Dec162011
Lower conforming limit causes 84% decline in loan volume
In Los Angeles and Orange Counties, the conforming loan limit dropped from $729,750 to $625,000 on October 1, 2011. Many market bulls claimed this would have no effect on sales. In November sales of houses with loans between $625,000 and $729,750 declined 84% as compared to last November. So much for having no impact.
In other news, the falling prices are beginning to motivate some buyers as evidenced by the small increase in sales volume. Falling prices and increasing sales are prerequisite to forming a durable market bottom.
SoCal home sales rise on declining prices
The number of homes sold in Southern California rose modestly last month from both October and a year earlier as investors and first-time buyers targeted homes priced below $400,000.
Prices, however, slipped in most areas, except in San Bernardino, Calif., where the median price rose 2.3% and nearby Riverside, where prices remained stable, according to San Diego real estate information firm DataQuick.
How do prices slip? It makes it all sound very minor, doesn’t it. Prices have been dropping ever since the tax credit expired at rates similar to the worst of the crash in 2008.
A total of 16,884 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in November, up 0.3% from October and up 4.2% from November 2010.
More often than not, sales have dropped between October and November and have fallen, on average, 8.4% between those two months since 1988, when DataQuick’s statistics begin. Still, last month’s sales were 22.7% lower than the November average of 21,832 transactions since the record-keeping began.
A small uptick is a start, but obviously, the market has a long way to go. The lack of a move-up market is paralyzing sales and forcing above-median home sellers to lower their prices to make a deal. Expect this trend to continue for at least a few more years.
November existing-home/condo sales rose 5.8% from a year earlier, while new home sales fell 15.2% to the lowest level on record for a November.
So much for a recovery in homebuilding.
“Tis still the season to go bargain hunting — or at least that’s what the November home sales data suggest. The portion of homes sold to investors continued to hover near an all-time high,” said John Walsh, DataQuick president.
Distressed property sales accounted for 51.3% of the Southland resale market last month, down from 52.3% in October and down from 53.4% a year earlier.
Short sales, where the sale price fell short of what was owed on the property, made up just shy of 20% of Southland resales in November.
With distressed sales making up 50% of the market, don’t expect appreciation any time soon.
Lower conforming loan limits that took effect Oct. 1 continued to impact the housing market. Lawmakers recently restored the higher limits, which vary by county, for FHA loans but not for mortgages guaranteed by Fannie Mae and Freddie Mac.
In Los Angeles and Orange counties, where the conforming loan limit was lowered from $729,750 to $625,500, the number of homes sold with purchase loans in that range totaled 58 in November, down 44.2% from October and down 84.1% from a year earlier.
The chart below (click to expand) shows homes sales and median prices changes in the Southern California markets tracked by DataQuick.
Write toKerry Curry.
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Back in August when the lowering of the conforming limit was all but certain, Jaysen Gillespie a the Global Decision Analytics blog took a look at its impact: New lower conforming loan limit impact on Irvine, CA.
The above chart shows the distribution of home prices for all sales under $2M in Irvine, CA from 1/1/2010 through 7/31/2011. Irvine, CA is an expensive sub-market of an expensive region (Southern California). As a result, it is likely to feel any impact from lower conforming home limits more than most other places.
With that in mind, we’ve identified two potential price ranges that could be most impacted by the new limits. The green band represents homes that have selling prices where a 3.5% down payment represents a loan between the old limit ($729,000) and the new limit ($625,000). These properties represent 13.0% of all home sales in Irvine, CA. For the taxpayer’s sake, let’s hope that not many of the buyers in this price range are using only a 3.5% down payment. Those buyers are likely to be underwater soon as we predict continued downward drift in higher end home values in Southern California. These buyers represent one end of the spectrum.
On another point (but not the end, which would be “all cash” buyers) of the spectrum, we have buyers who put down 20%. At current Irvine, CA valuations, this is a substantial down-payment of around $170,000. For this level of royalty, we’ve used a purple band in the chart above. Using a 20% downpayment, 8.4% of sales in Irvine, CA would be impacted by the gap between the old and new conforming loan limits.
