Economists and housing market observers pour over sales numbers each month to divine the direction of future house prices. Everyone has their pet theories on whether house prices have bottomed or if there is more pain ahead. Many rely on these numbers as gospel forgetting that these numbers are generated by the actions of people responding to the conditions around them. Change the conditions, and the numbers can change quickly.
For example, in February of 2012, lenders across the Southwest abruptly stopped processing their backlog of foreclosures, not because they exhausted the supply of delinquencies but because of internal policy changes brought about by the foreclosure settlement with state attorneys general around the country. The story of the housing bubble is really the story of unprecedented market manipulation by lenders, legislators, regulators and the federal reserve. Predicting how this all plays out is fraught with difficulty, not because the basic economics are hard to understand, but because there is no way to predict when one of the key players will change a policy, what that change will be, and how that change will effect the market. So far, even when the bulls have been right, they have been right for the wrong reasons. Unpredictable and unprecedented policy responses are what has stopped the deep correction in house prices from becoming a complete catastrophe for loanowners and lenders.
The bears were right
Back in 2005 and 2006, the bears predicted a collapse in housing prices. Toxic mortgage products proliferated driving prices up beyond all reasonable measures of value. Many ordinary citizens became real estate speculators, and housing bears postulated that these people would default resulting in a violent contraction of credit, millions of foreclosures, rising interest rates to compensate lenders for the risk, and a dramatic crash in prices as product was forced into a market with a greatly diminished buyer pool.
The story of the housing market since 2006 has been one of unprecedented manipulations of the market by lenders and regulators. First, in response to the weakening economy, the federal reserve lowered interest rates counter to what the market would have done if left to its own forces. When it became obvious that mortgage lending would soon implode and take the GSEs down, the government reneged on 60 years of promises and took the GSEs into conservatorship. Without the backing of the US taxpayer, mortgage interest rates would have skyrocketed, or mortgage lending would have stopped. Four years later, the government still insures over 95% of the loans in the mortgage market, and there are few signs of private lending returning. The jumbo loan market is still moribund and likely to stay that way.
By late 2008, prices were crashing hard in nearly every market in the country because lenders were doing what the bears said they would do; they foreclosed on those who defaulted and resold the properties. These foreclosures were concentrated in low-end neighborhoods dominated by subprime lending because those loans went bad first. Bears said it was only a matter of time before the alt-a and prime borrowers defaulted and those neighborhoods crashed too. And they would have if banks and bank regulators hadn’t changed the rules.
In response to the crash of prices in subprime neighborhoods, lenders slowed the rate at which they filed foreclosures and finally processed them. Shadow inventory was born. Prior to late 2008, lenders had not done this since the Great Depression. To allow lenders to sustain shadow inventory, government regulators suspended mark-to-market accounting rules which allowed lenders to keep loans on their books at full value rather than reflect what these loans were really worth. Further, regulators allowed lenders to sustain these fantasy values until they foreclosed on the property providing a huge incentive not to foreclose. As a result, when the alt-a and prime borrowers defaulted as the bears predicted, no wave of foreclosures followed. How could bears know that banks and regulators would change the rules? How could bulls know that? Many bulls have smugly said the bears were wrong about the wave of foreclosures. That much is true, but the bears were certainly right about the wave of delinquencies that should have been foreclosures. Only the unprecedented response to these delinquencies was in error.
The completely unpredictable and unprecedented actions taken by banks and regulators did not end with the takeover of the GSEs, the creation of shadow inventory, and suspension of mark-to-market accounting rules. No, the federal reserve took interest rates down to zero, and for the first time in their existence, they bought something other than short-term Treasuries. The federal reserve loaded up on mortgage-backed securities paying prices the private market wouldn’t in order to further drive down interest rates. Who could have reasonably predicted that? The federal reserve had never done anything like that before.
By 2009, some markets began to stabilize while others continued to crash. This mostly sorted out by concentrations of subprime loans. Markets like Las Vegas or Phoenix which were almost entirely subprime crashed very hard. Markets like Orange County which were mostly alt-a and prime were spared thanks to a healthy dose of shadow inventory and high-end squatting. 
