Sep272012
Housing recovery in question as California home sales fall
Recently I wrote that a durable recovery would be demand driven, not supported by restricted supply. Reductions in supply may temporarily force house prices higher, but a sustained recovery requires higher prices and higher sales volumes. In other words, a durable recovery requires a resurgence of demand. Reduced supply threatens to choke off the recovery as buyers lose interest in a market where little is available for sale, and the prices being asked are too high. In a high demand market, buyers don’t wait on the sidelines. In a supply restricted market, they do. And wisely so because educated buyers know the supply will come to the market eventually, and there is no need to overpay today for a product that will be available tomorrow.
The importance of higher prices and higher sales volumes was reiterated in a recent Time magazine article.
Home Sales, Prices Rise: Is Housing Finally Ready to Lead a Recovery?
By Christopher Matthews | @crobmatthews | September 20, 2012
During each of the previous three recessions, the American economy was powered back to full strength largely on the back of the housing market. … But since this spring, when many analysts were calling the official bottoming of the housing market,
The bottom has “officially” been called now. Good to know. Are the housing bottom callers all wrong… again? As Barry Ritholtz noted, bottom calling happens every year, and as I noted the housing bottom consensus could be very wrong.
hopes have been high that the sector could throw its weight fully behind a recovery — one that would bring the country back to full employment and output.
Two reports yesterday served to bolster these hopes. The first was from the Commerce Department, which announced that new housing construction rose 2.3% to a seasonally adjusted 750,000 in August. The other, from the National Association of realtors, showed that existing home sales were up 7.8% to a seasonally adjusted rate of 4.82 million in August, compared with 4.47 million in July and 4.41 million in August of 2011. The NAr report also showed that the median price of an existing home rose 9.5% from last year, the strongest yearly increase in more than six years.
So how good are these numbers? The rise in new housing construction was slightly below analyst’s expectations,
That doesn’t sound good.
but still represents forward momentum.
I feel better now…
Actually, homebuilders will do well in the absence of competing MLS inventory. How well the homebuilders do will depend on how well bank asset managers can manage their bad loan liquidations. The biggest competitors the homebuilders have are the banks.
The new home sales numbers are even more encouraging, and are due to a number of different factors. As my colleague Michael Sivy wrote this week, housing prices have declined nationally more than 30% from their peak. These existing home sale numbers seem to reinforce the notion that buyers across American don’t believe that home prices will fall any further.
Financial reporting has become infected with the belief that reports must serve to reinforce consumer sentiment. Shouldn’t the facts simply speak for themselves?
At the same time, as Robert Brusca of Fact and Opinion Economics told The Wall Street Journal , since 2011 represented the worst year for mortgage lending in 16 years, last year is a “low hurdle” to have to overcome.
An increase in sales volume shouldn’t be that difficult given the base year comparison. Yet, as we will see later, California managed to fall below last year’s levels.
But one should not downplay the importance of even modestly rising home prices. As Bill McBride of Calculated Risk noted last month, in an environment of rising prices, sellers will be more apt to wait for the right time to put their homes on the market, keeping inventory down which further reinforces price increases.
So let me get this straight. Sellers won’t list their homes when prices are falling because they would rather wait for better pricing. That’s why prices are “sticky” on the way down. And now we are told sellers won’t list their houses because prices are rising? So if sellers don’t want to list when prices are falling, and they don’t want to list when prices are rising, when exactly do sellers want to list their houses?
Ever since Bill called the bottom early this year, he has suffered from a confirmation bias. He interprets every news story bullishly. He could start writing copy for the NAHB or the NAr. His bottom call may prove prescient, but his attachment to that bottom call has created a confirmation bias that is seriously clouding his judgment. He is no longer impartial.
Rising prices will bring out new sellers, particularly struggling loanowners. Once they get above water, many of them will want to sell. Some will sell because their bubble-era home no longer meets their needs. Some will sell to downsize to a more affordable property. And some will sell and rent just to have their freedom back. Rising prices, in and of themselves, do not cause sellers to keep their houses off the market. In fact, many with equity will sell to reignite a move up market once prices rise enough to give them move-up equity.