These are estimates — buyers in the green and purple bands have a few options. In order of long-term common sense for the buyer they are:
1. Pay less. Leverage seller fear that the loan limits really will reduce demand and correspondingly demand a lower price.
2. (tie) Put more down. Buy down the loan amount so that it becomes conforming.
2. (tie) Delay the purchase. The price-lowering impact from this change will be slight, but will occur over time. With an ongoing slow economy and prices above rental parity, there are no upward drivers for Irvine, CA home values.
3. Use “creative” financing. Pay the asking price but increase your monthly carrying cost for the term of the debt obligation.
As Jaysen noted, 20% of the Irvine market is impacted by the lowered limits, and that band just experienced an 84% decline in loan origination. No wonder prices are falling in the $700,000 to $900,000 price range.
A story I will cover next week.
Scheduled foreclosure auctions soar in California
Banks set the clock for forced sales of more than 26,000 homes in the state in November, a 63% increase from October. Overall foreclosure notices nationwide fell last month.
By Alejandro Lazo, Los Angeles Times
December 15, 2011
Banks in November scheduled more than 26,000 homes to be sold at California foreclosure auctions, a 63% increase from October and a sign that a surge in discounted, bank-owned properties is on track to hit the market next year.
The uptick in scheduled auctions follows an increase last summer in homes entering the foreclosure process by receiving default notices and was largely driven by Bank of America. It appears that many of those homes are now quickly working their way through the process, said Daren Blomquist, a spokesman for RealtyTrac of Irvine, a data tracker that published the November data.
The increase played out nationally, hitting a nine-month high, even as overall foreclosure notices declined last month. Among the states, California had the biggest month-over-month increase in scheduled auctions, followed by Washington, 56%; Ohio, 53%; New Jersey, 44%; and New York, 38%.
“November’s numbers suggest a new set of incoming foreclosure waves, many of which may roll into the market as [foreclosures] or short sales sometime early next year,” said James Saccacio, co-founder and chief executive of RealtyTrac.
Nationally, overall foreclosure filings on U.S. properties — default notices, scheduled auctions and bank repossessions — totaled 224,394 in November, down 3% from October and off 14% from November 2010. About 1 in 579 homes received a foreclosure filing last month, by RealtyTrac’s tally.
Celia Chen, a housing economist with Moody’s Analytics, said she expected the number of foreclosures on banks’ books to rise next year and for the number of discounted foreclosures on the market to remain elevated. That will continue to put pressure on home prices.
“The pace of sales will remain very slow, so the share of distressed sales is going to rise most likely through the middle of next year, and this will cause home prices to fall,” Chen said. “Job growth is still weak, and then it is still a bit difficult to get those low rates. Lenders, in general, are still being pretty careful about who they write a mortgage for.”
The West’s Foreclosure Belt continued to be the hardest hit region in the nation. Nevada posted the highest foreclosure rate in the nation for the 59th month in a row, despite a decline in foreclosure activity because of a new law cracking down on those doing the foreclosing. California had the second-highest rate and Arizona the third in November.
California cities accounted for nine of the 10 metro areas with the highest foreclosure rates. Las Vegas was the only city outside of California in the top 10, coming in at No. 6. Stockton posted the nation’s highest foreclosure rate for the second month in a row, followed by Modesto and Fresno.
In California, total foreclosure activity was up 15% from October and up 11% from November 2010. The number of homes entering foreclosure continued at an elevated level last month, down just 1% from October and up 12% from November 2010. Notices of trustee sales, or scheduled auctions, jumped 63% month over month and 14% over November 2010. Bank repossessions declined 15% from the previous month and were up 1% from the same month last year.
The uptick in California filings was driven by the auction notices. When such a notice is filed at a county recorder’s office, a home can be sold within 21 days.
