Recently I wrote that a durable recovery would be demand driven, not supported by restricted supply. Reductions in supply may temporarily force house prices higher, but a sustained recovery requires higher prices and higher sales volumes. In other words, a durable recovery requires a resurgence of demand. Reduced supply threatens to choke off the recovery as buyers lose interest in a market where little is available for sale, and the prices being asked are too high. In a high demand market, buyers don’t wait on the sidelines. In a supply restricted market, they do. And wisely so because educated buyers know the supply will come to the market eventually, and there is no need to overpay today for a product that will be available tomorrow.
The importance of higher prices and higher sales volumes was reiterated in a recent Time magazine article.
By Christopher Matthews | @crobmatthews | September 20, 2012
During each of the previous three recessions, the American economy was powered back to full strength largely on the back of the housing market. … But since this spring, when many analysts were calling the official bottoming of the housing market,
The bottom has “officially” been called now. Good to know. Are the housing bottom callers all wrong… again? As Barry Ritholtz noted, bottom calling happens every year, and as I noted the housing bottom consensus could be very wrong.
hopes have been high that the sector could throw its weight fully behind a recovery — one that would bring the country back to full employment and output.
Two reports yesterday served to bolster these hopes. The first was from the Commerce Department, which announced that new housing construction rose 2.3% to a seasonally adjusted 750,000 in August. The other, from the National Association of realtors, showed that existing home sales were up 7.8% to a seasonally adjusted rate of 4.82 million in August, compared with 4.47 million in July and 4.41 million in August of 2011. The NAr report also showed that the median price of an existing home rose 9.5% from last year, the strongest yearly increase in more than six years.
So how good are these numbers? The rise in new housing construction was slightly below analyst’s expectations,
That doesn’t sound good.
but still represents forward momentum.
I feel better now…
Actually, homebuilders will do well in the absence of competing MLS inventory. How well the homebuilders do will depend on how well bank asset managers can manage their bad loan liquidations. The biggest competitors the homebuilders have are the banks.
The new home sales numbers are even more encouraging, and are due to a number of different factors. As my colleague Michael Sivy wrote this week, housing prices have declined nationally more than 30% from their peak. These existing home sale numbers seem to reinforce the notion that buyers across American don’t believe that home prices will fall any further.
Financial reporting has become infected with the belief that reports must serve to reinforce consumer sentiment. Shouldn’t the facts simply speak for themselves?
At the same time, as Robert Brusca of Fact and Opinion Economics told The Wall Street Journal , since 2011 represented the worst year for mortgage lending in 16 years, last year is a “low hurdle” to have to overcome.
But one should not downplay the importance of even modestly rising home prices. As Bill McBride of Calculated Risk noted last month, in an environment of rising prices, sellers will be more apt to wait for the right time to put their homes on the market, keeping inventory down which further reinforces price increases.
So let me get this straight. Sellers won’t list their homes when prices are falling because they would rather wait for better pricing. That’s why prices are “sticky” on the way down. And now we are told sellers won’t list their houses because prices are rising? So if sellers don’t want to list when prices are falling, and they don’t want to list when prices are rising, when exactly do sellers want to list their houses?
Ever since Bill called the bottom early this year, he has suffered from a confirmation bias. He interprets every news story bullishly. He could start writing copy for the NAHB or the NAr. His bottom call may prove prescient, but his attachment to that bottom call has created a confirmation bias that is seriously clouding his judgment. He is no longer impartial.
Rising prices will bring out new sellers, particularly struggling loanowners. Once they get above water, many of them will want to sell. Some will sell because their bubble-era home no longer meets their needs. Some will sell to downsize to a more affordable property. And some will sell and rent just to have their freedom back. Rising prices, in and of themselves, do not cause sellers to keep their houses off the market. In fact, many with equity will sell to reignite a move up market once prices rise enough to give them move-up equity.
An environment of rising prices will also encourage mortgage lenders to loosen their lending standards, as lenders won’t have to worry about recouping underwater collateral in the event of a default. … But unfortunately, rising prices haven’t yet led to relaxed lending standards. And this seems to be the biggest obstacle to recent efforts by the Federal Reserve to stimulate the economy. … Banks appear to be reluctant to lend even with the very low cost of financing. They’re apparently content to keep prices relatively high and the number of loans they make relatively low. Until banks start loosening their standards, and begin competing over borrowers, there won’t be the kind of robust housing recovery that can quickly power us to a full recovery.
