A broken clock is right twice a day. People who are permanently bullish or permanently bearish are constantly calling the bottom or calling the top. Since market prices go up and down, both bulls and bears are eventually right.
The permanently bullish come in two flavors. The self-serving spinmeisters of the NAr, and the optimistic economists and financial reporters who want to tell people what they want to hear. realtors believe they have to be bullish to induce people to buy homes. realtors show a callous disregard for the financial well being of their clients in order to generate a sales commission. realtors will tell people prices have bottomed even if they don’t believe it. realtors need potential buyers to believe prices will rise so that the buyer will make money from a house purchase.
Economists and financial reporters also love to call the bottom. Everyone who owns anything wants to hear the value of their holdings is going up. Whenever prices decline in any market, economists and financial reporters are keen to call the bottom and make investors happy. Since so many own real estate, economists and financial reporters are especially keen to call the bottom of a real estate decline.
Barry Ritholtz recently documented the plethora of bottom calls since 2006. It’s astonishing how frequently, consistently, and incorrectly the NAr and various econiomists and financial reporters called the bottom.
… These bad calls reoccur every Spring, as the data begins its annual improvement. I use the phrase Perennially Wrong Bottom Callers and its acronym PWBC™ (I may have to trademark that!).
… Spring has sprung, and the usual suspects are up to their old tricks. There are so many bad PWBC that it is really difficult to make special mention of anyone, but we are compelled to point out two PWBC in particular: Alan Greenspan, who was wrong early and often, and the National Association of Realtors, whose spin has been astoundingly consistent, bullish and wrong, the whole way down.
Real estate could be on the rebound(DelMaravnow May 27, 2012)
“the national market, which saw sale prices in April jump nearly 5 percent higher than the same month last year, the Commerce Department said Wednesday. The number of homes sold was up nearly 10 percent, too.”
Housing Market May Finally Be Turning Around With Sales Up 10 Percent In April (Huffington Post, May 28, 2012)
Housing Prices Show Signs of Stability (Wall Street Journal, May 29, 2012)
“Sinking prices have made a mockery of their exhortations, but the S&P/Case-Shiller index of home prices in 20 major cities is showing signs of stabilizing.”
“But if prices really are turning the corner, that has positive implications for banks’ and consumers’ balance sheets.”
U.S. Home Prices: Has the Tide Turned? (ABC News, May 29, 2012)
“Average home prices rose in March compared with February in most of the 20 cities in a Standard & Poor’s/Case Shiller survey out today – the first time in seven months there’s been a gain. This report adds to the growing evidence that the worst of the five-year housing slump appears to be over.”
Home prices at post-bubble lows but may point to market stability (LA Times, May 29, 2012)
“Home prices in the U.S. ended the first quarter at their lowest point since the housing crisis, with values in 20 major cities dropping 2.6% in March compared with the same period a year earlier.”
“Analysts believe the data could signal stability in the turbulent housing market, if not a nascent turnaround.”
The Housing Bottom Is Here (Business Insider, May 29, 2012)
“The headline sequential gain for the 20-city composite was just 0.09%, bit below the 0.2% that analysts had expected. But it’s obvious: Housing is bottoming.”
“As S&P’s David Blitzer said on CNBC today: Housing is ‘a whole lot better than the headlines’”
“The bottom line: Every single measure out there is showing gains price gains.”
S&P: Home Prices See New Bottom, Recovery On Deck (Reverse Mortgage Daily, May 29, 2012)
“The rate of decline has moderated, however, suggesting that a recovery is near.”
Not everyone is buying it. While I believe it’s possible housing has bottomed, particularly for the below-median price points, I think it’s very possible that the liquidation of shadow inventory could push prices lower still. If we only focus on the above-median segment of the housing market, particularly in place like Orange County, I think it very likely the values of those homes will fall further. If there is an epic crash yet to happen, it’s with high-end real estate.
