Housing bears roar over influx of MLS inventory
I was a housing bear. From when I started writing publicly about housing in February 2007 to September 2012, I was bearish on Coastal California real estate. In August of 2010, I wrote the post Buy Las Vegas real estate, which made the case for buying cashflow assets in beaten down markets. I was and still am very bullish on properties in these markets.
Because I was completely bearish for four and one half years, and because I continue to point out the bogus manipulations of the market, some people classify me as a permabear. The reality is that since last September, I have discussed in numerous posts the reasons prices will continue to rise despite the manipulations of the housing market. In the post Must-sell shadow inventory has morphed into can’t-sell cloud inventory, I detailed the overriding set of circumstances created by the banks, the federal reserve, and government regulators that caused the elimination of must-sell REO inventory and maintains the restricted inventory condition causing prices to rise. So far, nothing I have read from the remaining housing bears has convinced me the bank’s gambit will not work.
by Mark on August 4, 2013
1) I am tracking a sharp jump in MLS “listed” supply all over the Western region in the past 3 weeks.
In my little city in California for example, listed for-sale supply went from 60 houses to 100 in the back half of July. Say what?!?
We sell 20 houses per month so this market went from 3 months to 5 months supply “going into” the slow season. This is unprecedented. It reeks of panic. And comes as Realtors from coast to coast tell me that the “frenzied” demand pace through May has all but evaporated.
I recently gave the advice Sell now, mortgage interest rates to keep rising. Apparently, some sellers got the message.
The rise in MLS inventory, though significant, is overblown. (See: House listings increase, but MLS inventory still at very low levels)
Listings in Irvine and Aliso Viejo (courtesy of Irvine Housing Blog) show a dramatic percentage increase this year. Both are up more than 100%, but considering the very low level that forms the base of that calculation, it sounds more dramatic than it is. Taken in a historical context, current listings are still very low, approximately the previous low listing count recorded over the previous six years (see below).
As more evidence clearly presents itself — as the lagging housing data begin to capture the effects of the interest rate “surge” that most everybody has blown off as “negligible” — I am more convinced than ever that it was as a significant catalyst; that a 45% increase in interest rates over 6 weeks has acted a lot more like the sunset of the 2010 Homebuyer Tax Credit — an immediate removal of stimulus that was mostly responsible for driving demand and prices — than any other time in modern housing market history when rates “rose” slowly over 3 to 6 “quarters” giving everybody lots of time to “think” and act accordingly.
Rising interest rates are certainly having an impact (See: OC housing affordability fading fast). However, with the frenzy from the spring, many potential buyers are still out there who were unable to obtain a house. Those buyers will likely remain active during the fall and winter keeping prices and sales up.
I think everybody — private and institutional — knew that sub-3.5% rates was in fact a gift. And over the long, 18-month “gifting period” a great job was done at filling pent-up demand but an even better job was done at pulling it forward.
I would love to hear from real estate and mortgage professionals out there on real-time MLS “listing” activity in your regions. Specifically, if you are tracking the same jump in listed supply as I am over the past few weeks.
I had lunch with Shevy yesterday. He told me it is getting much easier to get buyers into escrow. There are more sellers, and they are somewhat more motivated. None of them are desperate, but it’s far easier to get a buyer a property than it was 60 days ago.
2) Some will say that a wave of supply is great for the market; exactly what is needed in an “under supplied market.
Put me in that camp.
To this I have a few things to think about.
First, there is not a shortage of houses in which “to live”. This is evidenced in all the legacy bubble/crash regions — new-era “recovery boom” regions — by the large amount of vacant properties; properties under rehab/remodel awaiting sale/rent; and “single-family” houses listed for rent.
In Vegas, Phoenix, the inland empire etc — the regions that are getting so much press for being so “hot” — there is plenty of supply in which to live with 10s of thousands of SFR units coming online in the next year. Housing units have simply been misallocated by “investors” — many with with endlessly deep pockets due to Fed QE like all the hedge and private equity funds running these markets — for rentals. This skew will work itself out, as investors smarten up…of course, that will happen all at once when they realize they “are” the bagholders.
I don’t think so. These investors expected tepid appreciation for several years. The fact that prices went up dramatically and suddenly may cause them to stop buying, but it gives them no reason to head for the exits. The plan was always to hold these properties for 5 to 10 years, then sell them to owner occupants.
Second, “total potential demand” is half of what it used to be. Remember, analysts, builders, the media, investors et al are looking at historic metrics on supply and demand without normalizing the numbers to adjust for 50% of all mortgage’d homeowners — the absolute largest demand cohort — being locked-in due to negative equity, “effective” negative equity, a legacy HELOC not charged off, or insufficient income/credit needed for a mortgage loan. This is a fatal oversight. Essentially half of the nation’s top demand cohort died over the past 6 years. This is something that is absolutely unprecedented.
Now this part of his analysis is right on. The move-up market will suffer for another decade because delinquent jumbo loans in Coastal California pollute bank balance sheets.
Lastly, a surge of supply into a market with 10-year notes at 1.6% and 30-year mortgage rates at 3.25% — when investors and organic buyers were driven by the biggest stimulus to ever hit housing too jump all over each other and pay 15% over last price/appraised value — is a completely different situation than a surge of supply AFTER a house prices and interest rate surge, which have both done a great job of sidelining a large percentage of investors and organic buyers alike.
This is exactly what happened.
