For home inventories to recover, sellers must come back to the market. Since so many loanowners are underwater, particularly at lower price points, very few organic sales occur on below-median properties. Further, since below-median loanowners have a strong incentive to squat until foreclosure, few of these properties are coming to market as short sales. That leaves us with a depleted market that is only be replenished by foreclosures. And as I noted on Monday’s post MLS inventory is NOT coming as foreclosure filings dry up, banks are in no hurry to process foreclosures and bring these properties to the MLS. To make matters worse for would-be buyers at these price points, about half of the foreclosures that are processed are being purchased by hedge funds at the auction sites. These properties are being held as rentals and not being sold on the MLS. For as much as flippers are decried, at least they sell the properties after they fix them up which adds to MLS inventories. REO-to-rental funds keep properties off the MLS. Given these circumstances, it may be several years before inventories of below-median properties recover and provide opportunities for owner-occupants to reenter the market.
Inventory of lower-priced homes plunges in California
By Alejandro Lazo — October 11, 2012, 12:25 p.m.
Housing inventory in California keeps coming up short.
Lower-priced homes attractive to first-time buyers are in particularly scarce supply, according to a report released Thursday by real estate website Zillow.
The number of lower-priced homes available in the Golden State shrank by more than 40% over the last year, according to the analysis. Lower-priced homes were defined as those that sold for $313,200 or less. California saw the largest inventory reduction in that classification of any state.
The shortage is due to reduced bank processing of foreclosures and an increase in hedge fund and investor activity at the auction sites.
The reason is because cheaper homes — particularly foreclosed properties — have become highly attractive to investors who have developed a sophisticated industry around buying up properties, fixing them up and selling them or renting them out.
Renting out foreclosed homes has increasingly emerged as an investment opportunity to Wall Street. Financiers are busily studying ways to take the single-family home rental business, for years mostly a mom-and-pop affair, and make it a bigger industry. That has made it difficult for first-time shoppers to compete.
If not for programs from HUD (FHA foreclosures) and the GSEs that offer properties on a preferential basis to owner-occupants, very little inventory would be available to them.
“First-time home buyers are being squeezed out of the market by falling inventory and the rapid influx of investors looking to buy basic homes to rent out,” Zillow chief economist Stan Humphries said in a statement. “Investors are paying in cash and can close sooner, which is more favorable to banks and homeowners looking to sell.”
… While Wall Street has grown interested in low-end homes, real estate agents in California have bemoaned the lack of available properties for sale. Real estate professionals say the state can handle more foreclosures and they have protested plans by the federal government to sell foreclosed California properties in bulk to investors.“Sales would be even higher if inventory were less constrained … particularly in the Central Valley and Inland Empire, where there is an extreme shortage of available homes,” LeFrancis Arnold, president of the California Assn. of Realtors, said in a recent forecast distributed by the group. “Sales will be stronger in higher-priced areas, where there are more equity properties and a somewhat greater availability of homes for sale.”
The analysis by Zillow mirrored the take of the real estate agents. Central Valley markets have seen the biggest drops in supply of lower-cost homes with inventory down 59.7% in Fresno 59.7% and 55.4% in Sacramento. San Francisco supply fell 53.2%. In Los Angeles, supply was down 45.1%. Nationally, the bottom tier of homes for sale has seen a decline of about 15.3%.
Shevy has relayed to me the difficulty buyers face in today’s market. It’s very frustrating for buyers and agents alike. There are competing offers on nearly every reasonably priced property, and even motivated buyers willing to bid above recent comps are failing to obtain properties. The problems are worst at the low end of the market.
Right now, I don’t see an end to this problem. The incentive of sellers is to wait. Lenders get greater capital recovery, and some loanowners can get out at breakeven. Eventually, more organic sellers will come to the market, particularly those who are distressed, but creating organic sellers requires a significant increase in price. So until prices rebound substantially (or if the banks change their policies), the inventory shortage will persist, and it will be particularly acute at below-median price points. It’s amazing how quickly the market changed from last year when the same demand was greeted with 40% more inventory and competing sellers willing to slash prices.