In response to the continuing deterioration in the subprime markets, government legislators stepped into the fray and passed a series of tax credits designed to stimulate demand. Again, neither the bulls or the bears could have predicted such a response, but both the federal government and the State of California passed tax credits which served to pull demand forward, temporarily raise prices (and hopes), and trap another group of hapless buyers in underwater mortgages.
When the tax credits failed to reignite the housing market — something the bears did predict — prices rolled over and went on an 18 month decline until the spring of 2012. Aided by a 20% to 30% reduction in borrowing costs as interest rates continued to fall per the federal reserve’s plan, the cost of ownership fell below the cost of a rental in most markets.
This prompted many hesitant buyers to act, and it also caused investment hedge funds to enter the market with significant capital to buy up low-end properties. I predicted this back in March of 2007:
Two Levels of Buyer Support
There are two categories of buyers that will enter the market and purchase real estate without regard to appreciation: Rent Savers and Cashflow Investors. These are the buyers that will buy houses even if prices are declining; therefore, they are the ones who call the bottom. Rent Savers are buyers, like me, who enter the market when it is less expensive to own than to rent.
It doesn’t matter to these people what houses trade for in the market in the future. They are not buying with fantasies of appreciation. They just know they are saving money over renting, and that is good enough for them.
Cashflow Investors have a different agenda; they want to turn a monthly profit from ownership. For them, the cost of ownership must be less than prevailing rent for them to make a return on their equity investment. Cashflow Investors form a durable bottom. If prices drop low enough for this group to get into the market, the influx of investment capital can be extraordinary.
In a declining market, a market where by definition there is more must-sell inventory than there are buyers to absorb it, it takes an influx of new buyers to restore balance. Since it is foolish to buy with the expectation of appreciation in a declining market, the buyers who were frantically bidding up the values of properties in the rally are notably absent from the market. With the exception of the occasional knife-catcher, these potential buyers simply do not buy. This absence of buyers perpetuates the decline once it starts. Add to that the inevitable foreclosures in a price decline, and you have an unending downward spiral. It takes Rent Savers and Cashflow Investors to enter the market to provide support, break the cycle and create a bottom.
BTW, if there were any inventory right now, I would be looking to buy a home.
So what does the future hold?
Two thousand twelve will be remembered as the year the chorus called the bottom. Perhaps they will be right, or perhaps not. One of the most influential bottom callers is Bill McBride of Calculated Risk. In a recent post, he stands by his recent call and presents one of the better arguments to date against further significant price declines.
House Prices and a Foreclosure Supply Shock
by Bill McBride on 8/14/2012 12:25:00 PM
Those making the argument for further house price declines usually start with “shadow inventory”. Although there is no formal definition of “shadow inventory” it usually includes 1) some properties with homeowners who are current on their mortgages, but have negative equity in their homes, and 2) properties not listed for sale, but where the homeowner is seriously delinquent on their mortgage or already in the foreclosure process.
This can lead to some pretty scary numbers being bandied about. As an example, CoreLogic recently reported that “11.4 million, or 23.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2012”. And LPS reported 1.6 million loans were 90+ days delinquent at the end of June, and another 2.1 million are in the foreclosure process.
These numbers suggest a coming “flood” of foreclosures to those arguing house prices will fall further. I think this is incorrect.
Let’s be clear on semantics here. I don’t think many bears are pushing the “flood” scenario (except perhaps in some judicial foreclosure states). The banks have been remarkably successful controlling the release of REOs over the last four years, and they will likely continue that success for the next four years while their inventory still dominates the market. If they lose control to some degree, or if there is an unexpected exogenous shock, then prices may drift lower and even take out the recent bottom, but with super low interest rates, it’s unlikely a 20% drop is forthcoming.