An environment of rising prices will also encourage mortgage lenders to loosen their lending standards, as lenders won’t have to worry about recouping underwater collateral in the event of a default. … But unfortunately, rising prices haven’t yet led to relaxed lending standards. And this seems to be the biggest obstacle to recent efforts by the Federal Reserve to stimulate the economy. … Banks appear to be reluctant to lend even with the very low cost of financing. They’re apparently content to keep prices relatively high and the number of loans they make relatively low. Until banks start loosening their standards, and begin competing over borrowers, there won’t be the kind of robust housing recovery that can quickly power us to a full recovery.
The last thing we want is lowered lending standards, particularly since the US taxpayer is on the hook for all the losses that will surely result. The NAr and others are clamoring for looser standards, but they aren’t the ones who must absorb the losses. Lending standards should remain right where they are, or possibly even tighten further. Until borrowers consistently make payments and sustain ownership, standards are not tight enough.
Volume is still key
Despite the reports that sales volumes are up, they are only up slightly in most markets — which is surprising considering how low interest rates are — and in California, the shortage of inventory is so extreme, sales volumes are down over 2% from 2011 levels.
California Pending Home Sales Down from a Year Ago; C.A.r. Reports
Sept. 24, 2012, 10:00 a.m. EDT
LOS ANGELES, Sep 24, 2012 (BUSINESS WIRE) — California pending home sales rose in August from July, but a continuing shortage of housing inventory sent pending sales lower from the previous year. Additionally, the lack of supply, particularly of REO properties, sent the share of equity sales to its highest level in four years, CALIFORNIA ASSOCIATION OF rEALTORS(R) (C.A.r.) reported today.
Pending home sales data:
C.A.r.’s Pending Home Sales Index (PHSI)* rose 2.7 percent from a revised 115.8 in July to 118.9 in August, based on signed contracts. Pending sales were down 2 percent from the 121.4 index recorded in August 2011. August’s year-to-year decline reversed a 15-month trend of higher pending sales than the previous year. Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market.
Does that mean CAr is calling for a reversal of the housing market and a decline in future home prices? ~~ giggles to self ~~
“While August’s pending sales were higher than July, the pending sales decline from last year is not a surprise, as we started to see a gradual slowdown in the year-to-year change over the past five months, primarily due to a dearth of available homes,” said C.A.r. President LeFrancis Arnold.
It should surprise no one that sales declined in the fact of an absence of inventory. Sales will not improve until the inventory returns.
Distressed housing market data:
— The share of equity sales – or non-distressed property sales – compared with total sales grew to its largest level in four years. The share of equity sales in August increased to 62.2 percent, up from 59.5 percent in July. Equity sales made up 51.7 percent of all sales in August 2011.
— The share of REO sales statewide contracted further in August, while the share of short sales crept up slightly. The combined share of all distressed property sales fell to 37.8 percent in August, down from 40.5 percent in July and down from 48.3 percent in August 2011.
What looks like improvement on the distresses sales front is an illusion. The lack of distresses sales is not due to a lack of distressed loans that need to be processed.
Radar Logic: Home Prices Hit Peak in July, Distressed Sales Plunge
Home prices have hit their peak for the year, and the price increases seen earlier this year are slowing down, according to the latest data from Radar Logic.
The firm’s composite price index posted a 1.3 percent price increase from June 19 to July 19.
While the index is 3.8 percent higher than the same month last year, on a monthly basis, the increase is the smallest reported in the past three months.
The year-to-date increase in price is 13.1 percent, according to Radar Logic.
Based on years passed, Radar Logic suggests the gains are partially seasonal, and prices peaked for the year in July.
Seventeen of the metropolitan areas tracked in Radar Logic’s 25-market composite experienced year-over-year price increases in July.
Six experienced declines, and the remaining two were essentially unchanged over the year.
The largest year-over-year gains in prices were seen in Phoenix (20.2 percent); Minneapolis (12.7 percent); Detroit (10.4 percent); San Francisco (9.8 percent); and Washington D.C. (9.3 percent).
At the other end of the spectrum, Milwaukee, Wisconsin posted the greatest price decline year-over-year in July (-4.6 percent). Milwaukee was followed by Tampa, Florida (-4.4 percent); Charlotte, North Carolina (-3.2 percent); Chicago (-1.7 percent); and Miami (-1.7 percent).
