Prices crashed in 2007 and 2008 down to levels of relative affordability due to shrinking loan balances from the withdrawal of toxic loan products. Each of the loan owners who used unstable loans lost their houses and their creditworthiness. As a result, millions of foreclosures hit the market and there were not enough buyers to support prices at historic levels of affordability, so many markets crashed well below fundamental values.
The group who ordinarily take equity from a previous sale to support a move-up market is absent because they have neither the credit nor the equity to complete the sale. The absent move-up buyer is keeping sales volumes relatively low as compared to historic standards. realtors have been touting the strength of home sales recently by comparing them to the record low sales volumes of the last three years. In truth, we are still about 20% below the average sales volume of the last 20 years, mostly due to the lack of a viable move-up market.
Over the last few years, much of the housing market sales volume came from cashflow investors seeking better yields. The small investors are being joined by large hedge funds to buy properties to hold for their rental income. These buyers do not favor move-up markets because prices are still inflated, and the cashflow returns don’t make sense. Some speculate in these move-up markets, but few professional investors place money there. Most of the investor purchases have been below-median properties with good rental yields.
The reason this opportunity exists for investors is because there simply aren’t enough first-time homebuyers to absorb all the inventory. Some have postulated that investors are driving prices up for owner occupants. That isn’t the case. Cashflow investors don’t typically crowd out families. Someone buying a property as an owner occupant typically bids more aggressively than an investor because they are not worried about the rental returns. Cashflow investors are bottom feeders looking for bargains, so they are less prone to get caught up in bidding wars.
One result of all the investor activity at the bottom of the housing ladder is that first-time homebuyers who are the backbone of tomorrow’s move-up market are fewer in number. When prices start going back up, the equity which ordinarily would have supported a move up market will instead add to the wealth of an investor who won’t be selling the property to port the equity into a move-up house. As a consequence, the move up market will languish for much longer than most realize.
When Foreclosure Supplies Fall, the Bottom Falls Out of Housing
Published: Tuesday, 10 Jul 2012 | 1:04 PM ET
By: Diana Olick – CNBC Real Estate Reporter
Growing activity in the spring housing market brought new growth in home prices, but those gains are growing ever more precarious because they are dependent on low-priced, distressed properties.
While prices in the past three months rose 1.7 percent on a national average from a year ago, according to a report from Clear Capital, the biggest gains were out West, where foreclosures and short sales are often the majority of a local market’s activity.
In Minneapolis, Minn., for example, 35 percent of home sales are foreclosures; prices there rose just over 13 percent from a year ago. The same in Columbus, Ohio where prices rose 14 percent, given that nearly 34 percent of sales were of foreclosed properties.
While foreclosures brought home prices down initially, they are now driving them up because there is so much demand from investors and first time buyers, looking for bargains. Supplies of these cheap homes are also dwindling, because banks are still working to modify many troubled loans, and states that require a judge in the foreclosure process are still facing a huge backlog.
The below median market is certainly seeing price pressure from the lack of inventory. Prices are still low enough that investors are interested, but if they rise too far or too fast, many investors will lose interest and stop buying them.
The poster child for this new dynamic is Phoenix, Ariz. Prices there are up a whopping 20 percent from a year ago because so much of the market was foreclosures. They used to make up more than half of all sales, but now they’re down to about 23 percent because there are just not that many foreclosures left to buy. Investors honed in on the market, buying properties in bulk and putting them up for rent. Some investors are already cashing out and selling them, but not many.
The increase in prices in Maricopa County, Arizona, has been remarkable, and it isn’t due to a change in the product mix. Prices of individual houses are rising. Of course, more than two-thirds of the county’s mortgages are underwater, and many delinquent loan owners are waiting in the wings for their foreclosure, so the dramatic run-up is not likely to continue much further this year (note the declining asking prices already signalling a shift), but it would take quite a flood of REO to push prices back below the 2011 lows, and that doesn’t seem very likely given the banks behavior of late. Despite the apparent strength, sales volumes are down 17.4% from last years levels, and inventories are starting to rise again. There will likely be a pullback this fall and winter.
