiller Index, has led to concerns that the market will take a long time to start climbing up again.
Shiller argues that a gradual decline in the cost of buying a home could help people diversify their finances rather than just relying on their homes as an investment.
“Fifty years ago, there wasn’t this talk of housing as an investment. It was a zeitgeist of the early 2000s, and it has gradually gone,” he said.”
I have been talking about the benefits of lower home prices for five years now. Dependency on rising prices and HELOC spending is a Ponzi Scheme. As a society we are much better off without this activity.
The Housing Outlook Is Still Dismal
The growing optimism on housing is not justified. Not only is the recent data disappointing, but the overhang of shadow inventories threatens to keep the housing market depressed for some time to come.
We’ll begin with a look at the data. Existing home sales were down 2.6% in March, the second straight monthly decline. Sales remain depressed, and are still 37% below the peak during the boom. The purchase index for the latest reported week was down 11%, and is down 15% from a year earlier. New housing starts dropped for the second consecutive month to a paltry 654,000. It topped out at 2,273,000 in January 2006. The NAHB housing index for April dropped back to its early January level. It remains at 25, compared to a peak reading of 70. The latest Case/Shiller report show year-over-year national average price declines of 4% To find anything encouraging in these numbers is quite a stretch.
In addition to the data already reported, it is difficult to be optimistic about the period ahead. Although the bulls talk a great deal about the decline in inventories of homes for sale, keep in mind that the official inventory numbers include only homes that are now on the market, and ignores the importance of the so-called “shadow inventories” that loom over the industry like the sword of Damocles. The shadow inventories include houses that are not now on the market, but are either delinquent on mortgage payments, in default, owned by banks or are in some stage of the foreclosure process. Estimates of the number of houses in this category vary anywhere between 2 million and 10 million.
Foreclosures have generally declined over the past year as a result of the well-known robo signing scandal that caused banks to voluntarily stop most foreclosures pending some kind of settlement. This has now been accomplished by an overall settlement between the states’ attorney-generals and the major bank mortgage holders. As a result, the significant number of potential foreclosures that were held back by the scandal will now begin to be processed and show up in future inventories. It is highly likely that the vast number of distressed houses coming into the market will depress prices even more in the period ahead.
Importantly, the shadow inventories do not include homes that are under water, but where mortgage payments are up to date. This group includes homes with mortgages that are now worth at least 5% less than the amount of their mortgage. About 25% of all homes with mortgages now fall into this category, and as prices decline even more under the weight of the shadow inventories, the number of underwater homes will increase, putting even more pressure on prices. Experience indicates that the more a mortgage is underwater, the greater the chances are that owners will stop maintaining their property and quit paying their mortgage.
The bullish argument that houses are now generally affordable also does not hold up on closer examination. As we have repeated ad infinitum the average household has too much debt and is in the midst of deleveraging rather than taking on more debt. Furthermore, households, on average, do not have enough cash for a down payment or a high enough credit score to qualify for the more stringent credit standards put into effect following the credit crisis. Neither do they have enough income. According to Ned Davis Research the ratio of median home prices to median household income is still about 5% above the 36-year mean. It is notable that following all bubble periods, ratios not only decline back to the mean, but fall significantly under it.
All in all, it seems that it will be some time before the massive number of actual and shadow inventories are cleared from the system. Until that happens, home prices will remain under continued pressure.
Is there any data on what market segments these “future REOs” occupy? If the low end already crashed, burned, and was moved through the system, are these REOs going to be in the mid-to-high end of the market?
In other words, will Santa Ana be stable, while Laguna Niguel, Tustin, Dana Point, etc feel the pain?
Unfortunately, that level of detail is not available. We can infer that the pain is concentrated at higher price points from a number of other indicators.
First, the time to foreclose on mid- to high- end homes takes much longer. So we know the banks are dragging these foreclosures out hoping to avoid taking the loss.
Second, the mid- to high- end hasn’t seen the same price corrections as the low end, not because there is more demand, but because banks are not foreclosing.
Third, sales volumes are still down relative to historic norms, but only for houses. Condo sales have rebounded. This suggests weakness at the mid- to high- end while the low end is showing strength.
