Homebuilding usually leads the economy out of recession. The Great Recession did not end with a building boom largely because of overbuilding during the housing bubble. A false price signal triggered excessive homebuilding, and it took five years to work off the inventories. The collapse of the housing bubble saw new home sales and construction fall to the lowest levels ever recorded — and those records go back to the 1960s. To make matters worse, rather than experiencing a sudden drop and a “V” bottom leading to a new boom, new home sales flat-lined at record lows for five straight years. This basically wiped out the homebuilding industry. A few years ago, I heard the Riverside County manager of KB Home quip, “I’m building 10% of the homes with 10% of the staff I had in 2006.” That’s no exaggeration.
The other key point to take away from the chart above is the magnitude of the so-called recovery. Housing starts and sales may be up by large percentages from the bottom, but current new-home sales levels are still below the lowest low since 1963. Think about that for a moment. We have many more people today than we had in 1963, yet we are building fewer homes. When you factor in the changes in population, a grimmer picture emerges.
Over the last five years, new construction has matched the level of obsolesce. In other words, we have tore down as many as we built. Population is still growing, and the empty houses from the bubble are being absorbed, although this is still an overhanging problem. As some point, population pressures will contribute to new home demand — or at least new home desire. Until the next generation gets a job that pays enough to service their student loan debts and enables them to move out the basement in their parent’s house, population pressure will not translate to demand for new housing.
2012 and homebuilding’s recovery
The homebuilding industry is slowly recovering. New home sales are brisk in Orange County and across the Southwest despite high levels of mortgage delinquency. Pundits like to proclaim a large uptick in demand because increasing demand really would mark the turning point in the housing recovery. Unfortunately, that isn’t reality. The real reason homebuilding is recovering is because new homes are a substitute for the lack of inventory on the MLS. Demand is up slightly, but restricted MLS supply is really what’s driving the homebuilding recovery. And a recovery in homebuilding will lead to a broader economic recovery because many people will go back to work.
Why Housing Construction Is Rebounding
By Nick Timiraos — October 17, 2012, 1:13 PM
Housing construction was depressed to such a low level for so long that it wasn’t going to take much to boost the ailing sector.
What it needed was for demand to recover. Now, with consumer confidence rising and mortgage rates falling to their lowest levels on record, buyers are coming back.
Unfortunately, that just isn’t true, certainly not for owner-occupants.
Despite the lead touting the increase in demand, the rest of the article talks about the supply issues that are really driving the recovery.
It began earlier this year as investors scooped up properties at big discounts that they could rent at a profit—often buying homes out of foreclosure before they were taken back by banks.
Consider the case of Sacramento, Calif. The supply of previously owned homes listed for sale in September was down by 60% from one year ago, led largely by big declines in bank-owned listings.
That’s why homebuilding is rebounding. People who would ordinarily be purchasing resales are not able to get the properties they want, so they are turning to new homes as a source of substitute supply.
Now, builders are benefiting from sharp declines in the share of foreclosed properties. Just 14% of local home sales in September were foreclosures, the lowest in more than five years and down from nearly 50% as recently as February 2011.
If the lack of inventory were due to a lack of delinquent borrowers, I would be celebrating the new recovery, but that isn’t the case.
In fact, the problem is getting worse: September delinquencies skyrocket 7.72%, foreclosure filings decline 20.4%, shadow inventory grows.
Many traditional sellers are underwater—they owe more than their homes are worth—or aren’t willing to list their homes at prices that are down sharply from five years ago.
That’s putting home buyers in a bind. “People are running out of options,” says Veronica Roberson, vice president of sales and marketing at home builder Taylor Morrison. “We’re down to less than a month of supply, so buyers are coming to new homes pretty urgently.”
New home sales are not traditionally a supply substitute. People generally buy new homes — and pay a premium for them — because they want new construction. It’s similar to new car buyers. People want to be the first and only owner. Imagine what would happen to new car sales if 50% of the used cars suddenly disappeared from the market.
This has big implications for homebuilders. The demand driving new home sales is not the sustainable kind from buyers with traditional motivations for new construction. The buyers who are substituting to new homes because MLS inventories are so low will disappear the moment MLS inventories return. Are lenders planning to keep inventory off the market indefinitely to keep homebuilders active? Do we want or need a plethora of new homes? This isn’t a free-market signal, so we are causing yet another distortion the market will eventually have to absorb.
At Taylor Morrison’s Sorrento East community in Dublin, Calif., where homes are priced from the mid-$600,000 range, sales have been running at a rate of five to six homes a month—more than double what was selling one year ago.
One growing concern in markets like Sacramento is that home sales volume is falling precisely because there aren’t enough homes for sale. Rising prices could lure more sellers. Phoenix, which has witnessed strong price growth, saw inventory pick up in September.
Any significant return of sellers to the market, whether organic sellers or banks with more REO, will cause new home sales to suffer. Expect to see new home sales proceed upward in a choppy manner with significant periods of low sales as MLS inventories fluctuate.
Even if sellers dither, builders won’t. Nationally, builders started construction on more units during September than any time in the past four years, after adjusting for seasonal factors, the Commerce Department said Wednesday. Single-family construction was up by 43% from last year’s anemic levels.
On a seasonally adjusted basis, the 141,000 newly built homes for sale at the end of August was the lowest since the government began its tally in 1963. Listings of previously owned homes are at a seven year low.
