Anyone who watches the market carefully knows that lenders are withholding supply to cause prices to bottom. This is in the best interest of the members of the banking cartel. It’s surprising to me they managed to pull it off. Cartels are inherently unstable, most often because each member has a strong incentive to cheat by increase supply to take advantage of the improved pricing. In my opinion, that is what will likely cause the engineered spring rally of 2012 to fail.
Calculated Risk famously described the problem facing homebuilders in the wake of the housing collapse in his analysis of the “distressing gap.”
Following the housing bubble and bust, the “distressing gap” appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders haven’t been able to compete with the low prices of all the foreclosed properties.
Homebuilders are not part of the lending cartel. They are in business to provide a supply of homes to offset any shortage. In fact, the introduction of competing suppliers is one of the historic causes of the breakup of cartels. As lenders continue to withhold product from the market, builders sales should surge thus mitigating the cartel effect.
Since builders generally obtain a premium for new product, their supply will not drive prices lower like REOs do. However, since only the first-time homebuyer market is active, due to a lack of move-up equity, neither homebuilders or lenders will see robust sales volumes. In markets like Las Vegas where even the move-up product is prices at first-time homebuyer levels, sales volumes will remain near peak levels. However, in markets like Orange County which haven’t fully deflated, sales volumes will remain 20% or more below historic norms to reflect the absence of a move-up market.
Published: Thursday, 19 Apr 2012 | 10:46 AM ET
Sales of existing homes continue to drop, and while tough credit and weak consumer confidence are certainly factors, lack of supply appears to be the latest culprit.
Inventories of existing homes historically rise in the spring, as sellers look to take advantage of the busy season; not so this spring.
Inventories fell 1.3 percent to 2.37 million units for sale. That’s down nearly 22 percent from a year ago. Inventory is dropping because the number of distressed properties for sale is dropping.
If the decline in distressed sales were due to a lack of distressed homeowners, I would be celebrating the bottom of the housing bust. However, 5,591,000 mortgages are still delinquent! The reduction is supply is completely artificial. It’s being caused by collusion among the major banks to stop taking on REO and putting them on the MLS.
The data speak volumes: Distressed sales fell to 29 percent of all sales in March, down from 34 percent the previous month. The investor share of sales also fell from 23 percent to 21 percent. That pushed overall home sales down, but most notably out West, where most of the distressed supply exists.
Sales fell 7.4 percent month to month out West in March, as supplies of existing homes fell to 3.1 months from 4.7 months a year ago, according to internal tracking by the National Association of Realtors. That is the lowest supply of any region by far, and half the national average. Compare it to an 11.6 month supply in the Northeast, where there are far fewer foreclosures.
Lenders have obviously identified the Southwest as their primary targets for reducing REO inventories. California, Nevada, and Arizona all have fewer REO for sale, and investors are competing for the low-end properties. Anecdotally, I will tell you I have bid all-cash over asking prices on many REO in Las Vegas and been outbid by other investors. I can also tell you that most cashflow investors will not chase the market higher. We are buying for a return, and overpaying negates the reason we are buying. Expect to see small investor participation fall off if supply does not return to the market.
Supply is tight because banks, after the 25 billion dollar mortgage settlement over so-called “robo-signing” have slowed much of the foreclosure process, trying to modify more loans or find foreclosure alternatives. We predicted this earlier.
The real reason they are doing this is to restrict supply until prices stop going down.
Less supply usually means rising prices, if you go by the usual supply/demand theory. The trouble is, supply isn’t dropping because of so much demand, it’s dropping because of the distressed market.
This is a key point. I might also be more excited about the prospects of a real estate price bottom if demand were higher. It isn’t. Demand is fractionally higher than last year but still dismal by historic standards.
Normal sellers still aren’t putting their homes on the market for fear of deep price cuts, or because they are so underwater they can’t afford it. More than 11 million borrowers currently owe more on their mortgages than their homes are currently worth.
On the demand side, credit is still very tight and fees for FHA loans, which had really been fueling much of the market, rose April 1st. We saw a huge drop in mortgage applications last week, driven by a 23 percent drop in FHA applications.