If we look at negative equity, it is a serious issue for many homeowners, but it seems unlikely they will default en masse. Recent homebuyers who have negative equity are probably less than 10% underwater. And homeowners with significant negative equity probably bought in the 2004 through 2006 period; and they’ve been paying their mortgage for 6 to 8 years – so it is unlikely they will just default without some unfortunate event (divorce, death, disease).
I don’t think this is a proper way to look at this issue. Most people own a home for about 7 years. The loanowners trapped in those homes are entering a different stage in their life cycle, and many will want to move. They may not default due to an unfortunate event, but they may want to short sell to move on with their lives. If they don’t get the bank approval they seek, then they might strategically default. Normal mobility in an age of underwater borrowers may prompt more defaults than the bulls want to acknowledge.
Probably the biggest impact on the housing market is that people with negative equity can’t sell, and this restricts supply (the opposite of the “shadow inventory” argument). For more on this, see: Zillow chief economist Stan Humphries has been discussing this: The Connection Between Negative Equity, Inventory Shortage and Increasing Home Values: Why the Bottom Won’t Be as Boring as We Expected.
This is certainly what is preventing more properties from coming to the market now. When lenders abruptly stopped their REO processing, it left a void in the market, and with so few owners with equity, nobody can come forward to list their houses.
And I expect with the recent increase in house prices that the number of reported homeowners with negative equity will be down sharply in Q2. The HARP refinance program will help too.
Keep in mind that the number of underwater borrowers has always been under reported because these reports don’t take into account selling costs. And we know loan modifications programs fail over and over again. Most of those loans will simply be recycled.
A more immediate concern is the 3.7 million homeowners currently 90+ days delinquent or in the foreclosure process. Many of these properties will eventually be a distressed sale, either a foreclosure or short sale, although some will receive loan modifications. It is important to remember that some of these homes are already listed for sale (so they are included in the “visible inventory”), and there has been a significant shift by lenders from foreclosures to short sales (short sales have less of an impact on prices than foreclosures).
Very few delinquent mortgage holders are listing their homes. I recently measured this number in Orange County at 4%. Most of these people are committed to squatting until foreclosure. Lenders may want more borrowers to sell in short sales, and the first-lien approval process has shortened quite a bit, but second lien holders still hold up the process, and committed squatters are more motivated to keep receiving free housing than they are to sell and move into a rental.
But here is the key: Although forecasting house prices is very complex, we can make some simplifying assumptions and think in terms of supply and demand with foreclosures being a supply shock (increased supply). It is important to remember that national prices are an aggregate of many local prices (although there are national impacts, housing markets are local). And housing prices are more complex than say commodity prices (as an example, house prices tend to be stick downwards).
Imagine a multi-year supply shock with a bell curve shape. The supply shock shifts the supply curve to the right relative to the height of the bell curve. Prices will bottom when the supply shock is at the peak, NOT when the supply shock is over.
I do not believe this is accurate. Perhaps in the days prior to shadow inventory this may have been true, but prices will not bottom when the supply shock is at the peak, and in fact, they did not bottom when supply peaked in 2008.
There is an threshold for foreclosure processing determined by market demand, which is currently still weak. When supply is above this threshold, prices fall. When below, prices are not pressured downward. Supply has been elevated above this threshold from 2008 through early 2012. And the only reason it fell below this threshold now is due to policy changes and market manipulations. It is entirely possible lenders will be able to keep supply below threshold while they process shadow inventory, but it’s also possible they might lose control again.
Thinking in terms of threshold levels is much more productive than thinking about the peak and trying to rationalize why the peak was not predictive.
The supply shock from foreclosures probably peaked in late 2008, with a second smaller peak in 2010. Prices didn’t bottom in 2008 because 1) prices are sticky downwards (so the bottom happens after the peak of the supply shock) and 2) fundamentals such as price-to-income and price-to-rent were still out of line.
Now fundamentals are close to normal, and any supply shock will probably be smaller than the 2008 or 2010 peaks.
If the supply shock is smaller it’s only because lenders are more adept at managing threshold levels.