Over $400,000 mortgage equity withdrawal and three years squatting
- The former owners of today’s featured REO obtained maximum benefit from their term of ownership. They purchased the property for $250,000 back in 1988. Their original mortgage data is not available, but they likely put 20% down which left them with a $200,000 first mortgage and a $50,000 down payment.
- On 10/26/2000 they had refinanced up to a $344,000 first mortgage.
- On 10/31/2001 they refinanced with a $356,000 first mortgage and obtained a $53,500 HELOC.
- On 6/12/2003 they refinanced again with a $421,600 first mortgage and obtained a $69,400 HELOC.
- On On 10/18/2004 they obtained a $196,839 HELOC.
- Assuming they maxed out the final HELOC, the total property debt was $618,439, and the total mortgage equity withdrawal was $418,449.
They received their first NOD on 6/9/2009 which means they quit paying early in 2009. They were foreclosed on 2/27/2012 about three years later.
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Proprietary OC Housing News home purchase analysis
145 BUCKTHORN Dr Brea, CA 92823
$612,500 …….. Asking Price
$250,000 ………. Purchase Price
1/22/1988 ………. Purchase Date
$362,500 ………. Gross Gain (Loss)
($20,000) ………… Commissions and Costs at 8%
============================================
$342,500 ………. Net Gain (Loss)
============================================
145.0% ………. Gross Percent Change
137.0% ………. Net Percent Change
3.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$612,500 …….. Asking Price
$122,500 ………… 20% Down Conventional
3.43% …………. Mortgage Interest Rate
30 ……………… Number of Years
$490,000 …….. Mortgage
$110,910 ………. Income Requirement
$2,181 ………… Monthly Mortgage Payment
$531 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$153 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,865 ………. Monthly Cash Outlays
($338) ………. Tax Savings
($781) ………. Equity Hidden in Payment
$131 ………….. Lost Income to Down Payment
$173 ………….. Maintenance and Replacement Reserves
============================================
$2,051 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,625 ………… Furnishing and Move In at 1% + $1,500
$7,625 ………… Closing Costs at 1% + $1,500
$4,900 ………… Interest Points
$122,500 ………… Down Payment
============================================
$142,650 ………. Total Cash Costs
$31,400 ………. Emergency Cash Reserves
============================================
$174,050 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
31 Responses to “Below-median home inventories may not recover for years”
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I think Lennar will sell you one.
Yes, the builders will provide some of this inventory, and this activity will help boost the economy. However, most of the product they provide will be priced above the median because they generally obtain a premium, and locally, they prefer to provide upscale product over more affordable condos.
OCHN: ”The shortage is due to an increase in hedge fund and investor activity at the auction sites”.
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GREAT NEWS! Looks like a decrease in future hedge fund activity is coming.
First, let’s review investing 101; law1: he who exits first always wins.
Och-Ziff Calls Top Of “REO-To-Rental”, And Distressed Housing Demand, With Exit Of Landlord Business
One of the first entrants in the REO-To-Rental space, $31 billion hedge fund Och Ziff, which a year after entering the program with hopes of quick riches, is now looking to cash out. “The New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected”.
What is effectively happening is that once again the large institutions, in this case those who are unburdened by legacy liabilities, i.e., hedge funds (it should be rather distressing that instead of banks serving the roles of landlords, this time around it is it is big hedge funds who are offering homes for rent) who have access to ZIRP are attempting to arb out the retail borrowing spread. The problem however is that while those who have access to Fed funding are expecting large, consistent ROEs, the other side of the equation is missing, and as rental prices increase fewer and fewer Americans can take advantage of the hedge funds’ “generosity.” This is what happens as the middle class collapse continues and as America’s society sees its nominal (not to mention real) income continue to decline as hourly earnings collapse
Expect all other subsidized “buyers” in the space to proceed to dump their properties en masse shortly. The problem is that once the greater fool is no longer clearly defined at the poker table, and the get rich quick scam has been exposed, the offerless market quickly goes back to being bidless. Which is precisely what will be the catalyst for the 4th leg down of the dead cat bouncing housing market, and the end of the illusion
http://www.zerohedge.com/news/2012-10-17/och-ziff-calls-top-reo-rental-exit-landlord-business
Several of the hedge funds who entered this business got in with unrealistic expectations. I’m not surprised that some will exit the business when they don’t hit their proformas. These portfolios will be purchased by other hedge funds with a lower cost of capital who are satisfied with somewhat lower returns.