This new lack of distressed supply may lead to what housing analyst Mark Hanson calls, “an investor gut check.” He sees early results that sales volume in many of the markets that were deemed to be “recovering” are actually falling.
“First is the artificial lack of distressed supply, which is the market in all of the miracle ‘recovery’ regions. As I have pounded the table over for years … ‘investors and first timers are thin and volatile cohorts that have been known to up and leave markets in a matter of a month or two leading to a demand collapse‘.
Professional cashflow investors will only remain interested in a market as long as the yields are good. Once prices rise too high relative to rents, professional investors stop buying and start looking for the exits. The hope of every professional investor is to see a frenzy like the run-up in Arizona so they can offload their cashflow properties to a speculator and make extra on the appreciation. Speculators are the chumps professional cashflow investors sell to.
But equally responsible are Zombie Homeowners; those without enough equity to pay a Realtor 6 percent and put 20 percent down on a new house and/or good enough credit or strong enough income to secure a new mortgage loan,” writes Hanson.
Hanson calls the lack of distressed supply “artificial” because he believes banks are holding back some distressed inventory and/or that many of the loan modifications being worked out will inevitably fail.
Let me clarify one point about how the banks are withholding inventory. First, they are not keeping many REOs off the market. In fact, banks have been reducing their REO inventories steadily all year.
What banks are doing is allowing delinquent loan owners to squat in houses they are not paying for to prevent those properties from coming to the market. This is an important distinction because this future inventory hiding in the shadows is still out there. Either through short sale or foreclosure, those properties will eventually be recycled. If prices keep rising, lenders will begin to process these properties to recover their capital.
He points out that distressed supply is vital to a market like Phoenix, because 66 percent of its current borrowers owe more on their mortgages than their homes are currently worth, and are therefore stuck in place, unable to buy or sell.
“Without repeat buyers in the market leaving a unit of supply when they move up, laterally or down (in the case of empty nesters), supply is simply removed from the market and not replaced,” notes Hanson.
The same problem impacts the demand side of the market equation. When a property is purchased by an investor today, five years from now when that investor liquidates for a profit, the equity from that sale is not put toward a move-up property. The demand is simply removed from the market and not replaced.
Phoenix is not unique. California, Florida, much of the Midwest will likely see the same, as will Atlanta, which is still mired in a foreclosure crisis with recovery nowhere in sight. Given that supply scenario, it is likely that many of these national gains (which as I’ve argued before are artificial anyway) will give some back before finding solid footing.
Bottom line, until this housing market is no longer dependent on distressed supply to support overall home sales, calling a bottom to the national housing market is premature.
That’s the same argument I have made as well. Perhaps 2012 will be the bottom, but we may revisit that bottom in 2013 and 2014 before embarking on substantive and sustained market appreciation.
Sold to the bank at the peak
The former owner of today’s featured property is not a Ponzi. He paid $139,000 back on 10/20/1994 using an FHA loan. His first refinance was in 1998, and he lowered his mortgage balance. He resisted refinancing all through the housing bubble, but on 5/22/2007, just as prices were starting to drop, he refinanced with a $328,000 first mortgage and effectively sold the property to the bank for peak pricing.
Worked out well for him.
Garden Grove Overview
Median home price is $335,000. Based on a rental parity value of $461,000, this market is under valued.
Monthly payment affordability has been improving over the last 12 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased to $232/SF to $238/SF.
Resale prices have been weak for 12 month(s). Price momentum suggests weak prices over the next three months.
Median rental rates declined $50 last month from $$1,933 to $$1,883.
Rents have been slowly rising for 12 month(s). Price momentum suggests slowly rising rents over the next three months.