And this analysis assumed demand was stable. Actually there was a demand shock too (less demand) due to tighter lending, and buyer psychology (potential buyers were afraid that prices would fall further). There were few investors in 2008 when the supply shock hit – just a few individual and small group investors buying REOs. Now there are large well capitalized groups looking to buy. Of course lending standards are still tight, but as the recent Senior Loan Officer showed, demand is picking up.
Demand is not picking up. Bill’s own charts show that. Any anecdotal perception of improved demand is not reflected in the data.
The bottom line is house prices have probably bottomed, and the concern about more distressed sales coming is real – but will probably not push house prices to new post-bubble lows.
Though I may quibble with some of Bill’s details, I agree with him overall. Based on what we are seeing today in the market, it doesn’t look like prices will go lower. However, as I also demonstrated, the entire housing market is subject to the whims of bankers, legislators, and regulators. A policy change with any one of those players could have far-reaching impact on house prices. Of course, all of those groups also want to see house prices go up, so expect any policy changes to be geared toward that end.
Markets have a funny way of making fools of us all. It may turn out the forces of the market are larger than any of those groups can manage.
Far too many took far too much free money
One thing positive about featuring a property each day is that readers get a daily reminder of what really caused this mess. Lenders gave out far too much free money to borrowers who were running personal Ponzi schemes. The behavior of bankers and borrowers motivated by greed is the root of all our problems.
Unfortunately, nothing enacted in the aftermath of the housing bubble addresses this core problem. In fact, the federal reserve is lamenting the lack of mortgage equity withdrawal as an economic stimulus. They want the “wealth effect” to come back. Apparently, they want everyone raiding the housing ATM out of blind ignorance to the instability this creates.
The former owners of today’s featured property were small-time Ponzis by Orange County standards. I recently profiled a borrower to took out over $3,000,000. By comparison the $150,000 pilfered by today’s former owner is pocket change.
- This house was purchased on 2/15/2002 for $305,000. The owner used a $221,000 first mortgage and a $84,000 down payment.
- On 4/30/2003 he refinanced with a $250,000 first mortgage.
- On 2/3/2005 he refinanced with a $365,000 first mortgage.
- On 12/15/2006 he refinanced with a $382,000 first mortgage and obtained a $95,500 stand-alone second.
- He was served notice on 11/23/2010, and he squatted until 7/11/2012 when Fannie Mae bought it back.
Countrywide strikes again.
We're sorry, but we couldn't find MLS # P831273 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
1231 North MOSSWOOD Dr Anaheim, CA 92807
$379,900 …….. Asking Price
$305,000 ………. Purchase Price
2/15/2002 ………. Purchase Date
$74,900 ………. Gross Gain (Loss)
($24,400) ………… Commissions and Costs at 8%
============================================
$50,500 ………. Net Gain (Loss)
============================================
24.6% ………. Gross Percent Change
16.6% ………. Net Percent Change
2.1% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$379,900 …….. Asking Price
$13,297 ………… 3.5% Down FHA Financing
3.64% …………. Mortgage Interest Rate
30 ……………… Number of Years
$366,604 …….. Mortgage
$96,042 ………. Income Requirement
$1,675 ………… Monthly Mortgage Payment
$329 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$95 ………… Homeowners Insurance at 0.3%
$382 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,481 ………. Monthly Cash Outlays
($252) ………. Tax Savings
($563) ………. Equity Hidden in Payment
$16 ………….. Lost Income to Down Payment
$115 ………….. Maintenance and Replacement Reserves
============================================
$1,797 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,299 ………… Furnishing and Move In at 1% + $1,500
$5,299 ………… Closing Costs at 1% + $1,500
$3,666 ………… Interest Points
$13,297 ………… Down Payment
============================================
$27,561 ………. Total Cash Costs
$27,500 ………. Emergency Cash Reserves
============================================
$55,061 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."  |
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0.24 miles 2 bd / 2 ba 1,471 Sq. Ft. |
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$419,900 8437 East AMBERWOOD St |
1.34 miles 3 bd / 2.5 ba 1,379 Sq. Ft. |
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1.88 miles 2 bd / 2 ba 1,128 Sq. Ft. |
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$410,000 1914 North HOMEWOOD Ln |
1.96 miles 4 bd / 1.75 ba 1,459 Sq. Ft. |
27 Responses to “Future house prices, “It’s up to the banks, stupid.””
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[...] pressure – BBC California home prices climb to highest point since 2008 – Housing Wire Future house prices, “It’s up to the banks, stupid.” – O.C. Housing News Tame Inflation Gives Fed Room to Focus on Demand – WSJ More Easing [...]