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Freddie Mac: 30-year mortgage rate ties record low
December 15, 2011 | 7:58 am
The average interest rate on a 30-year fixed-rate mortgage dropped again this week to 3.94%, tying a record low set in October, according to housing finance giant Freddie Mac.
Freddie Mac’s weekly survey pegged the rate for a 15-year fixed-rate mortgage at a record low of 3.21%. Loans fixed for five years before becoming adjustable also set a new record, with an average start rate of 2.86%
The survey, released each Thursday, asks lenders to report rates they are offering to well-qualified borrowers who pay about 0.75 of a percentage point in upfront lender fees and discount points. The rates are for loans of up to $417,000.
Freddie has conducted the survey of 30-year loans since 1971, 15-year loans since 1991, and five-year adjustable hybrids since 2005.
The record lows have touched off the latest surge in home refinancing. But while sales of homes increased slightly in California last month, scheduled foreclosure sales have risen sharply and the environment for housing remains rough overall, as Freddie Mac’s chief economist, Frank Nothaft, pointed out in announcing the latest survey results.
“In its Dec. 13 monetary policy announcement, the Federal Reserve reiterated the housing market remains depressed,” Nothaft wrote. “Over the first nine months of 2012, households lost almost $400 billion in property values, which contributed to a $1.4 trillion reduction in overall net worth.
“In addition, serious delinquency rates (90 or more days delinquent plus foreclosures) on mortgages increased slightly between June 30 and Sept. 30 of the year, breaking a six-quarter consecutive decline, according to the Mortgage Bankers Association.”
I thought congress passed a bill to increase the conforming limits back up to $730K. Is this the case? Which limits are the banks lending on today? Limits should go back down to $417K so we don’t get all this government backed inflation we are seeing.
http://www.housingwire.com/2011/11/18/obama-signs-extension-for-higher-fha-loan-limits
Friday, November 18th, 2011, 10:21 am
President Obama signed into law a government spending bill Friday morning effectively reinstalling higher conforming loan limits for the Federal Housing Administration through the end of 2013.
The House passed the minibus spending bill 298-121 Thursday afternoon, and the Senate approved it 70-30 Thursday night.
Effective Friday, FHA can insure loans up to $729,750 from $625,500 in the most expensive neighborhoods. In 2008, Congress elevated the limits for the FHA, Fannie Mae and Freddie Mac, but expired Oct. 1.
The Senate approved an amendment to the bill earlier in the month that would have reinstalled the limits for Fannie and Freddie as well. But a joint appropriations committee cut the government-sponsored enterprises out, leaving the FHA in.
By signing the bill, the Obama administration back-tracked somewhat from a white paper put out in February. The paper put forth three options for the housing finance system, precluded by the expiration of the higher conforming loan limits in order to begin ushering private capital back to the market.
FHA Acting Commissioner Carole Galante warned senators Thursday that the government should be looking to shrink the FHA market share.
“We maintain that it is appropriate to take a step back on the loan limits,” Galante said.
Rep. John Campbell, R-Calif., made the case on the House floor Thursday to reinstall the limits for Fannie and Freddie as well, citing concerns that the housing market is not healthy enough to be taken off the government lifeline.
“Even now, private lenders remain incredibly risk-averse, hesitating to provide long-term, fixed-rate mortgages to the vast majority of the market,” Campbell said. “Until Congress decides how to move forward with broad reform to fix our broken housing finance system, we should not dismantle the few remaining support systems that are preventing the housing industry from collapsing further.”
Sen. Bob Corker, R-Tenn., shook his head Thursday, clearly frustrated at the decision his colleagues made.
“The white paper and a bill are two very different things,” Corker said. “I am absolutely so discouraged at Congress in lacking the courage to deal with this issue that we all know needs to be dealt with.”
They have only raised the limits for FHA loans, not Freddie or Fannie loans. It’s an attempt to prop up prices on the backs of first-time buyers. With super-low interest rates, many high wage earners will qualify for loans between $625,000 and $729,750. Those borrowers will have to go FHA and pay the astronomical FHA insurance to get those loans. You will likely see an increase in FHA loans in Irvine as a result of this change.