The last thing we want is lowered lending standards, particularly since the US taxpayer is on the hook for all the losses that will surely result. The NAr and others are clamoring for looser standards, but they aren’t the ones who must absorb the losses. Lending standards should remain right where they are, or possibly even tighten further. Until borrowers consistently make payments and sustain ownership, standards are not tight enough.
Volume is still key
Despite the reports that sales volumes are up, they are only up slightly in most markets — which is surprising considering how low interest rates are — and in California, the shortage of inventory is so extreme, sales volumes are down over 2% from 2011 levels.
Sept. 24, 2012, 10:00 a.m. EDT
LOS ANGELES, Sep 24, 2012 (BUSINESS WIRE) — California pending home sales rose in August from July, but a continuing shortage of housing inventory sent pending sales lower from the previous year. Additionally, the lack of supply, particularly of REO properties, sent the share of equity sales to its highest level in four years, CALIFORNIA ASSOCIATION OF rEALTORS(R) (C.A.r.) reported today.
Pending home sales data:
C.A.r.’s Pending Home Sales Index (PHSI)* rose 2.7 percent from a revised 115.8 in July to 118.9 in August, based on signed contracts. Pending sales were down 2 percent from the 121.4 index recorded in August 2011. August’s year-to-year decline reversed a 15-month trend of higher pending sales than the previous year. Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market.
“While August’s pending sales were higher than July, the pending sales decline from last year is not a surprise, as we started to see a gradual slowdown in the year-to-year change over the past five months, primarily due to a dearth of available homes,” said C.A.r. President LeFrancis Arnold.
It should surprise no one that sales declined in the fact of an absence of inventory. Sales will not improve until the inventory returns.
Distressed housing market data:
– The share of equity sales – or non-distressed property sales – compared with total sales grew to its largest level in four years. The share of equity sales in August increased to 62.2 percent, up from 59.5 percent in July. Equity sales made up 51.7 percent of all sales in August 2011.
– The share of REO sales statewide contracted further in August, while the share of short sales crept up slightly. The combined share of all distressed property sales fell to 37.8 percent in August, down from 40.5 percent in July and down from 48.3 percent in August 2011.
What looks like improvement on the distresses sales front is an illusion. The lack of distresses sales is not due to a lack of distressed loans that need to be processed.
$282,000 in HELOC money and two years squatting
These daily debtor debacles are supposed to be cautionary tales to teach people what not to do if they want to keep their homes. However, when a borrower is handsomely rewarded for their outrageous behavior, it’s makes me wonder if people aren’t also learning how to game the system to their advantage. Realistically, I can’t see a good reason why more people won’t max out their HELOCs every six months or so in the future. If the house goes up in value, the borrower gets more money. If it goes down again, it’s the bank’s problem.
- Today’s featured property was purchased for $535,000 on 11/1/2001. The owner used a $428,000 first mortgage and a $107,000 down payment.
- On 9/25/2003 she refinanced with a $458,000 first mortgage.
- On 10/27/2003 she opened a $60,000 HELOC.
- On 12/2/2004 she refinanced with a $555,000 Option ARM.
- On 8/29/2007 she refinanced with a $610,000 Option ARM and obtained a $100,000 HELOC.
After extracting $282,000 in mortgage equity withdrawal, she was unable or unwilling to make the payments. She defaulted in early 2009, and the house was auctioned on 9/7/2011. After sitting on the bank’s books for a year, it was finally brought to the market for liquidation.
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Proprietary OC Housing News home purchase analysis
$635,000 …….. Asking Price
$535,000 ………. Purchase Price
11/1/2001 ………. Purchase Date
$100,000 ………. Gross Gain (Loss)
($42,800) ………… Commissions and Costs at 8%
$57,200 ………. Net Gain (Loss)
18.7% ………. Gross Percent Change
10.7% ………. Net Percent Change
1.6% ………… Annual Appreciation
Cost of Home Ownership
$635,000 …….. Asking Price
$127,000 ………… 20% Down Conventional
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$508,000 …….. Mortgage
$121,667 ………. Income Requirement
$2,284 ………… Monthly Mortgage Payment
$550 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$159 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$150 ………… Homeowners Association Fees
$3,143 ………. Monthly Cash Outlays
($356) ………. Tax Savings
($798) ………. Equity Hidden in Payment
$142 ………….. Lost Income to Down Payment
$99 ………….. Maintenance and Replacement Reserves
$2,230 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,850 ………… Furnishing and Move In at 1% + $1,500
$7,850 ………… Closing Costs at 1% + $1,500
$5,080 ………… Interest Points
$127,000 ………… Down Payment
$147,780 ………. Total Cash Costs
$34,100 ………. Emergency Cash Reserves
$181,880 ………. Total Savings Needed