2013 is shaping up to be a very painful year, the fiscal cliff and probable recession, These are the factors that are going to spoil the banks plan.
In the past, whenever bears pointed out the inevitable, we were dismissed by the bulls. Then when our predictions came to pass, they would claim it was an unexpected outcome or some strange exogenous event.
Actually, the bears would throw out 50 reasons why prices would fall. 47 would be nothingburgers, yet with the 3 right ones, the bears proclaim “I told you so”. Yet, given their abysmal batting percentage, the bulls are correct to ignore everything the bears say…
By contrast, the bulls would give creedence to 1 of the 3 factors that did drive prices lower, but incorrectly discount the other 2. The would look at the 47 failed predictions of the bears and triumphantly proclaim “I told you so”. Yet, since the bulls improperly discounted 2 of the 3 things that drove the market lower, the bears are correct to ignore everything the bulls say.
Also, since this is the internet, both groups will then torque, twist, revise history or otherwise do whatever they can to keep from saying those 3 little words that have never been uttered on real estate blogs “I WAS WRONG”
Your comment serves to undermine the achievement of the bears by making the debate look like a typical political discussion. The thoughtful bears were right about almost everything. You diminish it to a 6% batting average when it was closer to 80%. Read my early posts or my book and show me the 47 reasons I was wrong. I have five years of writing you can search through.
The one irrefutable piece of evidence that the bears were right is that house prices crashed. The bulls said this wasn’t possible based on their faith that the short-term rally would continue forever because house prices always go up.
Where the real distortion of fact has played out is the period since 2009. The bulls claim 2009 was the bottom, and they point to some indicator in some market which bolsters their claim. The bears claim 2009 and 2010 were bear rally years, and the evidence is on their side. However, both parties selectively chose evidence to support their entrenched views.
“You diminish it to a 6% batting average when it was closer to 80%. Read my early posts or my book and show me the 47 reasons I was wrong. I have five years of writing you can search through.”
I didnt say you – I said the “bears” as in the collective of all bubble bloggers I have seen. Over the past few years, I have heard, house prices will fall because of:
The foreclosure moratorium
The shadow inventory
Sellers holding out
The option arm TSUUUUUNAMI
The Alt-A TSUUUUUUNAMI
The 8K buyer’s bribe
It just hasnt happened yet
Robo Signing scandal
Mr. Mortgage’s “the quickening”
high foreclosure rates (even when declining)
high vacancy rates (even when declining)
% of people underwater (even when declining)
High unemployment (even when declining)
Rising interest rates
Baby Boomers
The stock market
The recession we are still in
The upcoming recession
The depression we are still in
Fannie & Freddie closing their doors
Increased dollar amt for jumbo rates
Default of Dubai World
The Elliott Wave
Kondratieff Winter
Deflation
USA = Greece
USA = Japan
Now, (and nothing personal against Gary) I have “the fiscal cliff” to add to that list.
Its like a never ending parade of horrors. And few speak of these things causing perhaps a few ticks down in prices. Instead its always going to cause a “crash” or “cliff” some apoplectic, hyperbole laden idea of major major price movement.
Also, the past few years has brought out some bat-shit-crazy types who even you would distance yourself from. Did you know there is a Bear on patrick.net who is predictng 1975 NOMINAL prices? Do you want to attest to the veracity of that prediction?
So again, as I said, there really was alot of crap flung out there by the bears over the years. Its part of the reasons I formally switched teams earlier this year…
LOL! That’s an impressive list. I guess I wasn’t reading enough of the really bearish stuff out there. I’ve had a few permabears come through here saying 1990s prices were coming. I never though it would get THAT bad.