Fourth, the last figures separating out delinquency by loan balance (from 2010) shows a much higher percentage of delinquent loans over $1,000,000.
Fifth, since the low end has crumbled, the buyers who would typically be selling their homes and taking the profit to buy a move up are notably absent from the market.
If you add those factors up, it strongly suggests the mid- to high- end of the market is still an illusion. Prices are too high, demand is weak (due to a lack of move up equity), and overhead supply is large. It also suggests the low end has bottomed.
Postponement does not equate to resolution.
OC’s lowest price tier can carry the weight of all ‘others’ above for a limited time only. Systemically, at the current juncture, the carry-cost to preserve today’s values is roughly $1.2 trillion of freshly minted US debt (per annum).
Reality is, the low-end is not done crashing. Especially in the bubble counties.
On future Orange County home prices: what matters first and foremost is total jobs/proprietors earning over the present Orange County salary median (jobs at or below median earning have little impact on the owner-occupied housing situation). The second factor is not quite the same as the first but is the more important derivation: the marriage rate creating above-median household incomes (equivalent to “household formation”) and this factor has fallen absolutely precipitously since 2000 in Orange County (source, City Data).
On IR pointing out again the mystery of bank/servicer foreclosure behaviors (individually and collectively) and that the banks hold $750 billion give or take of second positions secured by real estate: this touches on complex factors and anyone seeking to buy a home who isn’t fascinated by economic/political/finance would be wise to ignore this footnote. First: when the chance has arisen to see how each bank that actually has to account for its present “true” value of assets carried on its books, that is when the FDIC shuts down a bank, we can see in the real world the effect of present bank fantasy under-reserving for losses by an immense amount. The losses of assets values (net of accrued reserves) versus market value are anywhere from 10% to 30% (see Calculated Risk blog for last Friday for potent examples). The banks are still allowed to use ANY set of “reasonable” assumptions in valuing loan loss or reserve, and apparently no two banks use the same methods. This has caused conflict between SEC, the accountants, regulators, all of whom want something different…and the powerful bankers themselves, who have long arbitrarily and in violation of all accounting convention, used various “reserves for loss” to actually engineer nice consistent earnings. http://www.frbatlanta.org/filelegacydocs/wallkoch.pdf
There really is “mark to fantasy”: http://www.bauer.uh.edu/departments/accy/documents/conference/2012/McInnis-Paper.pdf
FDIC appears to close down banks not that are technically out of real capital net of real market value of assets, but only those few who with the “rigged” game of today’s banking still can’t make cash flow (as IR points out, it costs big money to run a bank). On a macro scale, our banks are probably insolvent by far and still hiding that fact. Thus: any setback national or international to this house of cards and printed money will have severe job/price repercussions throughout the economy…as in Spain at present (causing further loss of household formation being at the forefront, and jobs both).
Lastly, and more ominous for the Orange County market especially, the banks are being actively encouraged to violate all sound banking rules (which must yield to keep the fantasy going) to hold REO homes off market as owned inventory as “temporary” rentals for as long as they wish AND to use “mark to fantasy” accounting as freely as they wish for these owned-and-rented homes, while using the same fantasy assets to secure further free printed up money from the FED. If this rentals-to-hide-losses scheme is implemented in a widespread fashion, as appears likely, that will indeed completely alter the housing market. Is this rental scheme already happening? Here’s the Fed express position, nothing even secret here about this stunning and ill advised attempt to hide losses and keep banks going using the Fed’s inflationary printing press to solve all problems over enough time…they think…(while harming savers):
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20120405a1.pdf
Thanks for that great post with supporting papers.
Sometimes when I write about the banking cartel and mark-to-fantasy accounting, I wonder if people dismiss me as a conspiracy theory nutter. This stuff is real, and fortunately for bankers, it’s all too complex for most people to understand.
“I wonder if people dismiss me as a conspiracy theory nutter.”
Not at all. You were certainly ahead of most of the pack in the early months of the meltdown, but nothing that has been revealed since then contradicts anything that you’ve said.
I’ve contributed dozens of links to this blog, and none demonstrate any of your arguments are implausible.