Sales of foreclosed and REO properties reached their lowest level since January 2008, making up just 14.1 percent of all home sales.
The 17.4 percent decline in foreclosed and REO sales reported from June to July was the largest decline Radar Logic has recorded, having begun tracking the data in 2000.
Year-to-date foreclosed and REO sales have declined 39.9 percent.
Of these sales, which Radar Logic terms “Motivated sales,” the share of purchases by institutional investors continues to grow.
Four years ago, institutional investors accounted for about 3 percent of all Motivated sales. Today, they account for about 20 percent.
“We expect their share to continue to grow, as dozens of private equity firms and hedge funds are currently raising funds to pursue REO-to-rental investment strategies,” Radar Logic stated in its report.
Survey: Most Texans Drawn to Practical Side of Homeownership
Homeownership, long considered part of the American Dream, continues to have mass appeal but with a slightly more practical angle, according to a survey released Tuesday by the Texas Trust Credit Union, one of the largest credit unions in North Texas.
The survey “spotlights a more pragmatic and less idealized vision of home ownership,” according to a press release from Texas Trust.
A large majority – 83 percent – of non-homeowners revealed a desire to purchase a home “either this year or within the next five years.”
While 22 percent said their desire is driven by emotion, such as personal pride, the majority cited financial reasons as their motivation.
Thirty-four percent said they believe owning is more financially advantageous than renting. Another 28 percent view home ownership as “an investment in their family’s financial future.”
While 7 percent cite the home loan interest tax deduction as a motivator, the majority of homeowners interested in purchasing a second home said its elimination would not alter their interest.
However, 8 percent said it was important enough that they would not be interesting in purchasing if the tax deduction is no longer available.
Texas Trust also asked current renters interested in homeownership how they would define an affordable down payment on a home. A 77 percent majority feel a down payment of no more than five percent of the home value is affordable.
Current homeowners were more tolerant of higher down payments. About 48 percent fell into the category of defining affordable by up to five percent of the home value.
Twenty-six percent felt 10 percent was reasonable, and 23 percent felt a 20 percent or more down payment was affordable.
While varying on their view of a reasonable down payment, renters and current homeowners came together on another issue: the importance of having a personal relationship with their mortgage holder.
All together, 82 percent of survey respondents said a relationship with their mortgage holder was “very important or at least somewhat important.”
“When you consider that home ownership is viewed as a financial investment, it is no surprise that consumers view the relationship with their mortgage holder as highly important,” said Richard Whitman, VP of mortgage lending at Texas Trust Credit Union.
What Keeps Baby Boomers from Walking Away?
As more and more baby boomers approach their golden years, many are finding themselves having to make a choice they never imagined: Whether or not to walk away from their mortgages.
YouWalkAway.com released the results of a client survey, revealing that the looming prospect of a fixed income is driving many older struggling homeowners to strategically default while they still have something left.
The study found that, compared to younger defaulters, baby boomers are more likely to have depleted their savings before making the decision to default, leaving them with little to no money during their retirement.
According to the survey, while younger generations see walking away from an underwater home as a strategic business decision, boomers appear to be more concerned about the morality of defaulting on a mortgage contract. When asked how difficult it was to reach a decision, 75 percent of respondents said they struggled over the morality.
As a result, many boomers inadvertently remove their “safety net” of 401ks and other funds in order to maintain an underwater property. Nearly half – 48 percent – of respondents said they depleted at least a large portion of their savings before defaulting.
However, after walking away, few seem to regret their decision. Fifty-three percent of those surveyed said they would have made the same decision to walk away if they were 20 years younger. An overwhelming 97 percent said they would recommend their decision to a family member facing the same circumstances.
One client started a blog on her experience defaulting. In it, she expresses satisfaction with her decision nearly two years later:
“We don’t think about it much anymore, it’s just a house we used to live in, and now we live in another one. It’s kind of funny to me now to think of how much I and I know others stress over the “ethics” of walking away [. . .] So we choose to be thankful for a home we can afford that’s full of a family who has really pulled together for the things that count most in life. No regrets.”
The highest percentage of respondents (34 percent) were 50-59 years old.