I became bullish on Las Vegas back in 2010 because the valuations were so low. My only regret is that I didn’t get more property before the foreclosure laws changed making it much more difficult to get a deal.
My own reports have been giving bullish signals since late last year, but I have been (and continue to be) very concerned about the overhang of delinquent mortgage squatters.
The real question we are all wrestling with is how orderly will the banks be with their disposition. The lenders would love nothing more than to drive prices back up to the peak before liquidating. Then they could get the full value back on their bad loans. I don’t think that’s realistic because affordability limits and there isn’t a large enough pool of buyers to absorb it all. Plus it is a cartel, and as some loans get back above water, lenders will liquidate even if prices aren’t back up to the peak.
Will the upcoming liquidation be orderly allowing for appreciation? If you had asked me six months ago, I wold have said “no way.” But then I watched lenders choke off the supply here and drive prices higher. Can it be sustained? I doubt it, but they have been remarkably successful so far. If they can drive prices up 10% in 2012, then they have some cushion when they liquidate before they take out the previous lows. Plus, with a zero cost of funds, they have no pressure to liquidate. If they see prices falling again, they can always pull back and stop their liquidations.
The overhang of delinquent mortgages is going to make for a bumpy ride, but for now, the banking cartel is winning, and potential buyers are losing. I think that’s a shame.
IR said…LOL! That’s an impressive list. I guess I wasn’t reading enough of the really bearish stuff out there. I’ve had a few permabears come through here saying 1990s prices were coming. I never though it would get THAT bad.
I guess not then. Yeah, there was some real batshit crazy stuff out there. Here is one of my favorite quotes from the very influential Stoneleigh who writes for The Automatic Earth:
“If I had to say when we might see a bottom that could last a few years instead of days weeks, or months, I wouldn’t suggest such a thing would be possible before the middle of the next decade at the earliest. This does not preclude largish rallies within that timeframe though. In terms of what the world might look like by then, Denninger and Weiss and other purely finance types seem to think that recovery is possible to something at least vaguely resembling business as usual. That isn’t our position. We would say that the combination of capital and energy scarcity will preclude a return to anything most of us would recognize (with the possible exception of those almost a hundred years old or who grew up in a war-torn third world country).”
Funny thing is, they still think they are right – they are just “early”…
“IR said…The real question we are all wrestling with is how orderly will the banks be with their disposition.”
I have every reason to believe it will be quite orderly. Most people severly underestimate the change made by the FASB when they issued 157 (change in “mark to market” accounting rules).
Until then, banks were dumping because they had to. Valuations were so poor, they were severely out of convenant and subject to seizure by the FDIC.
After 157, they are allowed to only take a loss when they sell, and since these are NOLs they can offset over time. Thus, suppose you are a bank showing 900K profit in June on performing loans. You can then sell say 16 houses, each at a 50K loss, and offset the 800K loss against the 900K profit, showing a 100K profit for the month. Thus, since this is the ONLY way you will survive (remember, dump too many homes and you are out of covenant and subject to takeover by the FDIC) you do this as long as it takes, be it months, years, etc.
Don’t forget that these houses come with property taxes, hoa’s, mello roos and maintainance costs for the banks so the cheap money is not the only consideration.
“I have every reason to believe it will be quite orderly. Most people severly underestimate the change made by the FASB when they issued 157 (change in “mark to market” accounting rules).”
This really was a game changer. Without mark-to-fantasy accounting, shadow inventory would not exist. The banks would have foreclosed as quickly as possible and this would have been over with two years ago. I certainly did not foresee such a sweeping change to accounting standards and how it would change the process. I don’t think anyone did.
Sorry, but the banks, their inventory, and shadow inventory are at this point irrelevant. Relevant is future currency devaluation. It never was a housing crisis. It was and still is a debt crisis.
The lack of resale supply is making the builders happy.