I think you’re still drinking the koolaid wrt Irvine house prices being “special”, but we’ll see. I think $250,000 for an average SFR is in the future, and that 2x or 3x the American average is unsustainable.
At 8.7 years won’t a lot of these houses fall into disrepair?
I think many of these homes will end up as short sales or strategic defaults. I think the 12,500 number of future foreclosures is too small. Many of these people will spend 10 years or more waiting for house prices to get them back above water, and underwater loan owners typically won’t spend money on repairs or renovations on the bank’s home, particularly since they won’t have access to the HELOC money to do it.
Seriously, where are the authorities? Where is the rule of law?
I mean when lenders decide 450 REOs are too many and it’s not supportive of the pricing they wish to see they, in unison, decide that 400 per month makes more sense.
As you say, Irvine Renter: “Therefore, lenders decided to reduce the rate to try to find an equilibrium where prices do not decline. Until demand picks up further, expect lenders to keep REO liquidations to less than 400 per month.”
Ain’t this collusion? Isn’t this illegal?
I would love to see an enterprising attorney take on the lending cartel. They would be sued under RICO racketeering charges or prosecuted under anti-trust laws.
Their behavior is clearly anti-competitive, and they are doing it to harm consumers. The government wouldn’t tolerate such behavior from any other group or industry.
Perhaps it could be a class action lawsuit.
With the scenario described above about many mortgage lenders, it seems like they’re paralyzed to the status quo.
They can’t liquidate or they’ll start a stampede of other banks doing the same and simply self-destruct (as market values plummet). Right now they’re just hunkering down, minimal staff, minimal strategic mobility, minimal services. I’m wondering then whether stronger, more solvent, healthier banks and credit unions – who have the flexibility and staff to provide better service, more competitive products and customer support – might gain an upper hand and start winning market share?
I realize that there’s a cartel, but looking at some of the bank ratios out there, clearly not every lender is on their death bed. A ton of them are, but there’s probably a significant number of “whippersnappers” that could run a marathon and kick some ass in the marketplace.
I’m not sure whether this is a real threat in the consumer/mortgage lending markets, I’m just imagining whether it could become one soon?
I believe the lending cartel’s ultimate demise will come from the strongest banks. Whichever bank earns its way to solvency first can start dumping its REO and screw their competitors.
You’re analysis is waay off. Your calculations of monthly liquidations doesn’t include the number of homes sold via short sales ( which is a major component of the market these days). Although I don’t have these figures off the top of my head, looking at your chart, we can assume that the “cancellations ( gray line) could be an accurate reflection of the number of short sale transactions. In addition, properties sold to third party buyers represents a good portion of the market. This represents investors buying cash at court house steps/auctions. So using YOUR data, the actual “liquidation rate for March 2012 is more line 1,200 per month in Orange County. Therefore, 41,875/1200 = 34.8 months or 2.9 years to get rid of all distressed supply using the current “liquidation” rate. Please re-examine your numbers.
I am a real estate analyst at a major financial institution, and
REOs do not get liquidated as short sales. They are already owned by the bank.
Further, if you look at the total number of pending REO sales in Orange County, the number is 676. Since escrows take between 45 and 60 days, lenders are poised to sell about 300 to 400 per month.
There are places you could poke holes in my numbers, but the one you chose is not a particularly good one.
If you want to see the impact of short sales, look at the discrepancy between the number of new filings each month and the number that actually go to auction. That’s where the short sale leak occurs. Lenders are filing about 1,500 new NODs, and they are cancelling about 900 per month. The other 600 are either sold to third parties or REO. The ratio between REO and thirds is usually 2:1 which is where you get the 400 new REO each month.
You could argue the 11,000 pipeline REO might be less due to short sales, and that may be true to a point. However, if you look at the REO pipeline on Foreclosure Radar, you see that very few of these properties are for sale, so not many will end up as short sales. Most will be REO.
Further, you can’t simply take the cancellation number as short sales because many of them are loan modifications which end up as future notices when the borrower redefaults.
