Feb262014
Investors and owner-occupants purchase fewer homes
Home sales volumes are down across all market segments. Investors and owner-occupants alike find prices far too high for their liking.
Home sales are down despite hopeful predictions from economists and financial reporters that the housing market had finally achieved “escape velocity.” The theory was that investors would cause the housing market to bottom, and owner-occupants, seeing less risk in purchasing a home, would step in and purchase homes once prices started rising. In the past, owner-occupant buyers often would purchase even when prices were rising briskly because they believed house prices couldn’t go down, so they needed to buy before prices became too high; plus, many wanted to make a fortune on appreciation. The housing bust changed all that.
(See: Is the public growing weary of rising home prices?)
Real Property Report – California, January 2014
Posted on February 18, 2014 by Madeline Schnapp
California single-family home and condominium sales fell 18.7 percent in January 2014 from December 2013, and were down 11.8 percent from a year ago. Taking a longer-term view, in the past 12 months (February 2013 through January 2014), sales are down 6.5 percent compared with the same 12-month period (February 2012 through January 2013) a year earlier.
To get a clearer picture of current real estate sales trends and to eliminate seasonal factors, we compare January 2014 property sales with January sales in prior years and divide sales into their distressed and non-distressed components. Non-distressed sales fell 18.9 percent in January 2014 from December 2013 but gained 18.2 percent year-over-year. Meanwhile, distressed property sales declined 17.8 percent for the month and were down 49.9 percent for the year.
Despite January’s sizeable falloff in distressed property sales, they still accounted for 25.0 percent of sales, which remains historically high. More importantly, distressed property sales as a percent of total sales remain much higher in counties away from the coastal areas. …
Sales are down because investors drove prices up so high that they no longer want more property. Unfortunately, owner-occupants aren’t excited about the higher prices either, and since the economy is not growing that robustly, there is no pressure on owner-occupants to buy before someone else does. Only the restriction of inventory is keeping prices afloat.
Cash Sales
In January 2014, cash sales fell 11.1 percent from December 2013 and are down 21.2 percent in the past 12 months. The decline is cash sales mirrors the decline in total sales due to seasonal factors that typically depress sales this time of year. Despite the decline in sales volume, cash sales represented 26.1 percent of total sales, up 2.3 percentage points from 23.8 percent in December 2013.
Taking a longer-term view, cash sales as a percent of total sales oscillated between 28 percent and 31 percent from January 2012 through January 2013. They peaked at 33.0 percent in February 2013 and stayed below 25 percent from August through December. Despite recent declines, cash sales remain high from a historic perspective and are an important part of the real estate marketplace.
Cash sales as a percentage of all sales slips back down to historic norms; however, since all sales are down, all-cash sales are down as even more.
Flipping
January 2014 flipping (reselling a property within six months) fell 19.8 percent in part due to seasonal factors that typically depress flipping this time of year. Flipping was down 15.3 percent from a year ago. Flips represented 5.2 percent of total sales in January 2014, up from 5.0 percent in December 2013.
Taking a longer-term view, in 2011, as housing prices trended sideways, flipping was basically flat, ranging from 2.5 percent of sales in January to 2.7 percent in December 2011. In 2012, flipping as a percent of sales began to increase, rising from 2.9 percent in January 2012 and peaking in February 2013 at 5.5 percent. Flipping retreated from February 2013 to June 2013, reaching an interim bottom of 4.1 percent of sales.
In January 2014, within the 26 largest California counties, flipping as a percent of sales was greatest in Contra Costa, Los Angeles, Orange, Sacramento, San Bernardino, San Diego, Santa Cruz and Stanislaus counties; Orange and Stanislaus counties were the highest at 8.2 and 7.6 percent of sales, respectively.
It shouldn’t be surprising that flipping took off as prices bottomed, and as prices began to rise quickly, flippers were buying everything they could. However, with plummeting sales volumes and stagnant prices, flipping becomes less profitable and thereby less popular.
Institutional Investor (LLC and LP) Activity
We approximate institutional investor activity by looking at purchases and sales made by limited liability corporations (LLC) and limited partnerships (LP). From our research all activity by hedge funds, real estate investment trusts and other entities that are pooling large sums of money to invest in residential real estate are doing so in one of these two business structures. While institutional investors represent the bulk of activity, there are some other entities, like relocation companies, that also use these business structures to buy and sell residential real estate. Their activity is included here as well.