Builder Confidence Improves to Highest Reading Since 2007
Builder confidence improved two points in August to 37, its highest level since February 2007, the National Association of Home Builders (NAHB) reported Wednesday. Economists had expected the index to remain flat at 35.
The improvement in the index in August marked the fourth straight month-month gain. The overall index has gained 22 points in the last year, the largest one-year gain since February 1992. The August reading also marked the third straight month the index was more than double what it had been one year earlier.
The Housing Market Index (HMI), considered a measure of builder confidence, could be reflected in permits and starts data reported for August. That report from the Census Bureau will be issued in September. Meanwhile, Census will report on July permits Thursday.
All three components of the index – the assessment of current sales, of sales six months out, and traffic at showrooms and model homes – improved.
The current sales measure rose three points to 39, its highest level since February 2007. The August gain followed a jump of five points in July. The current sales gauge is up 24 points in the last year, the last year, the strongest year-year surge since February 1992.
Buyer traffic also rose three points to 31, its highest reading since May 2006. Year-year the buyer traffic index is up 20 points, the largest 12-month improvement since March 1996.
The index of the outlook for sales in sales months rose one point to 44, the highest level since April 2007. The six month sales outlook index has increased 25 points in the last year, the largest annual gain since January 1992.
“This fourth consecutive increase in builder confidence provides further evidence of the gradual strengthening that’s occurring in many housing markets and providing a needed boost to local economies,” said NAHB Chief Economist David Crowe. “However, we are still at a very fragile stage of this process and builders continue to express frustration regarding the inventory of distressed properties, inaccurate appraisal values, and the difficulty of accessing credit for both building and buying homes.”
Gains in the index – or its components – do not always translate into new home sales. New home sales, for example, fell 32,000 in June to 350,000 although the HMI rose that month. The current sales measure rose in June as well but the buyer traffic index was flat. Six months earlier in December, the outlook for sales six months ahead had improved.
The index, built based on surveys conducted jointly by the NAHB and Wells Fargo, gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.”
Regionally, the index improved in two of the four census regions: up nine points to 42 in the Midwest and two points to 35 in the South but down nine points to 25 in the Northeast and down three points to 40 in the West. The regional confidence measures are consistent with the most recent report (for June) on new home sales, which showed new home sales plunged in the Northeast.
The HMI survey followed a surprisingly strong payroll report for July which showed the nation added 163,000 jobs, far more that what the market had been expecting but the unemployment rate rose to 8.3 percent in the same month. However recent housing specific survey such as the Case Shiller Home Price Index show improvements in home prices.
Mirabella, townhomes in Columbus Square, is sold out. The only other development/block remaining is Augusta, and it’s selling well – constant construction.
The builders are doing very well right now, and as long as lenders keep resale supply off the market, the builders will continue to flourish.
Why Lenders Don’t List REOs: The Conspiracy Theories
A previous post addressed some of the more practical reasons that lenders may not be listing the majority of REO inventory on their books.
While these practical impediments to listing REOs are more concrete and easier to grasp, two items in the most recent quarterly 10-Q SEC filing from Fannie Mae opens the possibility that lenders may be intentionally holding back REO inventory from being listed.
The first item is found in the list of reasons that Fannie gives for only 22 percent of its REO inventory being listed for sale: Other, accounting for 5 percent of the total 78 percent that are not listed.
The second is some version of the following phrase found several places in the report in reference to one of the strategies Fannie is taking to boost its bottom line: “Managing our REO inventory to minimize costs and maximize sales proceeds.”
This leads the door open to Fannie Mae and other lenders intentionally holding REO homes off the market if it somehow benefits them. And why might it benefit them? There are at least two reasons:
1.Deferring reported losses: lenders don’t realize the losses on a distressed loan — at least from an accounting perspective — until they sell the property at whatever price the market will bear. Thanks to changes to the so-called mark to market accounting rules back in early 2009 to try to stop the bleeding in the financial industry as the result of plummeting home prices and a flood of foreclosures. Up until the sale of that foreclosed home, banks may be able to justify a higher valuation of the asset because of the relaxed mark to market rules, but once that sale occurs there is no denying the full extent of the loss.
