Anyone who watches the market carefully knows that lenders are withholding supply to cause prices to bottom. This is in the best interest of the members of the banking cartel. It’s surprising to me they managed to pull it off. Cartels are inherently unstable, most often because each member has a strong incentive to cheat by increase supply to take advantage of the improved pricing. In my opinion, that is what will likely cause the engineered spring rally of 2012 to fail.
Calculated Risk famously described the problem facing homebuilders in the wake of the housing collapse in his analysis of the “distressing gap.”
Following the housing bubble and bust, the “distressing gap” appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders haven’t been able to compete with the low prices of all the foreclosed properties.
Homebuilders are not part of the lending cartel. They are in business to provide a supply of homes to offset any shortage. In fact, the introduction of competing suppliers is one of the historic causes of the breakup of cartels. 
As lenders continue to withhold product from the market, builders sales should surge thus mitigating the cartel effect.
Since builders generally obtain a premium for new product, their supply will not drive prices lower like REOs do. However, since only the first-time homebuyer market is active, due to a lack of move-up equity, neither homebuilders or lenders will see robust sales volumes. In markets like Las Vegas where even the move-up product is prices at first-time homebuyer levels, sales volumes will remain near peak levels. However, in markets like Orange County which haven’t fully deflated, sales volumes will remain 20% or more below historic norms to reflect the absence of a move-up market.
Lack of Distressed Supply Pushes Home Sales Lower
Published: Thursday, 19 Apr 2012 | 10:46 AM ET
Sales of existing homes continue to drop, and while tough credit and weak consumer confidence are certainly factors, lack of supply appears to be the latest culprit.
Inventories of existing homes historically rise in the spring, as sellers look to take advantage of the busy season; not so this spring.
Inventories fell 1.3 percent to 2.37 million units for sale. That’s down nearly 22 percent from a year ago. Inventory is dropping because the number of distressed properties for sale is dropping.
If the decline in distressed sales were due to a lack of distressed homeowners, I would be celebrating the bottom of the housing bust. However, 5,591,000 mortgages are still delinquent! The reduction is supply is completely artificial. It’s being caused by collusion among the major banks to stop taking on REO and putting them on the MLS.
The data speak volumes: Distressed sales fell to 29 percent of all sales in March, down from 34 percent the previous month. The investor share of sales also fell from 23 percent to 21 percent. That pushed overall home sales down, but most notably out West, where most of the distressed supply exists.
Sales fell 7.4 percent month to month out West in March, as supplies of existing homes fell to 3.1 months from 4.7 months a year ago, according to internal tracking by the National Association of Realtors. That is the lowest supply of any region by far, and half the national average. Compare it to an 11.6 month supply in the Northeast, where there are far fewer foreclosures.
Lenders have obviously identified the Southwest as their primary targets for reducing REO inventories. California, Nevada, and Arizona all have fewer REO for sale, and investors are competing for the low-end properties. Anecdotally, I will tell you I have bid all-cash over asking prices on many REO in Las Vegas and been outbid by other investors. 
I can also tell you that most cashflow investors will not chase the market higher. We are buying for a return, and overpaying negates the reason we are buying. Expect to see small investor participation fall off if supply does not return to the market.
Supply is tight because banks, after the 25 billion dollar mortgage settlement over so-called “robo-signing” have slowed much of the foreclosure process, trying to modify more loans or find foreclosure alternatives. We predicted this earlier.
The real reason they are doing this is to restrict supply until prices stop going down.
Less supply usually means rising prices, if you go by the usual supply/demand theory. The trouble is, supply isn’t dropping because of so much demand, it’s dropping because of the distressed market.
This is a key point. I might also be more excited about the prospects of a real estate price bottom if demand were higher. It isn’t. Demand is fractionally higher than last year but still dismal by historic standards.
Normal sellers still aren’t putting their homes on the market for fear of deep price cuts, or because they are so underwater they can’t afford it. More than 11 million borrowers currently owe more on their mortgages than their homes are currently worth.