Market Purchase Activity
Market purchases by LLCs and LPs posted steady gains from 2008 through 2011, accelerating rapidly in 2012 and reaching a peak in December 2012. Since then, LLC and LP market purchases have been trending lower and are now 52.1 percent below their December 2012 peak. Despite the longer-term decline, January 2014 purchases represented 4.4 percent of total sales up from 4.0 percent in December 2013.
The steady decline in LLC and LP market purchases is being driven primarily by the increase in purchase prices. As prices rise, the potential return on investment (ROI) for holding properties as rentals decreases, making homes less attractive to buy and hold investors.
The smart money stopped buying in early 2013; dumb money kept buying, and although cash sales are declining, many individuals are still buying investment properties.
Trustee Sale Purchase Activity
Purchases by institutional investors (LLCs or LPs) at the trustee sales (foreclosure sales) gained 0.8 percent for the month but are down 73.6 percent from a year ago.
The steady decline in LLC and LP trustee sale purchases is being driven by two factors; 1) the reduced number of trustee sales and 2) the reduction in return on investment (ROI) due to higher prices.
The trustee sale (foreclosure auction) market ceased to be a source of supply for hedge funds in mid-1012. These funds went from acquiring over half the total sales activity to just over 10%. Most hedge funds turned to the MLS, then in early 2013, they stopped buying entirely.
Market Sales Activity
Market sales by LLCs and LPs represented 6.0 percent of total sales in January 2014, up from 5.6 percent in December 2013 and up from 4.8 percent of total sales in July 2013. Despite this increase, total sales by institutional investors has been declining and we see no evidence that the major buyers over the last four years have begun to significantly reduce their accumulated inventory.
The decline in hedge fund purchases on the MLS is notable. Many mom-and-pop investors took their place, but sales volumes to investors declined overall. Unless owner-occupants get high-paying jobs and decide they want to pay near-peak prices, sales volumes will be lower in 2014, and the housing recovery will be in question.
Thank you for your patience
The rollout of the new site did not go smoothly, and there are still many bugs to work out. My first priority is to make the blog work properly to ensure you have the same experience you’ve come to expect from the OC Housing News. All the posts are accessible now, and the comments are working properly. In fact, I’ve improved the comments as nesting can now go 8 layers deep to keep the conversation going. As I work out the bugs over the next few weeks, I will point out many of the new features. For now, I thank you for your patience during the reconstruction.
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Purchase Applications Continue to Plummet
Mortgage applications fell 8.5% from a week prior continuing its downward trend for the week ended Feb. 21, the latest Mortgage Bankers Association report found.
As a whole, the refinance share of mortgage activity fell slightly to 58% of mortgage applications: the lowest level since September 2013.
Additionally, the refinance index fell 11% from the previous week, as the purchase index decreased 4% from one week earlier.
“Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it,” said Mike Fratantoni, MBA’s chief economist.
Meanwhile, the 30-year, fixed-rate mortgage with a conforming loan balance increased to 4.53% from 4.50%.
The 30-year, FRM with a jumbo loan balance increased to 4.47% from 4.45%.
The 30-year, FRM backed by the FHA reached 4.17%, a growth from 4.16% a week prior.
Furthermore, the 15-year, FRM escalated from 3.55% to 3.56%, and the 5/1 ARM dropped to 3.17% from 3.20%.
Presidents Day
Eventually, this unexpected week-after-week decline must end. If the holiday was the culprit (the numbers were adjusted), then perhaps next week, purchase applications will break the streak of steady declines.
Is the Housing Recovery Over?
Many of the nation’s major metros reported slowdowns—and even retreats—in home prices last quarter, but those weren’t enough to keep 2013 from being the strongest year for house prices in nearly a decade.
S&P Dow Jones Indices released Tuesday its S&P/Case-Shiller Home Price Indices for December, showing national prices up 11.3 percent as of year-end, a slight pickup over the previous quarter’s annual improvement of 11.2 percent. The national index covers all nine U.S. census divisions.
While prices were strong in Q4 compared to the previous year, they were down relative to Q3, dropping 0.3 percent.
“The S&P/Case-Shiller Home Price Index ended its best year since 2005,” said David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “However, gains are slowing from month-to-month and the strongest part of the recovery in home values may be over.”
Blitzer also pointed out there are other factors to consider when looking at the big picture.
“Recent economic reports suggest a bleaker picture for housing,” he said, citing weak numbers in existing-home sales and new construction. “Some of the weakness reflects the cold weather in much of the country. However, higher home prices and mortgage rates are taking a toll on affordability.”