Well, the cost of capital for the big boys is essentially zero— they have access to the feds discount window, so a lower CoC is really not in the cards between them. However, for the likely buyers (smaller entities) CoC is going to be higher.
Also, O-Z bought the homes at an average per unit price of $100k so the cost basis of the bucket(s) up for grabs will be much higher. Unless of course O-Z panics.
”Can’t get no…. satisfaction” with that
The real profit in the business model is in the aggregation. If O-Z put together a portfolio of homes with a cap rate of 7%, some other hedge fund will buy the entire portfolio from them at a cap rate of 5% and O-Z will make a large profit.
What shocks me — and this does happen — is that these hedge funds are paying above retail price for the properties in the portfolio because they don’t want to go through the brain damage of obtaining a thousand properties one at a time. It’s the aggregation that adds value.
“…Renting out foreclosed homes has increasingly emerged as an investment opportunity to Wall Street. Financiers are busily studying ways to take the single-family home rental business, for years mostly a mom-and-pop affair, and make it a bigger industry…”
Large, well financed investment groups that buy in bulk and create rentals, do IMHO, supply a needed service to help with a potential real estate recovery, at least in the short / medium term.
Longer term, a lurking danger is that these groups become so large that they collectively create a kind of feudalistic society, in which no ordinary citizen can realistically afford to singularly purchase real property, especially if [over time] they lobby to bend property law in their direction.
The Federal Reserve, by mis-pricing mortgage capital, may be aiding such an outcome. Whether such an outcome is intentional or an unintentional consequence is open for debate. But, frankly, sometimes I wonder.
These hedge funds will own a significant percentage of the homes in beaten down markets like Las Vegas, Phoenix, and Riverside County. The residents there will be living in Pottersville from It’s a Wonderful Life. The big concern for me is that these houses will never be affordable again. The hedge funds will buy these houses until the returns no longer make sense, and they will buy in any market where the rental returns are good. This will bid up prices across the country to return levels acceptable to the hedge fund with the lowest cost of capital. That will squeeze out any value an owner-occupant might have found in an undervalued property.
I’m glad someone else used the term “Pottersvilles” because I have been thinking it for months!
I am wondering whether the investors currently bulking up inventory in suburban SFHs will try to cut deals with the local taxing authorities to lower their tax burdens (I think I know the answer, so do you).
But what the hedgies taketh away with one hand they may inadvertently give with the other. Right now tenants in most suburbs in the country have very few rights, relative to those enjoyed in cities and, say, college towns. Concentrating so many rental units in the hands of a few big players will (I predict) spark movements to shift power to tenants, which will make this play even less profitable several years out.
This is just starting to get interesting.
It will be interesting to see how tenants are treated by these largely unregulated hedge funds. I have reviewed many of their business models (and created some of my own), and I know one of the main shortcomings they all share is an under-budgeting of expenses for maintenance. What happens when the tenants start complaining about their slumlord hedge fund owners? I would easily see a broad political movement to give renters more rights in the face of this broad shift from ownership to rentership.
‘…will make this play even less profitable several years out…”
Unless the scope of programs such as Section 8 are radically expanded to cover everyone except the 1%.
Then, the large aggregate real property owners can bump rents way beyond market rates and still generate a profit, paid for by middle class taxpayers. Just about the perfect money machine.