On the demand side, credit is still very tight and fees for FHA loans, which had really been fueling much of the market, rose April 1st. We saw a huge drop in mortgage applications last week, driven by a 23 percent drop in FHA applications.
“This drop follows big increases in the demand for FHA loans over several weeks in anticipation of the FHA mortgage insurance premium increases that went into effect last week,” wrote Mortgage Bankers Association chief economist Jay Brinkmann in a release. “This was the largest weekly drop in the government purchase index since the expiration of the first-time homebuyer tax credit in May 2010.“
I don’t think the increase in FHA insurance premiums will have the devastating effect of the expiration of the tax credit, but some demand was obviously pulled forward, and the increased cost of borrowing going forward will dampen the weak demand further.
Without a strong recovery in the job market, which does not appear to be the case, and a big loosening in credit, which also does not appear to be the case, regular demand for home purchases will remain soft.
The potential demand among investors is strong and growing, but they need supply to buy, and they’re just not finding enough.
Even if private equity investment funds start buying large numbers of homes (they will), this will not fill the demand gap left behind by owner-occupants who don’t qualify for mortgage financing. I had an interesting conversation with a prominent homebuilder a few days ago. He relayed to me the latest phenomenon in new home sales is timing the closing to be three years and one day after the borrower’s bankruptcy. Apparently, that’s when the restrictions on getting loans runs out. Perhaps this will be the next group realtors point to for pent-up demand.
Homebuilders will be the beneficiaries of the banks policy of withholding inventory. They will also be the beneficiaries of the working of private equity funds buying REO and holding them off the market as rentals. The less competing resales on the market, the better homebuilders will do. It’s still a risky time for homebuilders. What happens if lenders change their minds again?
If any of you are thinking about buying new construction, check out our new program offering up to a 1.5% rebate on a new home purchase.
Another Orange County Ponzi
The only thing extraordinary about the former owners of today’s featured property is how ordinary they were. I think after about a thousand HELOC abuse profiles over the least five years, I have established that prolific mortgage equity withdrawal was the norm rather than the exception in Orange County. These owners bought a median priced house, likely earned a median income, and Ponzied their way to oblivion just like everyone else did.
- This house was purchased on 7/26/2002 for $377,000. The owners used a $300,000 first mortgage and a $77,000 down payment.
- On 5/12/2003 they refinanced with a $302,000 first mortgage.
- On 9/15/2004 they obtained a $165,000 HELOC.
- On 11/5/2004 they refinanced with a $470,000 Option ARM with a 3.2% teaser rate.
- On 10/26/2005 they opened a $133,600 HELOC.
- They were given their first notice in December of 2010, and the house was called to auction on 10/12/2011.
These borrowers got somewhere between $177,000 and $300,000 in HELOC booty depending on how much of the final HELOC they used. A fairly ordinary borrower who managed to spend an extraordinary amount of free money.
Brea Overview
Median home price is $399,000. Based on a rental parity value of $529,000, this market is under valued.
Monthly payment affordability has been worsening over the last 2 month(s). Momentum suggests worsening affordability.
Resale prices on a $/SF basis increased to $233/SF to $251/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $66 last month from $2,166 to $2,233.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 8
Proprietary OC Housing News home purchase analysis 
3609 WOODPECKER St Brea, CA 92823
$449,900 …….. Asking Price
$377,000 ………. Purchase Price
7/26/2002 ………. Purchase Date
$72,900 ………. Gross Gain (Loss)
($30,160) ………… Commissions and Costs at 8%
============================================
$42,740 ………. Net Gain (Loss)
============================================
19.3% ………. Gross Percent Change
11.3% ………. Net Percent Change
1.8% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$449,900 …….. Asking Price
$15,747 ………… 3.5% Down FHA Financing
3.88% …………. Mortgage Interest Rate
30 ……………… Number of Years
$434,154 …….. Mortgage
$120,558 ………. Income Requirement
$2,043 ………… Monthly Mortgage Payment
$390 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$112 ………… Homeowners Insurance at 0.3%
$452 ………… Private Mortgage Insurance
$117 ………… Homeowners Association Fees
============================================
$3,114 ………. Monthly Cash Outlays
($314) ………. Tax Savings
($639) ………. Equity Hidden in Payment
$21 ………….. Lost Income to Down Payment
$76 ………….. Maintenance and Replacement Reserves
============================================
$2,259 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,999 ………… Furnishing and Move In at 1% + $1,500
$5,999 ………… Closing Costs at 1% + $1,500
$4,342 ………… Interest Points
$15,747 ………… Down Payment
============================================
$32,086 ………. Total Cash Costs
$34,600 ………. Emergency Cash Reserves
============================================
$66,686 ………. Total Savings Needed
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599……
sales@ochousingnews.com…..
