Are we facing yet another foreclosure crisis?

Despite numerous reports indicating that there has been a deep decline in foreclosure inventory over the past several months in many markets, the reality, as chronicled in several articles recently penned by this author and others, is that foreclosure rates are very likely to rise again in the not-too-distant future.

With that prospect just over the horizon, it is important to note that property preservation and repair services for bank-owned properties remain a vital component of mortgage default servicing.

As has been well documented, I am not alone in my beliefs about the prospects for increased foreclosure rates, at least not any more.

For example, author Keith Jurow has also been making the case that the so-called housing “recovery” is nothing more than an illusion. In a piece he wrote that appeared on Doug Short’s Advisory Perspective web site titled, “Why the Move-up Housing Market is Gone,” Mr. Jurow noted in particular that the mortgage delinquency problem just won’t go away.

In part, Jurow wrote, “I have also been writing about the serious delinquency problem for four years. Wall Street continues to disregard the issue.

“First, the delinquency figures put out by the Mortgage Bankers Association and others are misleading and quite useless. Why? More than 22 million homeowners have had their mortgages modified since 2008. Most of them had been delinquent in their payments. Once the modifications become permanent, the loan is considered current. So of course this pushes the delinquency rate ay down.”

To Jurow’s point, the recidivism rate on loans that have been modified following the housing crash has risen to be as high as 70%. The highly touted loan modification “workout” programs like HAMP, HAFA and other foreclosure alternative programs has only forestalled foreclosure, not eliminated them.

Many housing industry experts now expect the foreclosure numbers in 2015 to be higher than this year’s totals.

Truth is, those recent housing numbers aren’t so shiny

The mainstream financial media have something to sell you.

It’s optimism. Or optimistic spin.

It doesn’t matter whether they are servicing, in the “old profession” sense of the word, their Wall Street sugar daddies and insider connections, or working as palace guards for Team Red and/or Team Blue, whichever they favor.

In some cases it’s just overworked writers promoted Peter Principle-style to covering subjects they don’t understand. The rest are market cheerleaders who believe in management of perspective economics – if people hear enough good news about the economy, they’ll spend and invest more.

Today’s housing starts and permits report from the Department of Housing and Urban Development is a prime example.

And here are the plain facts. After plunging in June, housing starts and housing permits recovered in July, printing at 1,093,000 and 1,052,000, respectively.

And yes, this is a 15.7% gain in starts and permits.

The bad news is that almost all of those gains from June to July in starts and permits are in multifamily rental housing.

That’s not the sign of a housing recovery. That’s the sign of a shift from an ownership society to a rental society.

In permits, almost all of the increase was due to multi-family unit construction, which soared by 73,000 to 382,000, a 24% increase, while single-family residential permits were up by just 6,000, or less than 1%.

And technically, apartments can be homes, but come on. That’s not what they mean when they say things like:

Construction on new U.S. homes jumped 15.7% in July to the highest level in eight months and starts were revised up sharply for June, indicating a pickup in home building after an early-year lull.

Emphasis mine.

And it’s not just the mainstream financial press. Check the wording in this report from Capital Economics.

“The sharp rise in housing starts in July is an encouraging sign that the recovery in construction activity is getting back on track. Booming homebuilder confidence points to further gains to come.”

If you’re feeling déjà vu, there’s a reason. Words to this effect are used every time there’s an uptick in housing starts, pending sales, and existing sales, while every downturn is blamed on everything from the weather to the weather.

It’s never, ever blamed on the tepid economy and the part-time job market that’s the new norm. As CNBC notes, since the recession ended, lower-wage jobs have grown by 2.3 million while medium- and higher-wage jobs actually contracted by 1.2 million. This is in line with the ground-losing 2% wage growth the job market is seeing.

Now you see why the big gains in housing starts and permits are pretty much concentrated in apartment construction, not home building.

And you see why housing won’t get its footing back until private enterprise and the economy as a whole is unshackled and unhobbled.

Delinquency rate dropping because foreclosures clear delinquent loans

Overall, the mortgage delinquency rate declined for the 10th consecutive quarter, decreasing to 3.46% at the end of Q2 2014. This is down nearly 20% in the last year.

“Overall, the improvements in the mortgage delinquency rate can be attributed to a number of factors. These include the clearing of severely delinquent accounts through foreclosure as well as a lower rate of new delinquencies from post-recession vintages, which generally are of significantly higher credit quality and have experienced much better performance than mortgages originated before the recession,” Chaouki said.

“This dynamic is likely driving the low delinquencies among younger borrowers. It is encouraging to see younger borrowers perform well, since their generation was significantly impacted by the recession and their loans are among the newest,” he added.

Purchase application index continues to drop

The seasonally adjusted Purchase Index decreased 0.4% from one week earlier. The unadjusted Purchase Index decreased 2% compared with the previous week and was 11% lower than the same week one year ago.

“Interest rates dropped last week as a result of the ongoing turmoil in Ukraine and other international concerns, which in turn pushed mortgage rates lower,” said Mike Fratantoni, MBA’s Chief Economist. “Overall application volume for conventional mortgages increased. However, there was a 5.9% decline in the number of applications for government mortgages, with both purchase and refinance applications declining. Within the government sector, this decline was led by an 8% decline in unadjusted Department of Veterans Affairs applications, while Federal Housing Administration and Rural Housing Service unadjusted applications also fell by 5% and 3% respectively.”