This scheme will work until there is no more middle class to pay taxes.
I used to think that such radical socialism would be impossible to take hold in the USA. But here we are.
Welcome to the New Feudalism / Sharecropper society.
The hedge funds are going to spread themselves too thin. SFRs are not an institutional investment because it is a logistical nightmare to manage properly. Deferred maintenance and shady property management tactics (where the handyman creates an invoice for work never done, gets paid, and splits the proceeds with the property manager) will slowly erode the bottom line.
Potterville, I thought it was Obamaville.
Section 8 pays better in rural area than market rates and in may cities. Just that the neighbors don’t like it and upkeep usually goes up, but rents are paid on time or they lose the benefit. With all the people not working, once they deplete their saving, welcome Section 8.
Can Freddie and Fannie collect in CA for a non-judicial FC? I thought that only USDA had the federal exemption to collect after any FC in any state..
A seasonal drop or a sign that demand is really dropping off?
U.S. Weekly Mortgage Application Volume Drops 14%
The total number of mortgage applications filed in the U.S. last week fell 14% from the prior week as some interest rates increased slightly, the Mortgage Bankers Association said Wednesday.
The refinance index declined 15% from the previous week, according to the MBA’s weekly survey, which covers more than three-quarters of all U.S. retail-residential-mortgage applications. On a seasonally adjusted basis, the purchasing index edged up 0.9% from a week earlier, MBA said.
Record-low interest rates have attracted new buyers and convinced many homeowners to refinance, though potential market participants face tightened credit restrictions.
The share of applications filed to refinance an existing mortgage represented about 82% of total applications, down from 83% in the previous week. Adjustable-rate mortgages represented about 3.9% of total activity.
The average rate on 30-year fixed-rate mortgages with conforming loan balances rose to 3.57% from 3.56% in the previous week. Rates on similar mortgages with jumbo loan balances increased to 3.81% from 3.74% a week earlier. The average rate on FHA-backed 30-year fixed-rate mortgages was unchanged from 3.34% in the prior week.
The average for 15-year fixed-rate mortgages slipped to 2.87% from 2.88% a week earlier. The 5/1 ARM average edged down to 2.59% from the previous week’s 2.6%.
Sales drop a whopping 17.5% from August to September Due to Low Inventory
The median sales price for homes sold in September continued to move higher yearly and monthly while sales were stalled from the previous month, according to a housing report from RE/MAX, which tracks MLS data in 52 metropolitan areas.
The median sales price in September was $164,989, a slight 0.7 percent increase from August and a 7.8 percent improvement from September 2011. So far, prices have been rising yearly for eight straight months.
Out of the 52 metros surveyed, 44 saw yearly price gains. The metros with the most significant increases included Phoenix (33.3 percent), Miami (23.1 percent), Atlanta (23 percent), San Francisco (22.7 percent), and Detroit (20 percent).
September experienced a typical seasonal drop in home sales, with sales falling 17.5 percent from August. The report explained sales were also challenged by shrinking inventory. Despite the monthly decline, home sales still managed to stay 0.5 percent higher than last year’s figure.
Metro areas where year-over-year sales were strong included Albuquerque (40.9 percent), Chicago (24.1 percent), Raleigh-Durham (22.1 percent), Providence (22.1 percent), and Nashville (21 percent).
Inventory declined on a monthly and yearly basis, falling 5.3 percent and 29.1 percent, respectively. The month-over-month drop is the 27th consecutive month inventory has declined.
While a decline in inventory is helping prices to rise, its impact is still negative for sales.
The average months supply of inventory in September stood at 5.5, about two months lower than last year’s 7.7 months. Metro areas with very low months supply include San Francisco (1.3 months), Los Angeles ( 1.7 months), Orlando ( 2.6 months), Denver (2.6 months) and Washington, D.C. (2.8 months).
“Although we still face some serious obstacles in tight lending and shrinking inventory, we believe that the housing market will continue to recover into 2013,” said Margaret Kelly, CEO of RE/MAX.