We're sorry, but we couldn't find MLS # S695013 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$450,000 474 HUMMINGBIRD Dr |
0.04 miles 3 bd / 2.25 ba 1,400 Sq. Ft. |
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$428,000 3629 MOCKINGBIRD Ln |
0.12 miles 2 bd / 2 ba 1,333 Sq. Ft. |
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$470,000 2015 ARBOR Cir |
1.58 miles 3 bd / 2.5 ba 1,932 Sq. Ft. |
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$493,000 2213 MCCORMACK Ln |
1.67 miles 4 bd / 2 ba 1,700 Sq. Ft. |
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$520,000 169 WATERFALL Ln |
1.69 miles 5 bd / 3 ba 1,913 Sq. Ft. |
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$468,000 17341 CHICAGO Ave |
1.75 miles 3 bd / 2.5 ba 1,700 Sq. Ft. |
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$449,000 2113 TRAYNOR Ave |
1.83 miles 4 bd / 2 ba 1,902 Sq. Ft. |
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$479,900 455 DOVER Cir |
1.87 miles 3 bd / 1.75 ba 1,412 Sq. Ft. |
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$549,900 563 CRAFTSMAN Cir |
1.95 miles 4 bd / 3 ba 1,890 Sq. Ft. |
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$475,000 1936 WHITMAN Dr |
1.99 miles 4 bd / 2.25 ba 1,976 Sq. Ft. |
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39 Responses to “As lenders withhold product, the homebuilders will flourish”
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Reality is, the last ‘nail in the RRE coffin’ will be pounded-in when interest rates rise and nearly everyone is holding 4% paper.
Depends on which side of your balance sheet that 4% paper lies, no?
uh… the paper traditionally lies on the right side, no?
Paging all prospective buyers.. …especially those in the bubble counties currently being carted around daily by realtor ‘cabbies’ …..
More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth.
http://www.reuters.com/article/2012/04/26/us-usa-housing-negative-idUSBRE83P12E20120426
Since prices have been falling, I suspect their estimate is low. Further, since most of these new buyers used FHA financing with only 3.5% down, those effectively underwater (unable to sell and pay a broker’s commission) includes nearly everyone who bought using financing in the last two years.
I would agree with them being underwater, the question is by how much and are they willing to hold on for 5+ years when things should have a chance to come back to some sense of normalcy.
The people Shevy has worked with over the last few years will hold on, mostly because we warned them what would happen. Many of those who bought over the last two years because realtors were calling the bottom are likely pissed off and may strategically default. Setting the right expectations with buyers is critical to their being happy in their circumstances.
I think I’m going to use that article next week.
As the banks cannot control short sales being listed. I wonder what is going to happen to supply once loan owners realise they only have until december to sell without any tax liability.
“As the banks cannot control short sales being listed.”
They may not be able to control the listings, but they have total control over the eventual sale. I would expect to see many more short sale listings this year for the reason you describe. I further expect to hear many complaints this fall as banks fail to approve short sales before the cutoff date.
I have very little doubt that the govt will extend that tax liability law. Remember, govt is in the business of extend and pretend.
The problem is the law works against what the goverment and banks want. It allows loan owners to sell when the banks want them to stay where they are and pay their mortgage.
Both the banks and the government want loan owners to stay and pay, but ultimately if the loan owner wants out, they can simply strategically default. The more banks and the government work to keep debtors in place, the more strategic default will increase.