Market rating = 8
Proprietary OC Housing News home purchase analysis 
13011 PALM St Garden Grove, CA 92843
$349,500 …….. Asking Price
$139,000 ………. Purchase Price
8/25/1995 ………. Purchase Date
$210,500 ………. Gross Gain (Loss)
($11,120) ………… Commissions and Costs at 8%
============================================
$199,380 ………. Net Gain (Loss)
============================================
151.4% ………. Gross Percent Change
143.4% ………. Net Percent Change
5.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$349,500 …….. Asking Price
$12,233 ………… 3.5% Down FHA Financing
3.67% …………. Mortgage Interest Rate
30 ……………… Number of Years
$337,268 …….. Mortgage
$88,578 ………. Income Requirement
$1,547 ………… Monthly Mortgage Payment
$303 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$87 ………… Homeowners Insurance at 0.3%
$351 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,288 ………. Monthly Cash Outlays
($234) ………. Tax Savings
($515) ………. Equity Hidden in Payment
$15 ………….. Lost Income to Down Payment
$107 ………….. Maintenance and Replacement Reserves
============================================
$1,662 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,995 ………… Furnishing and Move In at 1% + $1,500
$4,995 ………… Closing Costs at 1% + $1,500
$3,373 ………… Interest Points
$12,233 ………… Down Payment
============================================
$25,595 ………. Total Cash Costs
$25,400 ………. Emergency Cash Reserves
============================================
$50,995 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # S704196 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$325,000 12282 MARBLE Pl |
0.18 miles 3 bd / 1 ba 1,000 Sq. Ft. |
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$369,500 12071 PEARCE Ave |
0.36 miles 3 bd / 2 ba 1,257 Sq. Ft. |
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$379,000 13402 SORRELL Dr |
0.57 miles 3 bd / 2 ba 1,167 Sq. Ft. |
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$448,000 12512 MERRILL St |
0.61 miles 4 bd / 2 ba 1,485 Sq. Ft. |
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$355,000 12761 North ADRIAN Cir |
0.65 miles 4 bd / 2 ba 1,178 Sq. Ft. |
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$369,900 12662 CADET Ave |
0.86 miles 3 bd / 2 ba 1,246 Sq. Ft. |
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$357,500 11851 SHETLAND Rd |
0.94 miles 4 bd / 1 ba 1,359 Sq. Ft. |
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$389,900 13011 LEWIS St |
1.07 miles 4 bd / 2 ba 1,311 Sq. Ft. |
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$425,000 11581 JERRY Ln |
1.13 miles 4 bd / 2.75 ba 1,632 Sq. Ft. |
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$305,000 1719 MARCELLA Ln |
1.34 miles 3 bd / 1 ba 1,288 Sq. Ft. |
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26 Responses to “Investors buying REO cripple the move-up market”
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Price Declines Inevitable for Many States Due to Backlog: Agency
Based on its database, YouWalkAway.com foresees an inevitable decrease in property values due to backlog and delays in processing foreclosures.
The foreclosure agency said that 40 percent of its client base comes from California and Florida. In these states, the years’ worth of backlog building up could ultimately be detrimental to the regions’ housing markets, the agency said.
For example, in Florida, 45 percent of YouWalkAway.com clients are in pre-foreclosure status, and on average, they are 17 months past due and still have not received their first formal foreclosure notice.
In California, 59 percent of the agency’s clients are in pre-foreclosure status, and on average, they are 15 months behind and still haven’t received a foreclosure notice.
“Eighty-five percent of the homeowners we’re working with are in pre-foreclosure and have not made a mortgage payment for an average of 14 months,” said YouWalkAway.com CEO Jon
Maddux. “It is astounding to realize these numbers haven’t been reported by other foreclosure monitoring services, because these homeowners aren’t technically in foreclosure. This data points to significant backlog, eventual foreclosure activity and predicts a drop in value for home prices. “
According to the agency’s database, states such as Minnesota, North Carolina, Maryland, and Texas may also face a wave a foreclosures, which will depress home prices. In those states, more than 80 percent of the agency’s clients reported they are, on average, about 14 months behind, but still not in foreclosure.
“Unfortunately new homeowners and investors may see a significant devalue of their properties due to the substantial amount of shadow inventory. The longer it takes to begin the foreclosure and process the property through the system, [the] longer it will take for housing market recovery,” said Maddux.
According to the agency, the current delays in foreclosure processing combined with the volume of shadow inventory indicates the road to recovery may be longer than what has been assumed.