For just December, the smaller 10- and 20-city composites were little changed, with only the 20-city index showing a minor decline.
More Local Markets Experiencing Full Bubble Reflation
Homes.com has released its December Local Market Index, a price performance summary of repeat sales of U.S. properties. The index notes year-over-year gains for single-family properties in all 300 top U.S markets for the ninth consecutive month.
The total markets that are considered “fully reflated” have increased to 89, up from the previous month’s 87.
Mid-size markets saw a large improvement in recovery efforts; 60 of the top 200 mid-size markets have fully recovered previous losses in home prices.
The index considers a market bubble to be “fully reflated” based on the market’s current index value to its corresponding value in the year 2000. “An index value above 100 indicates sales prices above the normalized level while an index value below 100 indicates sales prices below the normalized level,” the company’s website notes.
The South dominated the top 100 rebounding markets with 15 energy-based economies in Texas and Oklahoma.
“Despite the holiday season and the early winter storms in most of the nation, the number of top 100 markets to reach or surpass their peak prices at the height of the housing bubble in 2007 increased to 29 markets, according to December’s data,” said Brock MacLean, EVP of Homes.com. “With the largest year-over-year housing market price increases in seven years, the U.S. housing market is in a great position to continue making steady gains in 2014.”
The Homes.com index is significantly more optimistic than other reports, specifically the S&P/Case-Shiller Home Price Indices for December, which is cautious to project continued growth in 2014.
The best 19 Ben Bernanke memoir titles
Former Federal Reserve Chairman Ben Bernanke is, inevitably, writing a memoir, and he confirmed as much Tuesday.
It’s certain to be a best-seller based on the presumed huge volume of copies that banks like JPMorgan Chase will be buying. As, you know, a thank you to Bernanke.
Quantitative Teasing? Money for Nothing, and BPS for Free?
I Was Told There Would Be No Math.
Why It’s Different This Time – The Sequel
What to Expect When You’re Correcting
Bubblious Ben’s Awesome 4 trillion $ Ponzi Printing Adventure
A Farewell to ARMs
Drink yourself sober.
The Prints and the Paupers
Bubble Boy
Money for Nothing and Your Checks for Free
The Superhighway to Serfdom
Bernanke’s Operational Handbook In Currency Adjustment (BOHICA)
The Curious Case of Benjamin’s Printing Button
The World According to TARP
I ♥ Gutenberg
To Kill a Currency
Quantitative Pleasing
Unindicted Co-conspirator
The Cashier in the Rye
Read ’em and weep:
From the article above: “January 2014, cash sales fell 11.1 percent from December 2013 and are down 21.2 percent in the past 12 months.
Sales are crashing and the housing recovery is on an MBS-dripfeed that should weaken every month the Fed cuts back on QE.
Most of the folks on this blog anticipated the sales crash, we just disagreed on its effect on prices. I thought prices would go lower (5%) when the speculators began to pull out, but now I’m not sure. This could be bigger than I figured. As far as sales, we’re just about back to trend now, but I’m not sure that means what it used to given 1–Flat wages 2–high unemployment 3–student loans 4– firststime homebuyer drought and 5–dwindling interest in buying a house.
I expect Yellen to stop cutting back on MBS pronto, but that won’t stop the bleeding.
This will be the most interesting and unpredictable spring on record.
One thing is certain: public confidence in the “recovery” is zilch!
“One thing is certain: public confidence in the “recovery” is zilch!”
I’s surprised and encouraged by this. I thought kool-aid intoxication would erase the collective memory of all the people who got burned, but apparently, they do remember, and people are not acting with excitement to rising prices. That’s a good thing because the euphoria and resulting frenzy made people behave stupidly and led them to their own destruction. Maybe, just maybe, it will be different this time — in a good way.
“…1–Flat wages 2–high unemployment 3–student loans 4– firststime homebuyer drought and 5–dwindling interest in buying a house…”
I would like to see more analysis related to how the housing market, specifically highly-desired areas, is affected by wages growing well for the top ~20% of earners (even though they’re stagnant for the majority). I understand housing is a move-up market, that requires strength at the low-end to support the middle, to then support the higher-end.
It just seems like statistically, the buyers you’re competing against in Irvine, have done well over the last decade plus. As Irvine prices remain high, and surrounding areas slowly go lower, maybe that pushes some Irvine buyers out…
To support today’s prices, particularly in move-up markets like Irvine, the borrower needs both a good income to get a large loan and plenty of equity. It’s the equity part that’s often missing. With inventory low, prices can be artificially boosted, but without sufficient equity, sales volumes will have to remain low.