“Purchase applications never quite reached the aspirations of many housing bulls this summer,” said Quicken Loans vice president Bill Banfield. “These numbers continue to disappoint, given that rates have improved recently and continue to hold a firm grip near historic lows.”

California Home Sales Still Slow Despite 3.9 Percent Jump

Single family home and condominium sales in California experienced a month-over-month increase of 3.9 percent for July but saw a 9.2 percent decline year-over-year, according to PropertyRadar’s July 2014 Real Property Report for California.

Sales for single family homes and condos for the first seven months of 2014 year-to-date are at their lowest levels since 2008, the report stated.
Several factors contributed to the significant year-over-year decrease in California home sales, which fell in 13 of the state’s 26 largest counties, the report said. A major reason for the decrease was the decline in distressed property sales. In July 2014, 17 percent of home sales were distressed properties, down from 25.6 percent in July 2013. PropertyRadar reported that rising interest rates and affordability due to price increases were also factors in decreasing home sales.

“Lackluster sales volumes so far this year should come as no surprise given the fact that in many California counties houses have simply become unaffordable,” said Madeline Schnapp, director of economic research for PropertyRadar. “The decline in affordability in concert with the rapid decline in lower priced distressed properties for sale has exacted a toll on demand.”
The median price of a home in California in July edged slightly upward by 0.3 percent ($1,100) to $390,000, the smallest month-over-month gain since January 2014 according to PropertyRadar. By comparison, in July 2013, median home prices shot up 7.8 percent from the previous month. The slight uptick in median home price from June to July this year was fueled by a 4.4 percent month-over-month increase in the sales volume of more expensive non-distressed properties, which comprised 83 percent of total sales in July 2014 as opposed to 74.4 percent a year ago.

Other highlights from the PropertyRadar report for July 2014 for California include:

Cash sales comprised a significant percentage (21.6) of all sales even they have been falling since they reached their interim peak of 36.5 percent in August 2011.

Negative equity continues to decline but is still high. More than one million homeowners in California (12.1 percent) are underwater on their mortgage.

Foreclosures and notices of default (NODs) started a downward trend that began in March 2009. Foreclosures and NODs fell by2.9 percent month-over-month in July and 22.2 percent year-over-year.

The cloud inventory thesis I advanced early last year suggests that as prices rise, more inventory would come to market, but it would appear at near-peak pricing. Further, since foreclosures were concentrated at the low end of the market, more of the bad debt was cleared out there, so the new inventory would appear at the high end of the market and sit there because owners can’t lower their asking prices. A new study from Zillow confirms this is what’s happening.

Inventory Remains Low, Concentrated in Upper Value Tier

In recent years, inventory has fallen to historically low levels, reaching a national seasonally adjusted low of 1.28 million homes for sale down from 1.97 million homes in April 2011 – a 53.2% drop. Much of this drop can be attributed high levels of negative equity, locking homeowners into their homes. While inventory has rebounded slightly in most markets, as negative equity declined, nationally inventory remains low. In fact, of the top 50 metros, only Hartford, CT has returned to peak inventory levels as of June 2014 and 38 of the top metros are more than 30% below from their peak inventory levels in 2010 and 2011. …

While overall inventory remains suppressed, in many markets the bottom tier is particularly underrepresented. …

Given the state of the real estate market since 2010, it is difficult to gauge what the normal inventory composition is in these markets. We would expect the available inventory composition to match housing stock, but it will be interesting to see if this does indeed happen in more markets moving forward. As discussed in this recent post, while negative equity rates have eased overall, persistently high negative equity in the bottom tier is likely suppressing available inventory in that tier, skewing the composition. In general, while home shopping right now is difficult due to suppressed inventory, those shopping for home in the bottom tier will have a particularly difficult time until more of these homes come to market.

Median Prices Fall in 13 of California’s Largest 26 Counties

Year-to-Date Sales Lowest Since 2008

California single-family home and condominium sales gained 3.9 percent in July 2014 but were down 9.2 percent from July 2013. Year-to-date sales for the first seven months of the year are the lowest since 2008.

The overall decline in sales is due to several factors: the decline in affordability due to rapid price increases, the rise in mortgage interest rates, lack of affordable inventory, and the rapid decline in distressed property sales. Whereas in July 2013 25.6 percent of sales were distressed properties, in July 2014 distressed property sales comprised only 17.0 percent of the total.

“Lackluster sales volumes so far this year should come as no surprise given the fact that in many California counties houses have simply become unaffordable,” said Madeline Schnapp, Director of Economic Research for PropertyRadar. “The decline in affordability in concert with the rapid decline in lower priced distressed properties for sale has exacted a toll on demand.”

The July 2014 median price of a California home edged up 1,100 dollars, or 0.3 percent, to 390,100 dollars, the slowest monthly increase since January 2014. On a year-ago basis, median home prices gained 7.8 percent. Driving the month-over-month price increase in July was the 4.4 percent increase in the sales volume of higher priced non-distressed properties, which accounted for 83.0 percent of total sales. The median price of non-distressed homes was up only 0.2 percent over last year, indicating the gain in median prices was due mostly to a shift from less expensive to more expensive homes.

As the summer selling season winds down, median price increases have slowed or peaked in many of California’s largest counties. In July 13 of California’s 26 largest counties experienced monthly price declines compared to only six in April.