Do you think it might be that Boomers don’t to look poor infront of their cohorts? Most boomers come from blue collar parents.
“No regrets”? So, you don’t regret buying a house you couldn’t afford? You don’t regret not having sufficient reserves to get you through any tough times? You don’t regret all of the other debt payments you’re making each month which make it that much harder to pay the mortgage payment? None?
I don’t think many people learned the proper lessons from the bubble. Very few have endured any real consequences for their poor decisions.
Not Orange County, but still
Workers give up in Los Angeles
By Annalyn Censky @CNNMoney September 27, 2012: 6:07 AM ET
NEW YORK (CNNMoney) — The unemployment rate has been falling lately in Los Angeles County, but not for the right reasons.
Last month, the jobless rate for the county fell to 11%, down from 12.4% a year earlier.
While that’s far higher than the 8.1% unemployment rate for the nation as a whole, it nevertheless seems to show progress for the City of Angels… right?
Wrong. In Los Angeles, the falling unemployment rate is slightly misleading, just as it has been for the country overall.
When surveyed by the government, fewer L.A. residents say they’re unemployed compared to a year ago. But it’s not because they’re finding jobs. It’s because they’re dropping out of the labor force altogether.
Just over 100,000 of workers have left the Los Angeles labor force since the beginning of the year, according to seasonally adjusted data from the California Employment Development Department.
The decline stands in stark contrast to other major metropolitan areas. New York, Chicago, Washington D.C., and San Francisco are all seeing their labor forces grow.
So what’s going on in Southern California?
The real estate boom and bust hurt L.A. far more dramatically than those other cities, and a lack of construction jobs may partially explain why some workers have stopped looking for employment. Construction jobs have recently started to come back slowly, but in L.A. they’re still off by about 50,000 jobs from 2007 levels.
Other large Western cities affected by the housing bust, like Las Vegas and Phoenix, have also reported declining unemployment rates over the last year, partly due to their shrinking labor force.
The overall job numbers in Los Angeles are also heavily influenced by its immigrant population. As job opportunities have waned, particularly in low-skill sectors, so too has immigration to the city. Data from the Pew Hispanic Center shows immigration numbers have dwindled and vast numbers of Mexican immigrants have returned to Mexico
“In general, these folks have been moving back or simply not coming back as they have before, because the opportunities, particularly in the construction industry, are simply not as they used to be,” said Christopher Thornberg, founding partner of Beacon Economics, a firm based in Los Angeles.
Full-time job, but can’t afford rent
The “labor force” refers both to people who are working, as well as those who are actively searching for jobs. People who are retired, enrolled in college or staying home to take care of relatives are not included in the category.
When the labor force declines, it can be the result of a broad demographic trend — for example, more Baby Boomers retiring, or more young people enrolling in college — or it can be a worrisome sign of people getting discouraged, moving away and giving up on the job market altogether.
The latter seems to be the case in Los Angeles.
“This local economy has now gone through a couple of very severe cycles over the last 20 years, and we are concerned,” said Robert Kleinhenz, chief economist at the Los Angeles County Economic Development Corporation. “We still have double digit unemployment rates here.”
Buy or rent? Los Angeles
Still, economists caution not to look just at one piece of data. Los Angeles County residents say they have fewer jobs than they did a year ago, but when the government surveyed employers last month, companies reported creating 74,000 jobs over the year — the largest increase in a decade.
“You’ve got to reconcile the shrinking labor force with the growing number of jobs, which is a conundrum,” said Steve Levy, director and senior economist of the Center for Continuing Study of the California Economy.
Part of the disparity could mean that commuters, who live outside the county, are getting the new jobs that are being created.
“L.A. has hot industries, but those people may not live in Los Angeles,” Levy said. “They may live in surrounding areas like Orange County.”
This is so true. I live in the more ghetto side of Torrance. It’s like the movie Friday. There’s people that just hang around all day and don’t work 9 to 5. Keeps the neighborhood safe tho with so many eyes on the streets.
That can work both ways. If you have a lot of unemployed, you have more desperate people with time on their hands who will be looking for targets of opportunity for break-ins.
What it all boils down to…. need to see 30yr money coming online for 3% soon, then 2.89, 2.39 and so-on or it’s game over.