RE/MAX also reported the average number of days on the market was 81 in September, unchanged from the previous month, but a decrease from 94 days last year.
The ‘right’ people are buying them up and hoarding them with money that they print.
I guess the banks want to refinance the squatting owners into 2.5% federally insured mortgages. Hoping they will never squat again because their cost of ownership is under rental costs.
However, what we learned is greed is being rewarded this housing cycle. If mortgages shoot up to 6% again and push home prices lower and their squatter is now 25% upside down or more. They will stop paying to get a loan modification. The banks have no incentive to end this situation. It will continue for years.
GSEs Recover a Paltry 0.22% of Mortgage Deficiencies
When a home is sold through a foreclosure sale, at times the debt on the mortgage is not fully recovered through the sale. The remaining amount is the deficiency, and this amount is passed on to the mortgage owner to absorb or to try and collect from the borrower.
The FHFA’s Office of Inspector General (OIG) revealed in a report Wednesday that Fannie Mae and Freddie Mac have a recovery rate of only 0.22 percent when pursuing deficiencies, leaving room for much improvement.
According to the report, in 2011, the GSEs’ vendors pursued 35,231 deficiency accounts, with a combined value of about $2.1 billion. Of this amount, vendors recouped about $4.7 million, which is 0.22 percent of the total.
In addition, 2012 may see even more losses to recover, considering there are 1.1 million seriously delinquent mortgages on the verge of becoming foreclosures, OIG reported. The figure is triple the number of GSE foreclosures in 2011.
In the report, OIG said “timely guidance” from FHFA on how the GSEs can manage deficiencies could help them recoup future losses and protect taxpayer dollars.
“Recovering losses from strategic defaulters and others who have the ability to repay their financial obligations-e.g., real estate investors and vacation home owners-presents an opportunity for the Enterprises to strengthen their financial positions and to reduce the need for future taxpayer support,” OIG stated in the report.
As the conservator of the GSEs, OIG further stated that FHFA “should obtain information necessary to better understand the Enterprises’ deficiency activities and to determine where improvements can be made.”
However, recovering the deficiencies has not been a priority for the GSEs. Instead, the FHFA watchdog said they are more focused on foreclosure alternatives to minimize losses.
In addition, the GSEs have different policies on pursuing deficiencies. For example, Freddie Mac does not pursue a borrower for a deficiency if a third party buys the property at foreclosure sale, while Fannie Mae will pursue the deficiency, regardless of whether it or a third party bought the property at a foreclosure sale, OIG explained.
When dealing with strategic defaulters, the GSEs also have different approaches. Fannie Mae has articulated intent to focus on strategic defaulters, according to the OIG, but Freddie Mac has no policy on collecting from strategic defaulters.
OIG offered three recommendations to FHFA on managing deficiencies.
One of the recommendations is to obtain deficiency-related information, such as the GSEs’ effectiveness in collecting deficiencies for borrowers who have the ability to repay.
The second is to incorporate deficiency management into FHFA’s supervisory review process, and the third is to provide written guidance to the GSEs “on managing their deficiency collection processes, including at a minimum whether they should be pursuing the same type of defaulted borrowers and pursuing collections in the same states.”
I bet the GSE spent more than the $4.7 million collected on this program. They probably actually increased the mortgage losses further. This will happen again in the future.
BofA Reduces $4.75B in Principal in 5 Months
As part of the agreement under the national mortgage settlement, Bank of America has completed or approved more than $4.75 billion in principal reductions on first mortgages, with the average principal reduction exceeding $150,000.
Through the bank’s principal reduction program, 30,000 homeowners have been approved for a trial modification or received a permanent modification as of the end of September.
The $25 billion national mortgage settlement was reached in February between state and federal officials and the five largest mortgage servicers.
BofA said it’s on its way to meet the obligations under the settlement within the first year of the three-year agreement. BofA agreed to provide more than $7.6 billion in relief through first and second lien modifications and foreclosure prevention solutions.