States with the highest % of clients not in foreclosure, average months delinquent
Minnesota (96%) 12 months
North Carolina (88%) 13 months
Maryland (88%) 19 months
Texas (85%) 16 months
Oklahoma (84%) 8 months
Washington (79%) 13 months
Nevada (79%) 13 months
Georgia (75%) 12 months
Michigan (73%) 18 months
Virginia (72%) 18 months
It’s official.
California Homeowner Bill of Rights Signed Into Law
California Attorney General Kamala Harris announced Wednesday that Governor Edmund G. Brown signed two provisions of the much-debated Homeowner Bill of Rights into law.
The Homeowner Bill of Rights so far consists of a series of related bills containing provisions that prohibit certain practices by lenders that have been attributed to the state’s foreclosure crisis. Chief among the banned practices are robo-signing (signing of fraudulent mortgage documents without review) and dual-track foreclosure (starting foreclosure proceedings while the homeowner is in negotiations to save the home). The bill imposes civil penalties on perpetrators of these activities. In addition, it guarantees struggling homeowners a single point of contact at their lender who has knowledge of their loan and direct access to decision makers.
“Californians should not have to suffer the abusive tactics of those who would push foreclosure behind the back of an unsuspecting homeowner,” said Brown. “These new rules make the foreclosure process more transparent so that loan servicers cannot promise one thing while doing the exact opposite.”
The laws will go into effect at the start of 2013. Borrowers can access courts to enforce their rights under the legislation.
The Homeowner Bill of Rights also contains a number of bills currently outside of the conference committee process. These other bills enhance law enforcement responses to mortgage and foreclosure-related crime. In addition, some bills are designed to help communities fight neighborhood blight resulting from foreclosures and provide enhanced protection for tenants in foreclosed homes.
The bill, unveiled by Harris in February, builds upon reforms negotiated in the national mortgage settlement between leading lenders and 49 states. Harris secured up to $18 billion for California homeowners in the agreement, some of which was used to establish a Mortgage Fraud Strike Force intended to investigate crime and fraud associate with mortgages and foreclosures.
“The California Homeowner Bill of Rights will give struggling homeowners a fighting shot to keep their home,” said Harris. “This legislation will make the mortgage and foreclosure process more fair and transparent, which will benefit homeowners, their community, and the housing market as a whole.”
It’s funny, how some people are declaring bottom in the housing market. However when you bring up the subject of the move up buyer they have no fact to defend their argument.
Also, there are a lot of proposed new rules for lender retention for risky loans, borrowers that can help sue lenders, and elimination of prepayment penalties. All of these propose changes will increase the cost of lending and possibly mortgage rates.
As long as the government insures all the loans, it won’t drive up costs. It will merely shift those costs and risks to the US taxpayer. I fear we will never again have a private mortgage market.
I signed my refi docs last night. The list of disclosures grows ever longer. Some of them, and I’m paraphrasing here, “Watch out you are getting a loan foreclosure!”.
Hey, those numerous disclosures keep some of us lucratively and gainfully employed!
That and I heard they are hiring a lot of IRS agents? I guess the feds now looking at small business and 1099 stuff.
That is disclosure. Oy, I’m off today.
The work on reducing shadow inventory has begun.
Foreclosure Starts Up for First Time Since 2009: RealtyTrac
In the first half of this year, over 1 million U.S. properties received a foreclosure filing, according to a midyear foreclosure report released by RealtyTrac Thursday.
The exact figure – 1,045,801 – marks a 2 percent increase from the previous 6-month period and an 11 percent decrease from the first half of 2011. Foreclosure filings include default notices, auction sale notices, and bank repossessions.
Second quarter foreclosure starts totaled 311,010, a 9 percent increase from the previous quarter and a 6 percent increase from a year ago. The increase is the first yearly rise in quarterly foreclosure starts since the fourth quarter of 2009.
A breakdown by state revealed foreclosure starts were up in 31 states in the second quarter compared to the same period a year ago. Of those states, 17 were judicial and 14 were non-judicial. In judicial states, lenders must get court-approval before proceeding with a foreclosure.