At this point, I wouldn’t be surprised to see 3% or lower interest rates.
LendingTree: Mortgage rates to remain low into fall
Residential mortgage rates will likely remain near record lows this fall, according to the LendingTree Monthly Mortgage Review.
Lenders affiliated with Charlotte-based LendingTree found that the average mortgage rate this summer was 3.91 percent for a 30-year fixed-rate mortgage, with the average home loan at about $200,000. And while mortgage lending overall is expected to remain tight, rates are likely to stay low.
Rates last week matched a record low at 3.49 percent for a 30-year fixed mortgage, down from 4.09 percent a year earlier.
Low rates on loans, stabilizing home prices and the end of the seasonal buying season could add up to a hot housing market in the fall, according to LendingTree.
“Home values are beginning to improve just as we approach the close of the home-buying season,” Doug Lebda, the company’s founder and chief executive, says in a press release.“Home prices are still below the levels they were five years ago, creating an excellent opportunity for first-time home buyers to enter the market.”
In the Charlotte market, home prices rose 2.2 percent in July from a year earlier.
LendingTree is an operation of Tree.com Inc., also based in Charlotte.
Tree.com (NASDAQ:TREE) is the parent of several businesses that connect borrowers to lenders, focusing on Internet marketing and developing mortgage leads. It also sells leads to for-profit colleges and universities, auto dealers and home-maintenance providers.
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I just got my 2013 Health Care Cost increases. Oh, man. I don’t see how home prices will increase over the next 10 years. You will have increases in:
Cost of Borrowing
Cost of Food
Cost of Energy (see Global Warming Act)
Cost of Medical
Risky loans are back
By Maureen Farrell @CNNMoneyInvest September 26, 2012: 5:48 AM ET
NEW YORK (CNNMoney) — Some of the riskiest loans of the pre-financial crisis are back. But this time around, investors are being much more discriminating.
Enter collateralized loan obligations — the one risky investment that survived the financial crisis virtually unscathed.
CLOs are created out of corporate loans that private equity firms, hedge funds and occasionally banks buy up, pool together, slice up and resell. Each slice carries its own risk rating and reward. In theory, holders of a AAA-rated slice would get paid even if a number of companies in the overall pool defaulted.
More than $30 billion of CLOs have been issued so far this year, according to researchers at RBS. That’s more than double the $12.6 billion of CLOs issued in 2011. While 2012 levels will likely fall far below the height of CLO issuance — $92.7 billion in 2007 — it’s a big comeback for a market that ground to a halt in 2009, when none were issued.
“Investors are getting back into this market because they recognize that these loans are different than the collateral backing other collateralized debt obligations, which observed high levels of defaults during the crisis,” said Kenneth Kroszner, structured credit analyst at RBS.
Those included pools of subprime mortgages that nearly blew up the global financial system. During the subprime mortgage crisis, even AAA-rated CDOs stopped making payments because of the extraordinarily high rate of default. In contrast, fewer than 1% of the CLOs completely stopped paying returns, according to Moody’s.
Investors are still steering clear of those subprime-related securities. “I don’t think the CDO market will ever come back,” said Matt Natcharian, who sells CLOs to pensions, mutual funds and other big investors as the head of structured credit investments at Babson Capital. “It’s clear that the ratings of the collateral for those loans were not accurate and the diversification exposure proved to be elusive.”
In the acronym-heavy parlance of the debt market, a CLO is also a type of CDO, but considered the least risky of the bunch. Aside from CLOs, there haven’t been any new CDOs created since 2009, according to Dealogic data. That’s a far cry from 2006 and 2007, when there were hundreds of billions of dollars worth of CDOs issued.
Today, newly-issued CLOs pay a better return for a AAA-rated security than almost anything else.
AAA-rated CLOs that mature in 5 to 7 years pay investors a yield of roughly 1.9%, according to JPMorgan Chase analysts. In contrast, pools of credit card loans rated AAA that mature in 5 years pay a yield of 0.6%. Pools of AAA-rated student loans with a 7-year maturity pay a yield of 1%.
The only securities that come close are pools of AAA-rated loans backed by commercial mortgages that yield roughly 1.8%, according to JPMorgan Chase.