I am not as sanguine as the bottom callers, nor am I as downbeat at the bears. It’s difficult to predict government intervention or the behavior of the banking cartel, and these are the primary factors influencing housing market pricing. However, some market watchers are downright negative, and Keith Jurow is convinced a market crash is imminent.
Over the last several months, Keith and I have developed a regular correspondence, and we have spoken at length on the phone about housing issues. Where he lives on the East Coast, the amend-extend-pretend policy is widespread. No segment of the market has crashed there like the low end of our market has crashed here. Since many New England states have judicial foreclosure laws, and since the banksters live there, they have much more shadow inventory and far fewer foreclosures — so far. Whereas I think the low-end markets in the non-judicial foreclosure states are near bottom, I agree with him that the judicial foreclosure states and anything above median has yet to experience real pain.
After being one of the few analysts who was correct in stating for the past two years that there is no housing bottom in sight, it’s time for me to tell you what I see ahead.
Housing pundits are nearly unanimous in declaring that housing markets are showing signs of bottoming. This is nonsense!
What is Really Happening Now
We hear that California markets are showing signs of revival and that prices are rising in certain markets. Let’s see. Here are the latest figures from trulia.com.
In Los Angeles, trulia reports that the average price-per square foot for homes sold in February through April was down 9.3 percent year-over-year for 3-bedroom homes and down 8.7 percent for 2-bedroom homes.
In San Francisco, allegedly one of the hottest areas in the nation, the 3-bedroom average price-per-square-foot was down 4.7 percent year-over-year and 1-bedroom price-per-square foot was down 8.1 percent.
Price-per-square-foot statistics are the best way to compare prices because it does not matter how large the house is. Median prices are skewed by square footage as well as by the percentage of distressed properties sold.
I totally agree with his reliance on price-per-square foot as the best measure of house price trends. The OC Housing News report relies on it.
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Here in Connecticut where I live, double-digit price declines are commonplace:
Fairfield County – down 10.7 percent year-over-year
Darien – down 13.5 percent
New Canaan – down 15.7 percent
Norwalk – down 13.8 percent
New Britain – down 15.3 percent
Branford – down 15.9 percent
City of New Britain – down 15.3 percent
City of Hartford – down 14.4 percent
These statistics come from Wm. Raveis & Co.’s website – raveis.com. …
No matter how long the liquidations are delayed, when they finally occur, prices fall. Lenders have been pretending the market would stabilize for five years, and the lack of move-up buyers and widespread insolvency are taking their toll. The few foreclosures they have processed have been pushing prices substantially lower despite all the hoopla about improving conditions.
Serious Mortgage Delinquencies – The Real Story
We have been told that the rate of mortgage delinquencies has been declining over the last year. Let’s see.
In the NYC metro area, the banks drastically cut back foreclosing on properties in the spring of 2009 and have never changed their policy. This has nothing to do with the robo-signing scandal which occurred 18 months later.
In late 2009, the NYS legislature passed a law requiring all servicing banks in the state to send a “pre-foreclosure” notice to all delinquent owner occupants. …
Through the end of March 2012, a total of 192,000+ pre-foreclosure notices had been sent to delinquent owners in NYC. This does not include delinquent investor-owned properties because the law did not require servicers to send notices to them. There are lots of 2-3 family homes in the four outer boroughs of NYC. I estimate that there are roughly 75,000+ delinquent investor-owners.
This means there are roughly 265,000 seriously delinquent homeowners in NYC who have not yet been foreclosed. Why so many? The banks do not foreclose in NYC. As of May 24, foreclosure.com reported a total of 301 foreclosed properties on the active MLS and 103 in Brooklyn.
Those are astonishingly large numbers, and they are accurate. One of the problems with estimates of shadow inventory we have here in Orange County is that the numbers are voluntarily reported to organizations like CoreLogic rather than mandatory reporting from the state. I have long contended these numbers are underreported and the problems are much larger than widely known. Keith’s research proves this in New York City.
