Federal Reserve willfully ignorant to real cause of MLS listing shortage
Sometime in late 2011 or early 2012, lenders changed their internal policies regarding foreclosure processing on delinquent borrowers. Prior to that time, most major lenders, and in particular the GSEs, were processing foreclosures to reduce the level of shadow inventory and stop delinquent mortgage squatters from enjoying a free ride. Lenders were still slow at this processing, and the shadow inventory was enormous, but they were processing just the same.
Lenders finally came to realize that continued foreclosure processing was providing a steady stream of distressed properties, and these distressed property sales were keeping prices down. They correctly reasoned that if they stopped foreclosure processing, they could greatly reduce the supply of must-sell distressed inventory and alleviate the pressure on home prices. If they could make home prices go up, they would increase the recovery on the bad loans they did process, and if they could make prices go up enough, many of the distressed borrowers could sell on their own in a conventional equity sale.
In order to make this plan work, they needed everyone to be on board. If one of the major banks kept processing foreclosures while the others withheld it, the rebound effect would not reflate the housing bubble quickly enough to help out the rest. It was a classic cartel problem. Since there are only a few major banks that control most of the bad loans and servicing of bad loans, getting them to collude was easier. Further, with incentives and directives coming from many levels of government encouraging and demanding that lenders stop foreclosures, lenders were ready to comply.
The result was a change in policy at all the major lenders to stop foreclosing on delinquent borrowers and instead to focus on modifying loans to get a few more payments out of these deadbeats while prices recovered. It didn’t really matter to lenders that loan modification failure rates are very, very high because this solution was never intended to be permanent. Lenders merely needed to delay foreclosure processing long enough to raise prices. Then, either the owner could sell on their own, or the bank would get tougher and force them out.
This is the real reason MLS inventory levels are down. The insiders at the federal reserve know why inventory is really down. They couldn’t possibly be ignorant to the real causes as they helped orchestrate them. I was shocked to read a federal reserve whitewash study of the MLS inventory issue that completely ignores the factors and circumstances the lead directly to the lack of inventory. Instead, they blame the problem on consumer behavior. They are either knowingly distorting the truth or willfully ignorant to it.
The relatively low level of homes available for sale appears to reflect the rising strength of the housing sector, rather than its weakness.
New research from the Federal Reserve Bank of San Francisco released Monday argues that a study of housing market dynamics indicates that homeowners who are inclined toward selling their homes appear to be holding back in order to take advantage of rising prices. The report refutes the idea that the dearth of homes for sale reflects the inability of sellers to come to market because they owe more on their dwelling than they can sell it for.
This report refutes nothing. In March I demonstrated that Low housing inventory is an indicator of residual mortgage distress. The lack of listings is directly related to the number of people who owe more than what they can sell it for. To suggest otherwise is laughable.
The report claims sellers are holding back to take advantage of rising prices. That much is true, but it ignores the fact they must hold back until prices rise enough for them to get out. The best evidence of this is that the inventory restriction is the greatest in the markets where prices were the most beaten down and the highest percentage of borrowers were underwater. The correlation between the percentage underwater and the percentage of missing MLS inventory is impossible to ignore — unless you work at the federal reserve and that isn’t the story you want to tell.
“County-level data suggest that many homeowners are waiting for prices to rise further in their markets” before selling, writes William Hedberg and John Krainer, economists with the San Francisco Fed. “Markets that have seen the strongest house price appreciation and job growth are the ones where for-sale inventories have declined the most,” they noted.
This puts the cart before the horse. The markets with the strongest price appreciation were those where the for-sale inventories declined the most. The depleted inventory condition came first, and it was the cause of rapid appreciation. They try to make it sound like prices magically began to rapidly appreciate, and sellers responded by withholding inventory to make prices rise faster. That’s nonsense.
The paper seeks to address the question of why are there, relatively speaking, so few homes for sale given the prices finally appear to be on a sustained upward swing after the crash of the house market.
The answer to that is simple too. Prices haven’t risen enough to elevate people above water. Even those who reach the surface need prices to rise another 10% to cover closing costs and commissions, and that still leaves them penniless. Most will want to wait until they have some equity to buy another home, so as long as prices are rising, they will wait.
The paper’s authors note that the bursting of the housing bubble continues to cast a long shadow over the decisions homeowners are making. With many having been so badly burned, homeowners are now being cautious and are patiently waiting for the market to rise more before putting their homes on the market.
“It is well documented that house price changes are persistent, meaning that price rises are likely to be followed by more rises, and price drops by more drops,” the paper said. Homeowners with “flexibility” appear to be taking their time, with the researchers writing “If they observe prices going up, they may want to wait and gamble that the increases will continue, allowing them to sell later at a higher price.”
The fact is that owners always have that option. House prices rise most of the time. It’s not like the incentive to wait and sell for a higher price is a new phenomenon. This didn’t impact the housing market in past booms (inventory was steady during the bubble rally from 2002-2006). Why would it be a factor now?
As evidence, Messers. Hedberg and Krainer write that counties with the biggest house price increases have experienced “relatively large declines” in the inventory of homes available for sale.
This is their evidence? As I pointed out above, this puts the cart before the horse. The reality is those markets with the largest declines in inventory triggered the biggest price gains. The lack of inventory was the cause not the effect.
This “rational choice” to hold off on selling until prices appreciate further is likely to be a short-lived behavior though, the report said. Eventually, the authors conclude continued buoyancy in the market will flush sellers out into the open.
“If prices continue to rise, inventories for sale should eventually rise too,” the researchers wrote.
They are correct in their prediction that rising prices will bring out more sellers, but not for the reasons they cite. Rising prices will bring out sellers because they can finally sell without taking a loss. When you think about it, their conclusion makes no sense at all given the mechanism they posit as the cause. If sellers really were choosing to withhold their properties because prices were rising, they would continue to do so as long as prices were rising. Their explanation doesn’t provide a reason or a mechanism for changing seller motivation. Why would they suddenly list?
My explanation provides the reasoning the federal reserve’s explanation does not. Sellers are withholding their properties because they can’t sell without a loss, and once they get above water, many more distressed sellers who can’t afford their homes will list and get out.
[idx-listing mlsnumber=”PW13209347″ showpricehistory=”true”]
2153 VISTA ENTRADA Newport Beach, CA 92660
$999,990 …….. Asking Price
$1,387,343 ………. Purchase Price
6/28/2013 ………. Purchase Date
($387,353) ………. Gross Gain (Loss)
($79,999) ………… Commissions and Costs at 8%
($467,352) ………. Net Gain (Loss)
-27.9% ………. Gross Percent Change
-33.7% ………. Net Percent Change
-94.3% ………… Annual Appreciation
Cost of Home Ownership
$999,990 …….. Asking Price
$199,998 ………… 20% Down Conventional
4.74% …………. Mortgage Interest Rate
30 ……………… Number of Years
$799,992 …….. Mortgage
$214,967 ………. Income Requirement
$4,168 ………… Monthly Mortgage Payment
$867 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$208 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$310 ………… Homeowners Association Fees
$5,553 ………. Monthly Cash Outlays
($1,158) ………. Tax Savings
($1,008) ………. Principal Amortization
$360 ………….. Opportunity Cost of Down Payment
$145 ………….. Maintenance and Replacement Reserves
$3,892 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$11,500 ………… Furnishing and Move-In Costs at 1% + $1,500
$11,500 ………… Closing Costs at 1% + $1,500
$8,000 ………… Interest Points at 1%
$199,998 ………… Down Payment
$230,998 ………. Total Cash Costs
$59,600 ………. Emergency Cash Reserves
$290,598 ………. Total Savings Needed