If you want to expand the analysis to include all future short sales so we can add the short sale liquidations to the calculations, you need a good estimate of future short sales. If we assume 125,000 is a good number for the total who are effectively underwater, and if you assume the average homeowner sells once every seven years, then most of those 125,000 will likely end up as short sales unless we get a spectacular market rally. If you increase my calculations from 41,000 to add at least 80,000 more short sales, the total number of sales is closer to 121,000 distressed properties. Then you can use your 1,200 per month distressed liquidation rate (still too high) to get to a 100 month number of distressed inventory.
I have re-examined the numbers, and I still feel pretty good about them.
Also, total sales in OC are around 3,000 per month, but over the winter it was only about 2000 per month. Total distressed sales are typically 33% which is around 1,000 homes. About two thirds of those are short sales and one-third REO which again gets to between 300 and 400 REO sold each month with the other 600 to 700 being short sales. And that is a good month, not like February where we only sold 1904 homes.
In short, there is no waay its 1,200 per month REO liquidations.
*125,000 homes in Orange are underwater
*3.90% Mortgage rates, only due to Federal Reserve manipulation of the interest rates.
*FHA is only sub-prime insurance policy, artificially inflating sales for low payments
*$625,000 Frannie/Freddie conforming ceiling, much higher than in 2007
My Point.
The pipeline for further strategic defaults will grow and this timeline might actually get longer. Maybe REO to rental will change a few things, but I doubt it. As mortgage rates are finally allowed to increase, home values will fall. More loan owners will just stop paying, even the 2009 and 2010 vintage FHA loans. Those FHA loans have no equity with very little skin in the game they will default. There are few move buyers to purchase the $400,000 plus home market. I haven’t even addressed taxes, jobs, median income in OC, and CA government debts.
This spring selling season is artificial the real market is years away.
Question for Housing Analyst:
why are you posting under an anonymous id?
Name of major financial institution:
Your name:
Thx in advance
I don’t mind people staying anonymous. Often people will reveal things anonymously they wouldn’t reveal otherwise.
Yeah, I hear ya.
quote: ”I am a real estate analyst at a major financial institution”
Trust but verify
Those statements never really help. If he had presented a data-driven argument demonstrating how my numbers were wrong, there would be something to react to, but by just saying “you’re wrong because I said so and I have credibility” isn’t going to fly.
IR, great post. Numbers like this keep things in perspective. We’ll be lucky to bounce along the bottom (whenever that may be) for a looooong time. I know someone who is very close to giving into the realtor “buy now or be priced out forever again” garbage. It would take a true miracle to get any meaningful appreciation in this economic climate….so what is the hurry again?
Correct me if I’m wrong, but isn’t your analysis essentially:
Total Shadow Inventory / REO sales per month = Number of Months required to clear inventory ?
This doesn’t make sense since not all shadow inventory will be cleared via REO sales. A good portion would probably get cleared out in the short sale process. In fact, most distressed sales are being sold pre-foreclosure. Thus, doesn’t that imply that the total time should be much lower than 8.7 years?
No, I was estimating total REO inventories, not total shadow inventory. If I wanted to estimate total shadow inventory, the number of future short sales would be added to the numerator. As I mentioned in a comment above, there will be another 80,000 short sales over the next several years as the 125,000 underwater loan owners sell their homes. It’s very unlikely everyone underwater waits until they have equity again, particularly since that will take a very long time.
[…] those who want a deeper understanding of why and how long, please see 8.7 years to clear Orange County distressed inventory at stable liquidation rate. Housing is getting a lift from reduced supply and stronger demand. Mortgage-interest rates at […]
[…] the nominal bottom in house prices. There are still thousands of bad loans to process. It will take 8.7 years to clear Orange County distressed inventory at a stable liquidation rate. While it’s possible this spring was the nominal low, it’s equally possible it will be […]
[…] 8.7 years to clear Orange County distressed inventory at stable liquidation rate. Housing bulls largely dismiss the realistically dire estimates of people like me or organizations like S&P who say it will take nearly four years to clear the backlog. A Disastrous Investment? […]
[…] inventory doesn’t make it go away. 8.7 years from now when delinquency and foreclosure rates drop back to historic norms because we are finished […]