This is an interesting point, the detachment of the “incomes” (let’s use this term loosely) of the so-called 1% (even more loosely) from the rest, and the impact of that on the markets in which they play (In SoCal, where does this market start? 1M? 3M?)
The question is “does this detachment mean that the relevant sub-markets can continue to experience appreciation even as the rest flat-line or worse?”.
I suspect that as long as things look rosy for their kind – and despite all the talk about inequality, I struggle to imagine plutocrat cheerleader Obama taking any real measures to curb it – then this can go on. These are the people who actually have real rising “incomes”. When you add “financial repression” (a hilarious term, IMO) into the mix, plus the perception that it is into these same sub-segments which the 3rd world entrepreneur / kleptocrat / flight money will flow, its easy to imagine that these markets detach the way that central London has from the rest of the UK.
For extra credit, what impact does this have on “adjacent” markets? IOW, if some can no longer afford 90212 because prices go stratospheric, does this substantially impact 90213, or do the “would-be-if-they-could-be” types simply f*** off somewhere else?
Maybe I’m weird, but even if I liked 90210(yuk, IMO), I don’t think I would put any premium at all on 90213.
In defense of Obama’s “soft” approach to the plutocrats, he has managed to raise “income” taxes significantly. e.g. Imagine your Romney, earning millions every year from investment income and paying just a 15% effective tax rate due to the 15% long-term cap gains rate. Then, Obama comes along and raises that rate to 20% if your income falls into the top bracket (~$400k+), and adds a 3.8% Net Investment Income tax on top of that to help pay for the ACA. Romney’s effective tax rate for 2014 will increase nearly 60%! He’ll go from paying 15% to nearly 24%!
It’s still not fair that Romney will be paying an effective rate on his millions in “income” less than what two married professionals each making $150k+ will pay, but it’s a start…
“For extra credit, what impact does this have on “adjacent” markets? IOW, if some can no longer afford 90212 because prices go stratospheric, does this substantially impact 90213, or do the “would-be-if-they-could-be” types simply f*** off somewhere else?”
This is the really important question. Assuming the 1% do continue to drive up prices in the neighborhoods they covet, there must still be a shoulder, a transition to somewhat less desirable areas. Perhaps this gradient gets pretty steep (look at the properties around Hancock Park), but the concentration of wealth has to impact closely comparable markets. Of course, everyone thinks they live in a closely comparable market, and it’s difficult to tell where these begin and end.
Even during the worst of the crisis, I predicted subprime would be back. Nobody… and I mean nobody… believe it during 2008-2010. All of the permabears on Lansner’s blog thought “this time will be different” due to the severity of the crisis. It’s not.
http://www.housingwire.com/blogs/1-rewired/post/29101-now-accepting-applications-a-new-word-for-subprime
This is also in line with my summer prediction that standards would be loosened in response to rising rates as a way to recapture business. It seems that 2014 won’t be the year of the short sale, but rather the year of the subprime mortgage.
Subprime lending was bound to return, but I doubt it will be anything like the housing bubble. The definition of prime has gotten so much tighter that the definition of subprime has broadened. Loosening of lending standards to capture business is an inevitable part of the credit cycle. The big question is how far will this go, and will the new regulations prevent this credit expansion from inflating a whole new bubble?
“Subprime” during the bubble’s growth meant, “Regardless of your credit, capacity, or the collateral, we can get you into a mortgage.”
“Subprime” today means, “So long as you have the capacity (real provable income to make the real payment), and the collateral can be reasonably valued, then your credit can be pretty bad.”
I think the definition shifts incrementally over time. The most basic definition of subprime is lending to a lower credit score than prime, but due to the way the crisis was reported on, people started associating all lending excesses with subprime, even though risky loans were also heavily marketed to prime borrowers. For example, option ARM’s were a prime product. I blame it on the fact that subprime loans were the first to go bad, so they got the lion’s share of the blame, but really it was a crisis across the entire credit spectrum. The term “subprime” became a catch-all that sounded good in headlines and on NPR.
That’s the truth. I can’t forget how when we bought in 2007, the loan originator couldn’t understand why we wanted to use two 30-year fixed piggy-back mortgages, when the payment would be two-thirds lower if we went with the option-ARM.