“This drop follows big increases in the demand for FHA loans over several weeks in anticipation of the FHA mortgage insurance premium increases that went into effect last week,” wrote Mortgage Bankers Association chief economist Jay Brinkmann in a release. “This was the largest weekly drop in the government purchase index since the expiration of the first-time homebuyer tax credit in May 2010.“
I don’t think the increase in FHA insurance premiums will have the devastating effect of the expiration of the tax credit, but some demand was obviously pulled forward, and the increased cost of borrowing going forward will dampen the weak demand further.
Without a strong recovery in the job market, which does not appear to be the case, and a big loosening in credit, which also does not appear to be the case, regular demand for home purchases will remain soft.
The potential demand among investors is strong and growing, but they need supply to buy, and they’re just not finding enough.
Even if private equity investment funds start buying large numbers of homes (they will), this will not fill the demand gap left behind by owner-occupants who don’t qualify for mortgage financing. I had an interesting conversation with a prominent homebuilder a few days ago. He relayed to me the latest phenomenon in new home sales is timing the closing to be three years and one day after the borrower’s bankruptcy. Apparently, that’s when the restrictions on getting loans runs out. Perhaps this will be the next group realtors point to for pent-up demand.
Homebuilders will be the beneficiaries of the banks policy of withholding inventory. They will also be the beneficiaries of the working of private equity funds buying REO and holding them off the market as rentals. The less competing resales on the market, the better homebuilders will do. It’s still a risky time for homebuilders. What happens if lenders change their minds again?
If any of you are thinking about buying new construction, check out our new program offering up to a 1.5% rebate on a new home purchase.
Another Orange County Ponzi
The only thing extraordinary about the former owners of today’s featured property is how ordinary they were. I think after about a thousand HELOC abuse profiles over the least five years, I have established that prolific mortgage equity withdrawal was the norm rather than the exception in Orange County. These owners bought a median priced house, likely earned a median income, and Ponzied their way to oblivion just like everyone else did.
- This house was purchased on 7/26/2002 for $377,000. The owners used a $300,000 first mortgage and a $77,000 down payment.
- On 5/12/2003 they refinanced with a $302,000 first mortgage.
- On 9/15/2004 they obtained a $165,000 HELOC.
- On 11/5/2004 they refinanced with a $470,000 Option ARM with a 3.2% teaser rate.
- On 10/26/2005 they opened a $133,600 HELOC.
- They were given their first notice in December of 2010, and the house was called to auction on 10/12/2011.
These borrowers got somewhere between $177,000 and $300,000 in HELOC booty depending on how much of the final HELOC they used. A fairly ordinary borrower who managed to spend an extraordinary amount of free money.
Median home price is $399,000. Based on a rental parity value of $529,000, 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 $233/SF to $251/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $66 last month from $2,166 to $2,233.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 8
$449,900 …….. Asking Price
$377,000 ………. Purchase Price
7/26/2002 ………. Purchase Date
$72,900 ………. Gross Gain (Loss)
($30,160) ………… Commissions and Costs at 8%
$42,740 ………. Net Gain (Loss)
19.3% ………. Gross Percent Change
11.3% ………. Net Percent Change
1.8% ………… Annual Appreciation
Cost of Home Ownership
$449,900 …….. Asking Price
$15,747 ………… 3.5% Down FHA Financing
3.88% …………. Mortgage Interest Rate
30 ……………… Number of Years
$434,154 …….. Mortgage
$120,558 ………. Income Requirement
$2,043 ………… Monthly Mortgage Payment
$390 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$112 ………… Homeowners Insurance at 0.3%
$452 ………… Private Mortgage Insurance
$117 ………… Homeowners Association Fees
$3,114 ………. Monthly Cash Outlays
($314) ………. Tax Savings
($639) ………. Equity Hidden in Payment
$21 ………….. Lost Income to Down Payment
$76 ………….. Maintenance and Replacement Reserves
$2,259 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,999 ………… Furnishing and Move In at 1% + $1,500
$5,999 ………… Closing Costs at 1% + $1,500
$4,342 ………… Interest Points
$15,747 ………… Down Payment
$32,086 ………. Total Cash Costs
$34,600 ………. Emergency Cash Reserves
$66,686 ………. Total Savings Needed
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
We're sorry, but we couldn't find MLS # S695013 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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