At their current rate of liquidation, it will take forever for the market to clear there. If you have to clear up 265,000 bad loans and you are processing only 300 per month, it will take 883 months, a whopping 73 years!
Why the Collapse is Coming
Despite all the mortgage modifications, refinancings, and cutbacks in REOs for sale that have taken place in the past 2 ½ years, prices continue to decline. Will this change anytime soon?
Let’s take a look at potential buyers. It’s an undeniable fact that the trade-up buyer is gone in every major metro market. Most of those who would like to sell and buy another house are unable to do so. Their house is underwater and their equity is gone.
This is an undeniable fact. With prices at 2003 levels in Orange County and much lower in other areas, very few who purchased in the last decade have any equity, and with rampant mortgage equity withdrawal, many who purchased 15 or 20 years ago are similarly under water. With no equity, there is no move-up market.
I talk to Phoenix broker Leif Swanson on a regular basis. He has explained that the few normal sales he closes are for sellers over 70 years old. Because they have owned the property for decades, they have equity. The trade-up buyer of the past – ages 30-60 — has disappeared.
Who is going to buy all the Southern California homes priced over $800,000? I don’t know, and lenders don’t know either. There is no market for these. The people who would ordinarily be taking a few hundred thousand dollars of equity to make a move up are broke. There are almost no sales above $800,000, and inventory is abundant even in our depleted market.
That leaves first-time buyers and investors. According to Inside Mortgage Finance, their survey of roughly 2,500 brokers nationwide finds that roughly 30 percent of all purchases nationwide are by investors, many paying all-cash. Some analysts have argued that this is a good thing for housing markets. This is rubbish. There aren’t enough potential all-cash investors to make-up for the collapse of the trade-up market.
Furthermore, investors are concentrating in the sand states where prices have collapsed more than anywhere else – Arizona, Nevada, and Florida. Prices have plunged so much in the past year here in Connecticut because there are not many investors.
Plus, investors do not buy overpriced high-end homes. They don’t cashflow. The reason many of the subprime markets are nearing the bottom is because prices are low enough to attract cashflow investors.
That leaves first-time buyers. Do you really think there are enough potential first-time buyers out there to keep prices from declining further? …
Had it not been for the FHA’s program of mortgage insurance, buying by first- timers would have collapsed. The latest FHA Single-Family Outlook revealed that 78 percent of all purchase mortgages went to first-time buyers.
When you look at securitized mortgages bought or guaranteed by Fannie Mae and Freddie Mac, the picture is very grim. In the fourth quarter of 2011, 80 percent of all Fannie/Freddie mortgage originations were refinancings. The average down payment was 30 percent. How many first-time buyers can put that much down?
More recently, an April 2012 Federal Reserve Board survey of bank loan officers found that fewer than 4 percent of those surveyed said that their bank had eased mortgage lending standards for prime mortgages.
Credit standards will continue to tighten as private money enters the market. Without loan guarantees, lenders are far more cautious.
Worst of all is what I’ve been saying for more than a year. A growing number of prospective first-time buyers are reluctant to buy even though they can afford to. Their attitude is this: What’s the rush? I think prices are headed lower. And I like the flexibility that renting gives me.
As prices continue to decline, this new attitude feeds on itself – it becomes a vicious circle.
Changing this attitude is one of the many reasons lenders are withholding inventory to create a bottom. Back when lenders first began to collude on prices back in 2009, they hoped to engineer a bottom for the same reasons. Once buyer psychology changes, its very difficult to change it back.
What About the Potential Sellers?
Over the past two years, I have written extensively about the so-called “shadow inventory.” It’s real, growing and very scary in what it says about where things are heading.
You need to keep in mind that the total number of underwater homeowners is far larger than just those who purchased during the bubble years 2004-2007. Millions of homeowners took out what became known as “cashout” refis. Banks were only too willing to shovel out cash to owners whose homes were rising at double-digit rates.
I love that Keith is bringing more attention to HELOC abuse.