However, BofA explained that under the agreement, banks will not receive full dollar-for-dollar credit for all of the assistance provided to customers, and the settlement monitor will make the crediting determinations.
According to a BofA release, borrowers who qualified for the program saved an average of 35 percent on their monthly mortgage payment.
The bank also expects to reach out to 200,000 eligible customers within the first year of the program.
Nothing’s more fun a profitable than giving out money you print in your basement and calling yourself a business.
The federal reserve and its cronies in action.
Re-visiting/expanding on a previous post……………………..
OCHN: “all appreciation over the last 23 years is due to a decline in interest rates from 10.77% in April 1989 to 3.5% in October 2012″.
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That’s an avg 0.32% drop in rates for a $9652.17 gain in price per year x23.
Based on those stats, let’s evaluate what the next 10 years will look like, as long as rates don’t rise. We’re currently at a 3.5% 30yr rate and the OC median price is $428k.
Oct 2013: 3.18 = $437,652
Oct 2014: 2.86 = $447,304
Oct 2015: 2.54 = $456,956
Oct 2016: 2.22 = $466,608
Oct 2017: 1.90 = $476,260
Oct 2018: 1.58 = $485,912
Oct 2019: 1.26 = $495,564
Oct 2020: 0.94 = $505,216
Oct 2021: 0.62 = $514,868
Oct 2022: 0.30 = $524,520
Essentially, if rates do not meet those annual targets, the jig is up.
I did a similar table awhile ago, but with increasing mortgage rates. At the time mortgage rates with 4.5% for 30 year fix.
Mortgage Rate Loan Amount Value of Home % Change
4.00% $437,090.73 $546,363.41 0%
4.50% $411,734.24 $514,667.79 5.80%
5.00% $388,569.44 $485,711.81 11.10%
5.50% $367,369.48 $459,211.85 15.95%
6.00% $347,933.64 $434,917.05 20.40%
6.50% $330,084.15 $412,605.19 24.48%
7.00% $313,663.33 $392,079.17 28.24%
7.50% $298,531.13 $373,163.92 31.70%
8.00% $284,562.99 $355,703.74 34.90%
8.50% $271,647.97 $339,559.96 37.85%
9.00% $259,687.15 $324,608.94 40.59%
9.50% $248,592.20 $310,740.25 43.13%
10.00% $238,284.12 $297,855.15 45.48%
10.50% $228,692.19 $285,865.23 47.68%
11.00% $219,752.99 $274,691.24 49.72%
11.50% $211,409.62 $264,262.02 51.63%
12.00% $203,610.89 $254,513.61 53.42%
12.50% $196,310.73 $245,388.41 55.09%
13.00% $189,467.63 $236,834.54 56.65%
13.50% $183,044.12 $228,805.15 58.12%
14.00% $177,006.34 $221,257.93 59.50%
Simplified: If rates go up 1%, prices go down 10% to keep the same payment.
Lenders had to drive the cost of ownership to very low levels to find an equilibrium. If prices shoot up too far too fast, affordability will crumble, and the stimulus won’t be as effective, and interest rates will need to go lower still.
The federal reserve is going to have to allow for more inflation, and some of that needs to translate to wages to drive up rents and house prices. Otherwise, your math is inescapable. Incomes must rise faster than interest rates to allow for growing loan balances. Without larger loan balances, prices simply won’t go up. It’s not like people are saving more today to allow prices to rise with equity.
all these hedgies in rentals as well as random people i know being landlords makes me think rental investments are a crowded area.
It’s certainly getting more crowded, but the banks still have many more bad loans to process, and many of those will end up as rentals, so there is also an abundance of supply. In fact, if there wasn’t an abundance of supply, the hedge funds wouldn’t be getting in to those markets.
Speaking of hedgies…
I wonder how many of the 165 HF’s that own google stock received a margin call in their email inboxes today on the google dump.
(with a short interest as a % of market cap @1%), that’s definately gonna leave a mark
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