2. Preventing fire sales: Foreclosed homes, or REOs, sold for an average price that was 33 percent below the average price of a non-foreclosed home in the first quarter of 2012. These distressed sales have an impact on the values of surrounding homes and the future sales prices of surrounding homes as the distressed sales are used by appraisers and buyers in evaluating comparable sales. A market oversaturated with distressed homes for sale can turn into a feeding frenzy for buyers — especially if there are very few buyers looking to purchase. The basic law of supply and demand dictates that too much supply of these properties and low demand will result in plummeting prices. So to protect the prices of future REOs that they plan to sell, banks may be motivated to limit the supply of those REOs available at any given time — at least creating the perception that there is a limited supply and thereby tipping the balances back in favor of sellers rather than buyers.
This is the stuff conspiracy theorists latch on to, always looking for an opportunity to portray the big banks as malevolent masters of the housing market. While many of the conspiracy theories involving the big banks are unfounded, there are some rational reasons why banks would want to intentionally restrict the supply of bank-owned properties available for sale.
Analysis: Long road to US housing recovery despite tighter supply
(Reuters) – U.S. home prices are inching up as an ebbing tide of foreclosures creates a shortage of properties at a time of pent-up demand, but do not expect the housing market recovery to shift into higher gear.
Tightening house supplies have turned some parts of the country into sellers’ markets, marked by intense bidding wars among buyers eager to take advantage of rock-bottom mortgage rates and still-low home prices.
“It is encouraging that demand is flowing back into the market and buyers are getting off the fence at last,” Stan Humphries, chief economist at real estate group Zillow told Reuters.
But it’s not off to the races for the housing market, the main trigger of the 2007-09 recession. Many homeowners remain saddled with properties worth less than the amount they owe banks and other financial institutions.
This means they cannot afford to sell their houses, even if they wanted to. As such, the supply of houses on the market will remain tight and weigh on sales.
Home resales declined 5.4 percent in June, with realtors blaming the drop on lack of inventory.
Contracts to buy homes, a forward-looking indicator of sales, also fell during the month for the same reason, casting a shadow on the budding housing market recovery.
Unfortunately, for sector bull-tards, ‘markets’ have a way of punishing banker hubris. (see history)
Back in 2007, if anybody would have predicted all the nonsense that has transpired to “help” the housing market from 2008 to present…they would have been laughed off the stage. I was watching the business channel last night and the talking heads proclaimed that both Obama and Romney view a “healthy” housing market as the utmost importance. No matter who wins in November, the same action will continue.
I think anything below 600K in decent areas has bottomed. I doubt we will see any big gains anytime soon due to the dire macro economic conditions. The high end is still coming down and we will likely bounce along the bottom for the low and mid tier for years to come.
That’s how I see it too. Many people will get sucked into the euphoria and overpay in this tight market just like 2010, but eventually, supply will return, and we will establish a new equilibrium as lenders complete their liquidations.
Reality is, future home prices are headed down SIMPLY because the incremental cost of debt capital will destroy values going forward.
In other news….
Treasuries Got Bernanke’d: 3 Years Gone In 3 Weeks
http://www.zerohedge.com/news/treasuries-got-bernanked-3-years-gone-3-weeks
Thanks for the link. This may become a significant development driving up interest rates. Lately, banks have been enjoying wide margins on their mortgage originations, but those will thin out now. Ultimately, it will put pressure on mortgage interest rates if this becomes more than a short-term violent market correction in Treasuries.
At some point interest rates will rise, … quickly, and all those who thought that Bernanke and the Fed could keep interest rates low will see the emperor and his clothes clearly.
If that happens, if mortgage rates spike, house prices will crater, our banks will go bankrupt, and we will have real problems to deal with.
“Our” banks are already insolvent. The Fed will keep the banks in business. Nominal prices may fall, they may rise, but in real terms they will continue to decline. We have had “real” problems for awhile. The consequences have been postponed.
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Gong – Master Builder