I’m with Lee on this one. The government will likely extend the deadline. I think they will change the deadline to encompass any loan owner who began the short sale process prior to the deadline. This will help fend off the complaints about lenders slow-playing the short sale process and stopping people from obtaining the debt relief. These complaints will start before the election, so I would expect some clarification on this point this summer.
I can only imagine what would happen to all this shadow housing inventory if the law was allowed to sunset.
But would they default if there was a huge tax bill on the end of it.
“But would they default if there was a huge tax bill on the end of it.”
I think voluntary defaults would decline and I think there would be a rush of short sale listings in the Fall and Winter.
If this law were allowed to sunset, it would for the first time since 2008, place upside-down home debtors in the position of having to make a difficult choice. I think the govt should allow the law to sunset, however, I think they’ll extend it.
If the lender cannot seek recourse beyond the sale of the property (purchase mortgage or non-judicial foreclosure in CA), then there is no discharged debt taxable as income issue.
Are you sure that is true? Just because a lender cannot seek to get their money back doesn’t mean debt was not forgiven. I thought those with non-recourse loans still had to pay tax on any forgiven debt prior to the change. Did the law which is due to expire make the forgiveness of non-recourse debt permanently exempt?
I’m certain this is the case in CA for purchase mortgages used for principal residences. I’ve read that the IRS rule below also applies in CA in the context of a lender choosing non-judicial foreclosure, as they do not have the legal right after foreclosure to sue on any deficiency.
Remember, that any non-purchase second lien not involved in the foreclosure retains their right to sue (“one action”) on the debt, and therefore any discharged debt would be taxable as income.
“Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
…
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.”
http://www.irs.gov/individuals/article/0,,id=179414,00.html
Thanks for the clarification.
It makes logical sense – the lender isn’t “forgiving” any debt if it as no legal right to collect that debt from you. So even if a lender sends a 1099 to the IRS after a CA non-judicial foreclosure on a recourse loan (refi), I would argue no debt was forgiven.
Now, if the lender chose a judicial foreclosure in CA, received a deficiency judgement on a recourse loan, wrote-off the debt as noncollectable, and then sends a 1099 to the IRS, that should be discharged debt subject to income taxation.
“Paging all prospective buyers.. …especially those in the bubble counties currently being carted around daily by realtor ‘cabbies’ …..
More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth.”
My brother bought a townhouse in Vegas a few years ago for $100,000. It was a “steal” at the time. Now other houses in the same neighborhood are up for sale for $75,000-$80,000.
The strange part about Las Vegas is that your brother was right. The property he bought for $100,000 probably was a “steal.” It’s undoubtedly cashflow positive, and he likely paid a price last seen in the 1990s. What he didn’t count on was the downward price momentum driving prices even lower. Eventually, enough cashflow investors will be active in the market to absorb the lender supply, and prices will reverse. You will see that happen this spring out there, but the rally will be short lived.
IR – are you having any issues with finding stable renters?
It seems like there would be a good deal of downward pressure on rent. Maybe the properties are so dirt cheap it doesn’t matter.
Sec.8 renters bring high market rates to depressed neighborhoods. But, but, but …thats TAX dollars! [exactly]
I had one property this winter that was tough to rent, but demand has picked up now. Both resale and rental demand are strong in Las Vegas right now, particularly resale. I think the local economy is improving.
CAr is completely self-serving. They are so desperate to preserve their commissions, they are actually sponsoring a bill in the California legislature to keep them.
C.A.R. Sponsoring Bill Preventing Foreclosures with Approved Short Sales
The California Association of Realtors (C.A.R.) announced its sponsoring a bill that will prevent California homeowners from going into foreclosure if they have negotiated a short sale with their lender or servicer.
Assembly Bill 1745 (Torres, D-Pomona) prevents lenders or servicers from recording a notice of sale if a short sale has been approved.
The bill is scheduled for hearing on April 30 by the Assembly Banking and Finance Committee.