One of the buyers we have been working with makes enough money to borrow far more than the conforming limit at 3.5% interest rates. However, he was competing for properties with people making far less money than him due to the interest rate stimulus. Now with rates at 4.25%, he can still finance to the limit, but many of the potential buyers he was competing with are gone. This is the dynamic causing many buyers to lower their expectations, and it removes demand all the way up the housing ladder.
In short, people forget the housing market has been turbocharged by the greatest direct stimulus in history over the past 18 months. They are so accustomed to historic rates stimulus they simply don’t see it. I hear so much that the past year “recovery” has to be “organic” because the “government” is not providing any stimulus or subsidies.
I can see why he is frustrated with that nonsense. The market over the last year bottomed despite the poor fundamentals because policies permitted the banks to restrict inventory. Though this market manipulation has been successful (See: Las Vegas: a case study in successful housing market manipulation), it’s a clear sign that the fundamentals are weak, and the recovery is not an organic one.
Perhaps, technically they are correct because the Fed is not a government agency. But when you factor in the power of the Fed buying rates down from 5.5% in 2011 to 3.25% in 2012/13 on demand and 6.5 million mortgage mods on supply you come up with a very volatile situation if that go-go-juice is ever taken away. And it was just taken away.
Real simply, the housing market “hard reset” to Twist/QE3 — rates being forced down to 3.25% from 5.55% by the Fed over a couple of months — began in late 2011. Now that this stimulus has been taken away literally overnight, housing must “hard reset” again. This “reset” will appear in the form of a sales volume/price “air pocket” through year end at least.
I agree (See: Investor activity to plummet, home sales volumes will drop). However, this air pocket will be offset by the unsatisfied demand from potential buyers who didn’t get homes earlier this year, and even if sales drop, prices probably won’t. I recently asked Will fall and winter see a significant pullback in house prices?. My answer was probably not.
Bottom line: While more supply would have been great for “this” housing market a year ago, now — with far fewer buyers, prices through the roof (far more expensive than in 2003 – 2007 on a monthly payment basis), and 15% purchasing power lost in the past 2 months — it could crush it.
I don’t see how the crushed market scenario can come to pass. With the cloud inventory manipulation policy in place, nothing is going to force must-sell inventory on the market. Sales volumes may drop off, but without must-sell inventory to push prices lower, the market may stagnate, but it won’t go down.
Cash investors in Coastal California
We know investor purchases are at all-time highs, and with rising prices, the big hedge funds who are focused on returns will slow their buying. However, that isn’t the dynamic driving investors in Coastal California.
The investors active in our market have a different agenda. Many are kool aid intoxicated and will be disappointed with their outcome, but another group is buying for different reasons.
When the federal reserve lowered interest rates to zero, many people who retreated to the safety of government bonds found the returns lacking. These investors started buying further out on the yield curve trying to gain a few pennies over the safer yields of short-term Treasuries. These investors are not stupid, and they realize that continued quantitative easing is going to cause inflation, and it will make their long-term bonds less valuable. These investors are looking for other places to park their money.
Investors fleeing bonds find real estate attractive, particularly what they consider to be properties in stronger markets like Coastal California. They know that if they stay in bonds, they will lose money when bond prices collapse, so they are moving their money into safe-haven real estate, obtaining the same dismal returns, but they won’t face the prospect of crashing asset prices like they will in bonds (unless the housing bears can show how these prices will collapse). For these investors, even tepid appreciation is better than the crushing losses they face in bonds, so buying overvalued Coastal California real estate is actually a wise move for them.
It’s the activity of these investors that may cause prices to continue to rise, and perhaps even inflate a new housing bubble. Remember, these investors are not constrained by financing limitations, and they believe this is a good place to park money. If enough of them pile in, we could easily have a bubble, induced by federal reserve policies, that causes another painful crash. We aren’t there yet, but it’s a scenario that could come to pass.
These Ponzis nearly tripled their mortgage
The former owners of today’s featured REO bought near the bottom of the last real estate recession, over the 11 years they owned the property, they took their original $200,000 mortgage up to $592,500. That’s $392,500 in mortgage equity withdrawal. If their last appraisal had come in higher, they might have tripled their mortgage.
[idx-listing mlsnumber=”OC13157310″ showpricehistory=”true”]
25436 ADRIANA St Mission Viejo, CA 92691
$696,900 …….. Asking Price
$260,000 ………. Purchase Price
1/23/1996 ………. Purchase Date
$436,900 ………. Gross Gain (Loss)
($55,752) ………… Commissions and Costs at 8%
$381,148 ………. Net Gain (Loss)
168.0% ………. Gross Percent Change
146.6% ………. Net Percent Change
5.6% ………… Annual Appreciation
Cost of Home Ownership
$696,900 …….. Asking Price
$139,380 ………… 20% Down Conventional
4.46% …………. Mortgage Interest Rate
30 ……………… Number of Years
$557,520 …….. Mortgage
$137,838 ………. Income Requirement
$2,812 ………… Monthly Mortgage Payment
$604 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$145 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$3,561 ………. Monthly Cash Outlays
($604) ………. Tax Savings
($740) ………. Principal Amortization
$229 ………….. Opportunity Cost of Down Payment
$194 ………….. Maintenance and Replacement Reserves
$2,641 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$8,469 ………… Furnishing and Move-In Costs at 1% + $1,500
$8,469 ………… Closing Costs at 1% + $1,500
$5,575 ………… Interest Points at 1%
$139,380 ………… Down Payment
$161,893 ………. Total Cash Costs
$40,400 ………. Emergency Cash Reserves
$202,293 ………. Total Savings Needed