Got it. Thanks for the clarification. The problem with “other programs” is that there is always a cost associated with those programs. People should be taking the net present value of that annual cost and backing it out of the price…just like Mello-Roos/ADs, but they don’t.
I wonder if the government will ever get back out of supporting the upper tiers of the housing market. Taxpayers are supporting prices to benefit banks, and we are paying the additional costs.
I for one would have been very interested to see the Full Pricing History on this house, to judge whether the 2005 price was far too high or whether the current price looks good value (for this class of property).
And yes, the LaTimes article looks like the makings of a real story . . .
Apr 23, 1998 Sold (Public Records) $1,525,000
Its current list price is only $100,000 over its 1998 purchase price.
Thanks.
> where the conforming loan limit was lowered from $729,750 to $625,500, the number of homes sold with purchase loans in that range [is] down 84.1% from a year earlier.
There’s 2 significant things about this sales drop:
1) Any reader of IHB would have forecast that in advance, but others still don’t get it.
2) it indicates that US housing market prices are still driven by easy credit, period. California real-estate “market prices” are illusions with no base in reality.
Correct on both counts.
I remember the discussions several months ago when the bulls said private money would fill the void and interest rates on jumbo mortgages would come down to match the government-backed money. Obviously, that hasn’t happened, so the market falls off a cliff where the edge of government support lies.
Here’s what the WSJ said about private investors today:
“No wonder so many investors have run a mile. They are sitting on record amounts of cash, even though they are earning nearly nothing in interest. They are simply terrified of holding anything else.”
So don’t wait for the private investor cavalry to arrive.
http://online.wsj.com/article/SB10001424052970204026804577100350322300734.html
Even institutional investors are in full panic mode. European banks have already sold their sovereign debt holdings at a fire-sale loss. The only debt they will hold is German and local (guaranteed by their local government with the public as hostages, er, guarantors.
Very good article in wsj on Thatcherism:
What Would The Iron Lady Do?
http://online.wsj.com/article/SB10001424052970203518404577096341880141300.html
“My policies are based not on some economics theory, but on things I and millions like me were brought up with: an honest day’s work for an honest day’s pay; live within your means; put by a nest egg for a rainy day; pay your bills on time; support the police.” – Thatcher in 1981
“In wartime there was a slogan ‘It all depends on me.’ People seem to have forgotten that, and they think it all depends on the other person.”
“To me, consensus seems to be the process of abandoning all beliefs, principles, values and policies in search of something in which no one believes, but to which no one objects.” – Thatcher in 1981 (likely speaking about the EU experiment)
Can you imagine any modern politicians saying that?
I’ve had the misfortune of meeting Europeans. They actually believe that debate is the same as action, and agreement is the same as results.
Somebody did a count recently of Euro panic meetings, and counted 17 meetings, with no long-term solution in sight.
Those are some great quotes. I particularly liked this one:
“To me, consensus seems to be the process of abandoning all beliefs, principles, values and policies in search of something in which no one believes, but to which no one objects.”
Clinton looked for consensus without much principle, Bush followed principles, but they were all the wrong ones, Obama I haven’t figured out yet, but he does pander when he feel he needs to.
Ok, so there were 84% less loans valued between $625k-$730k than last year. But what effect did it have on selling of homes in the corresponding price range ($647k-$911k)? Less sales? Lower prices? Or just higher down payments?
It will have a combination of all three effects. Sales volumes are certainly lower. The few transactions that do occur require larger down payments. Over time, this will require sellers to lower their prices to make a deal.
that’s what I would expect, but I still hear naysayers saying it will have negligible effect. would be nice to see some data indicating otherwise.
so are these the same limits that were just raised back up making this already a thing of the past?
[…] make it easier to someday dismantle them; however, the last time the conforming limit was dropped, Irvine, CA witnessed an 84% decline in sales volume in the price range no longer financeable with GSE loans. But this must be done because as long as […]