“The increases in foreclosure starts in the first half of the year will likely translate into more short sales and bank repossessions in the second half of the year and into next year,” said Brandon Moore, CEO of RealtyTrac.
Foreclosure activity, on the other hand, was down in the second quarter, mostly due to a decline in REOs, according to RealtyTrac.
However, first-half foreclosure activity did increase yearly in 20 states, including Indiana (32 percent), Pennsylvania (24 percent), South Carolina (23 percent), Connecticut (23 percent), Florida (23 percent), and Illinois (22 percent).
“Additional scrutiny on how lenders and servicers process foreclosures, along with aggressive foreclosure prevention efforts by the federal government and several state governments, continue to keep a lid on the foreclosure problem at a national level,” said Moore.
The average time it took to foreclosure on a property increased nationwide, but was down in some states known for their long foreclosure timelines, such as New York, which decreased to 1,001 days from 1,056 days quarter-over-quarter. Even with the 5 percent drop, the state still takes the longest to foreclose.
For New Jersey, the state with the second longest foreclosure process, the average time to foreclose dropped 3 percent. Pennsylvania, which is number seven for its timeline, was down 1 percent.
“Lenders and servicers are slowly but surely catching up with the backlog of delinquent loans that under normal circumstances would have started the foreclosure process last year, and that catching up is why the average time to complete the foreclosure process started to level off or decrease in some states in the second quarter,” said Moore.
Bank-owned (REO) properties took longer to sell in the second quarter, averaging 195 days from the time they are foreclosed on compared to 178 days in the first quarter of this year. The states that held onto their REOs the longest were New York (430 days), Arkansas (357 days), and New Jersey (354 days).
The states with the highest foreclosure rates were Nevada, Arizona, and Georgia in the first half of 2012. Over a one-year period, foreclosure activity in Nevada has dropped by 61 percent, but the state still has the highest foreclosure rate, with one in 57 housing units with a foreclosure filing. Foreclosure activity in Arizona has declined by 37 percent since the first half of 2011, but the state’s foreclosure rate is still high, with one in 58 housing units with a foreclosure filing.
In Georgia, one in every 63 housing units had a foreclosure filing. California came in fourth for its foreclosure rate, and Florida was fifth.
Considering US/global macro econs, seasoned speculators/hedge funds who continue to deploy capital in the low to mid-income driven housing arena are in for a rough ride because renters ‘ability to pay’ always gets whacked from the bottom-up.
But once group-think fear of loss overtakes greeds desire for gain, it wont matter because a rough ride always morphs into a stampede to the ‘exits’.
I doubt the hedge funds will exit in a stampede. Most of them are buying homes because they have such strong positive cashflow. Absent another severe recession, rents won’t decline so much as to cause them to bail. If that were to happen, what would they rather put their money into? Cashflow investors won’t bail if prices drop. If anything, they will buy more.
You’re probably right and as usual, you raise valid, past proven points. But, most market participants are on the same side of that boat which is a red flag
We’ve hit the economic brick wall because US wages are not indexed to inflation and corporations are in the wage suppressing business. Thus, pos cash flow scenarios are subject to flip flat to negative, especially during crisis.
Regarding hedge fund group-think/repositioning, ‘real’ RoR has begun to carry more weight vs ‘nominal’, and movements seeking various hard asset exposure outside of the US, UK and EU financial systems are expanding for good reason.
paging ALL OC sellers (both active and prospective)
ALERT!
Unscrupulous activity abounds
http://www.businessinsider.com/there-are-real-estate-brokers-out-there-who-will-trade-sex-for-a-listing-2012-7
These situations usually don’t happen with bloggers.
Might as well work at Captain Creams.