What has been almost completely overlooked by the media is the enormous number of properties with second liens. There are still nearly 12 million home equity lines of credit (HELOC) outstanding. It’s safe to say that 98 percent or more of these properties are underwater. Roughly 30 percent of all HELOCs were originated in California. There are millions of owners there with HELOC balances in excess of $100,000.
The HELOC boom began in 2003. Most of these revolving lines of credit were interest-only loans for the first ten years. After that, they convert into 15-year fully amortizing loans. This means that beginning next year, these loans start to transform into a fully-amortizing loan. The number of HELOCs which do this increases in 2014 and even more in 2015 and 2016.
I didn’t know that. We have a new threat of recasting loans to worry about. In all likelihood, lenders will modify those terms to kick the can down the road again, particularly since these loans are worthless.
What will these homeowners do when their HELOC payment soars from a few hundred dollars per month to more than $1,000?
First they will try to borrow money to make the payments (Ponzi borrow), then they will strategically default.
… Do I see anything on the horizon that could turn things around and correct the growing imbalance between potential homebuyers and sellers. No. Nothing whatsoever. Wishful thinking won’t do it.
… Within a year, I expect many of the weakest markets to show signs of unraveling. Perhaps the most vulnerable market is the entire NYC metro area. Sooner or later, the banks will have to start foreclosing or even doing short sales. When these properties hit the market in significant numbers, I have no doubt that prices in the entire region – where 19 million people reside – will collapse.
I have been expecting this for five years now. The banking cartel shows no signs of ending amend-extend-pretend. They truly believe they can delay the crash indefinitely. So far for the above-median market, they have. Keith thinks the crash will come, but what will be the catalyst? Will the November elections foretell the end of times?
For other major metros, the plunge will depend on how crazy the bubble was during 2004-2007 and how large the total number of underwater owners becomes.
Predictions are always iffy. But I am convinced that things will get ugly from here and that there is no solution that can prevent this collapse. The wisest thing is for you to do is prepare for the worst. Is there anything wrong with renting a nice house or condo to ride out this perfect storm?
No. Renting is a good idea. Anyone who considers buying should always look at renting as a viable alternative, particularly if prices are trading above rental parity.
So what say you? Are the housing bottom callers right this time?
La Palma Overview
Median home price is $422,000. Based on a rental parity value of $504,000, this market is under valued.
Monthly payment affordability has been worsening over the last 2 month(s). Momentum suggests worsening affordability.
Resale prices on a $/SF basis increased to $254/SF to $260/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $0 last month from $2,116 to $2,116.
Rents have been falling for 10 month(s). Price momentum suggests falling rents over the next three months.
Market rating = 3
$463,000 …….. Asking Price
$430,000 ………. Purchase Price
6/3/2003 ………. Purchase Date
$33,000 ………. Gross Gain (Loss)
($34,400) ………… Commissions and Costs at 8%
($1,400) ………. Net Gain (Loss)
7.7% ………. Gross Percent Change
-0.3% ………. Net Percent Change
0.8% ………… Annual Appreciation
Cost of Home Ownership
$463,000 …….. Asking Price
$16,205 ………… 3.5% Down FHA Financing
3.75% …………. Mortgage Interest Rate
30 ……………… Number of Years
$446,795 …….. Mortgage
$118,127 ………. Income Requirement
$2,069 ………… Monthly Mortgage Payment
$401 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$116 ………… Homeowners Insurance at 0.3%
$465 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$3,052 ………. Monthly Cash Outlays
($315) ………. Tax Savings
($673) ………. Equity Hidden in Payment
$20 ………….. Lost Income to Down Payment
$136 ………….. Maintenance and Replacement Reserves
$2,220 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,130 ………… Furnishing and Move In at 1% + $1,500
$6,130 ………… Closing Costs at 1% + $1,500
$4,468 ………… Interest Points
$16,205 ………… Down Payment
$32,933 ………. Total Cash Costs
$34,000 ………. Emergency Cash Reserves
$66,933 ………. Total Savings Needed
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