Pensions that are failing to meet annual targets are buying CLOs to generate cash flow to pay out to beneficiaries. So are major banks, since AAA-rated CLOs fulfill their need for highly rated capital demanded by new post-crisis regulations.
Still, CLOs are just a tiny fraction of the overall corporate debt markets. In 2012, corporations issued nearly $2 trillion of investment grade debt, and $281 billion of junk bonds. With increased demand, some issuers predict that yields will start falling, which could, in turn, curb some of the growth for CLOs.
Of course, on Wall Street, where there’s a fee, there’s a way. In a yield-starved world, some are hopeful that past mistakes won’t be repeated.
“It’s too early to tell whether certain types of deals will ever come back, but if they do, they would likely come back in a way that appropriately addresses the shortcomings of the previous generations of deals, some of which were structural, and some of which were due to the underlying collateral,” said Joe Moroney, a senior portfolio manager at Apollo Group that runs its CLO practice.
In terms of home sellers, you and Bill could both be correct. We’ve had an unprecedented downturn and nobody knows exactly how the psychology will play out. Home sellers aren’t a monolith, and I could see both scenarios playing out. Non-motivated sellers may start listing at WTF prices to test the market. At the same time, young families that have outgrown their current residences might be highly motivated to move.
And just for the record, OC seems to be trying to reclaim the “we are special” title once again. Prices are up 7% YoY on 21% higher sales volume, while delinquencies are down 26% and foreclosures in process also continue to decline (sources DQ and CoreLogic). I guess this could be referred to as confirmation bias on my part.
Those are all good stats. If we were seeing those stats in 2014, I would believe the worst was behind us because in 2014, the lower foreclosure rates will be due to a lack of delinquent borrowers to foreclose on. Since we know the lowered foreclosure rate is due to can kicking, it’s much more difficult to get excited about what we know are manipulated numbers.
That being said, my monthly reports are giving a loud buy signal in nearly every city in Orange County. Whether or not we are at the bottom in nominal pricing is not certain, but we are probably at or near a low in cost of ownership relative to the cost of a rental. For anyone with a long holding time, it is a good time to buy.
Pending home sales fall nationally, but are mixed locally
Pending home sales, a leading indicator in the housing market, showed a decline in August, just one month after reaching a two-year peak.
The National Association of Realtors reported Thursday that the Pending Homes Sales Index, which is based on contract signings rather than actual sales, was down 2.6 percent nationally to 99.2 last month.
In July, the index rose to its highest level in more than two years, 101.9. Despite the decline, it was 10.7 percent higher than August 2011 when it was 89.6.
NAR chief economist Lawrence Yun said it is not unusual to see some fluctuation in the monthly data.
“The performance in month-to-month contract signings has been uneven with ongoing shortages of lower priced inventory in much of the country, and across most price ranges in the West, but activity has remained at notably higher levels this year,” Yun said in a statement.
“The index shows 16 consecutive months of year-over-year increases, and that has translated into a higher number of closed sales. Year-to-date existing-home sales are 9 percent above the same period last year, but sales were relatively flat from 2008 through 2011.”
I also think Bill and you will both be correct. I think we’ve all met more than our fair share of housing boosters, those few who long for the halcyon days of 20% appreciation. Those folks, if they’re still hanging on, will undoubtedly not sell. They’ll wait for there 20%. Others who feel like they were duped and bought at the wrong time, this group will bail as soon as they’re not underwater. I think the real goal is to get prices up high enough to where most debtors aren’t underwater so they won’t strategic default. Then at least the banks have a chance at being solvent, unlike the current masquerade. Just a guess though.
” I think the real goal is to get prices up high enough to where most debtors aren’t underwater so they won’t strategic default. Then at least the banks have a chance at being solvent, unlike the current masquerade.”
I think that’s a good analysis of what’s going on. Banks are appreciative of the boost in prices, but I rather doubt even they believe rapid appreciation will bail out all their bad loan losses. A little appreciation will help a few sell at breakeven, and it will encourage many on the fringe not to strategically default.
Over the next few years, there will be several “unexpected” setbacks that will be touted as temporary. Perhaps they will be, but the cumulative effect will be more of what we saw over the last three years.