Fascinating as always. But I’m not sure about the balance between investors, banks, and first time homeowners. Strange things are happening in my Chicago suburb. An example. A nice house that was foreclosed on nearly two years ago in a very desirable location has remained empty. Six months ago a sign appeared on the lawn as if it would soon be for sale. I called the agent. “Bank hasn’t released it yet, I’ll call you soon.” He didn’t. Months later the place appeared on Trulia at a very low price. I had my agent call this time. He said it was an error, that the house wasn’t available yet, but should be soon. He’d call. Guess what? Right, he didn’t. It disappeared from Trulia and shortly after the sign came down too. Who owns the house right now? No one knows. I suspect it got marketed only to developers or investors as a package deal at the price listed on Trulia. If so it was a great deal. But either way buyers never got a chance to even see it. This is the new normal. After losing our house 2 years ago we just found out we qualify for a loan. Good for us, right? But the market is so fixed we can’t find anything livable. Oh, and there’s nothing to rent either, because we foreclosees are now everywhere and the rentals that all those investors were supposed to put on the market (remember, that’s how our government justified these bulk sales to investors?) do not exist. We can wait for winter to set in and bring out the bargains, but I fear other families are jumping into big unnecessary debt just to have a place to register their kids for school. It sucks, but then I expect this now.
If the house in question is below the median price for the area, it may have been sold as part of a bulk sale package to investors. If it is above the median, it is likely being withheld from the market because the bank doesn’t want to flood the move-up market with product. There is strong demand below the median, and very weak demand above, particularly if the price requires a jumbo loan.
This new normal can’t last long. Product must come to the market either as rentals or resales. Banks can’t force people to pay more than they can finance. Banks can’t limit supply to force prices back to the peak. Buyers simply can’t afford those prices, even with 3.6% interest rates.
It was definitely below the median. I expect to see trucks outside it soon to begin its makeover. It’ll go on the market in the spring probably, priced double what they paid for it.
What I find interesting is that some investors are really adding value, while others are idiots who are repainting and expecting a pay-off. The market will smack some of these idiots across the mouth, but the ones who know what they are doing will do well.
Chicago area foreclosures are just picking up steam. We have nearly 3x the starts as repossessions at this point. It’ll take years. We will just save and pick up a “move up” house in the off season. But a lot of young families are overpaying. Oh well. Live and learn.
Friends of mine just completed a short sale in Aliso with no financial hardship. I’m not certain of their financial position (could be over-extended with no reserves), but I know neither the husband nor wife lost any income over the last few years. They had to stop making mortgage payments, and the bank agreed to a short sale which was completed within a few months.
Their 3-year Fannie clock has already begun ticking…
It looks like the banks are relaxing or abandoning any financial hardship limitations on short sales. They probably hope to resolve more bad loans this way.
I’ve also heard that if your friends had kept making payments up through the day of the sale, they wouldn’t have had to wait for an FHA loan.
This is silly… Why do u need equity to move up the housing market? What about all the renters like yourself dutifully saving there 20-30% down.
The “starter home” market will all be investor homes that are converted to rentals…and what you call the “move up market homes” will become the new “starter homes” for owner occupied.
“What about all the renters like yourself dutifully saving there 20-30% down.”
Realistically, very few. Do you honestly believe over the last four years of recession and slow growth, legions of potential buyers have saved $150,000 or more for a 20% down payment on a $750,000 house?
Well, if the massive numbers of people squatting and not paying a mortgage are actually true… And they still have jobs then. yeah, easily.
I have many friends and co-workers that are squatting and are saving. Most have saved over 40% and a few claim they have about 100% and are waiting for the “move-up” houses in desireable neighborhoods. This “squatting and hoarding of savings” is definitely what I see in Sacramento.
My wife and I are actually thinking of buying a house (under her name only) with 3.5% down and squatting in it for as long as we can…. never making a single mortgate payment except for the down payment. We figure in a 3 years we will be able to buy a house (under my name) in El Dorado Hills 100% cash. This is actual discussion a Realtors(R) used with us as potential clients… crooked wench! We could do “it”,,,. but our ethics get in the way of such temptation,,, but it is SOOOOO tempting!. Especially since she calls every month trying to get us to go for “it”.
Thanks for sharing. I may write about that in an upcoming post.
You really make it seem so easy with your presentation but I in finding this topic to be actually something which I feel I might never understand. It seems too complex and very broad for me. I’m looking ahead for your next post, I will attempt to get the dangle of it!