The bill would also allow the mortgagee, trustee, beneficiary, or authorized agent to withdraw a short sale approval if a condition in which approval was granted has changed. The bill would require a written notice to the seller no less than 3 days before withdrawing approval, with an explanation of the decision change.
California Attorney General Kamala D. Harris recently introduced her Homeowner Bill of Rights, one of which had a similar provision that prevents dual tracking, or the practice in which a lender proceeds with a foreclosure on a homeowner who is also trying to pursue a loan modification.
Legislators delayed voting on the bill last week before Harris was scheduled to testify. ABC News 10 reported that the California Bankers Association opposed the ban on dual tracking stating it only delays the inevitable.
CAr is short sighted as well. What this bill would do, if passed, would be to make lenders hesitant to approve short sales. It will have the opposite effect of what CAr intends. They are so stupid it boggles the mind.
“They are so stupid it boggles the mind.”
Hah, made my yogurt go in the wrong pipe.
“Cartels are inherently unstable, most often because each member has a strong incentive to cheat by increase supply to take advantage of the improved pricing.”
This is a great point. In particular smaller/more independent players tend to have the most to gain from “cheating”. I wonder if there is any evidence that smaller/more independent banks are more aggressive in dumping stock vs the large TBTF banks…
I’ll see if I can find some data on that. I suspect you will be proven correct and the smaller banks are putting out more REO relative to their number of bad loans, provided they have the financial stability to absorb the write downs.
IR, how do you think what Adam Bailey talked about the reason of less foreclosure in those days: ” because it’s election year”.
http://finance.yahoo.com/video/marketnews-19148628/will-less-foreclosures-help-the-housing-market-28824858.html
I’m always suspicious of political conspiracy theories. Most often they are either figments of someone’s imagination or a load of spin from the opposite political party.
That being said, a reduction in foreclosures and an improving economy will certainly help Obama’s reelection chances. In fact, if the economy is improving and the housing market is said to have bottomed, I think Obama wins easily.
I doubt Obama has the clout to go to the banks and demand they withhold foreclosures to ensure his reelection. The banks are withholding inventory for their own reasons.
IR: just noticing post ‘reply’ #’s keep going up. Well done, and congrats!
At some point, it would be great to see some of our esteemed local realtors chime-in to share their perspective on things. Seriously.
I always encourage Shevy to participate, but he is so busy, he rarely has the time.
It would be nice to have some thoughtful realtors who aren’t just trying to puff the market. They are hard to find. I have been so critical of realtors that few chose to comment here, although many of them read it periodically.
“IR: just noticing post ‘reply’ #’s keep going up. Well done, and congrats! ”
Thanks. I like running a blog with an active community. It keeps me on my toes, and I get good information from the feedback in the comments.
Cartels are unstable, but they can be strengthen by govt actions calling the agreements “regulations”. During the Great Depression, selling below the established rates were punishable by fines and imprisionment. The cartels or trade associations and commerce dept were sucessful in limiting the supply, holding the prices high, keeping the unemployed unemployed and weak, keeping their supporters happy. FDR was smart to sell to the Europeans food and war goods. Our current and past administrations, gives it way and the taxpayers foot the bill in dollars and lives. Those regulations later fell apart in the 1970′s to 80′s.
“… the latest phenomenon in new home sales is timing the closing to be three years and one day after the borrower’s bankruptcy. Apparently, that’s when the restrictions on getting loans runs out…”
It looks like this is the case for Fannie loans. If you can identify “extenuated circumstances,” then your wait period after foreclosure is just three years:
“Exceptions for Extenuating Circumstances – Foreclosure
3-year time period from completion date
Additional requirements that apply after 3 years up to 7 years following completion date:
The same additional requirements apply as above except the minimum credit score of 680 is not required.”
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf
Unless your default was truly strategic, you’ll qualify under extenuating circumstances:
“Extenuating Circumstances
Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).
The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.”
That has to be how people are doing it. I was told this is becoming a significant portion of builder sales, particularly in Riverside County.
Thanks for looking into that for us and posting the relevant information.