Meanwhile, applications for home-purchase mortgages last week hit their highest level since June and were 12% above their year-earlier reading, the Mortgage Bankers Association said on Wednesday.
Home purchase applications are stuck at 1990s levels, and they have been for the last three years.
The above graph is the best measure of market demand because it filters out the fickle cash buyers. Owner occupants borrowing money to buy properties is the foundation of housing market demand. Until we see a breakout of the tight range at the bottom of the chart and a sustained upward movement, I am not going to believe any of the arguments about increasing demand. The data simply doesn’t support it.
Gains in construction should lift the economy. Glenn Kelman, chief executive of real-estate brokerage Redfin, writes in an op-ed at Quartz that builders have been completing “half-built projects” with “skeleton crews” for much of the past year. That hasn’t done too much for job growth. “It takes fewer cooks to prepare leftovers for dinner,” he writes.
But as more new projects get underway, that will change. Perhaps 2013 will be the year that housing really helps the economy accelerate.
I believe 2013 will be the year residential construction starts to significantly contribute to economic growth and expansion. I am already seeing signs to life in the local land development industry, and this trend should continue. At this point, the industry is vulnerable to an increase in MLS supply, but the banks show no signs of increasing their REO acquisitions or liquidations, so the homebuilding industry will likely continue to benefit.
Irvine’s high end still crumbling
The prices people paid in 2006 are truly remarkable, particularly considering interest rates were 6.5% at the time. The former owner of today’s featured property paid $1,634,000 at the peak on 8/11/2006. The bank took it back earlier this year, and they are now selling it for 33.5% less. That’s a pretty steep discount considering all the talk of prices getting pushed back up to the peak.
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Proprietary OC Housing News home purchase analysis
$1,085,800 …….. Asking Price
$1,634,000 ………. Purchase Price
8/11/2006 ………. Purchase Date
($548,200) ………. Gross Gain (Loss)
($130,720) ………… Commissions and Costs at 8%
============================================
($678,920) ………. Net Gain (Loss)
============================================
-33.5% ………. Gross Percent Change
-41.5% ………. Net Percent Change
-6.5% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$1,085,800 …….. Asking Price
$217,160 ………… 20% Down Conventional
3.96% …………. Mortgage Interest Rate
30 ……………… Number of Years
$868,640 …….. Mortgage
$227,851 ………. Income Requirement
$4,127 ………… Monthly Mortgage Payment
$941 ………… Property Tax at 1.04%
$442 ………… Mello Roos & Special Taxes
$271 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$105 ………… Homeowners Association Fees
============================================
$5,886 ………. Monthly Cash Outlays
($1,066) ………. Tax Savings
($1,261) ………. Equity Hidden in Payment
$297 ………….. Lost Income to Down Payment
$156 ………….. Maintenance and Replacement Reserves
============================================
$4,012 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$12,358 ………… Furnishing and Move In at 1% + $1,500
$12,358 ………… Closing Costs at 1% + $1,500
$8,686 ………… Interest Points
$217,160 ………… Down Payment
============================================
$250,562 ………. Total Cash Costs
$61,500 ………. Emergency Cash Reserves
============================================
$312,062 ………. Total Savings Needed
The property above is available for sale on the MLS.
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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."
19 Responses to “Restricting MLS inventory is reviving homebuilding”
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Lenders are providing rationalizations and justifications for their policy of delaying foreclosures. Populist bullshit.
Foreclosures Cost Nearly $2 Trillion in Home Equity: Report
Foreclosures have drained nearly $2 trillion in home equity from neighborhoods across the United States, according to a report from the Center for Responsible Lending (CRL).
In a report titled “Collateral Damage: The Spillover Costs of Foreclosures,” researchers Debbie Bocian, Wei Li, and Peter Smith conclude that, based on the 10.9 million loans that entered foreclosure between 2007 and 2011, approximately $1.95 trillion in property value has been lost or will be lost by residents who live close to foreclosed properties. This estimate includes losses stemming from completed foreclosures and future losses projected on foreclosure starts.
The researchers noted that the estimated cost does not include the total loss in home equity resulting from the foreclosure crisis (estimated at $7 trillion) and also does not take into account the equity lost by families who are actually foreclosed on.
In addition, the report doesn’t cover “the billions of dollars drained from communities as a result of lost tax revenue, vacant properties, increased crime, and lower school performance by children.”
Communities of color are seeing the greatest share of the $2 trillion loss, with more than half of the home equity drain impacting minority neighborhoods. The average spillover cost per family is or will be $21,000 in household wealth, or 7 percent of median home value, according to the report. However, in minority neighborhoods, the average loss is or will be $37,000, or 13 percent of home value.
Wade Henderson, president and CEO of the Leadership Conference on Civil and Human Rights, called the report “troubling evidence of how much the economic costs of foreclosures are spilling over into communities all over America.” He also said the increased cost to minorities comes at the hands of abusive lending and servicing behavior.
“Communities of color—which have been targeted for years by predatory lenders, and abused for years by mortgage servicers-have been practically drowning. Until policymakers get serious about reducing foreclosures and restoring meaningful home ownership in all communities, a full economic recovery will likely remain out of reach,” Henderson said.
Janet Murguia, president and CEO of the National Council of La Raza, echoed the sentiment.
“The wealth drain triggered by foreclosures is continuing unabated, hurting Latino families and other vulnerable communities the hardest,” Murguia said. “We’re calling on policymakers to show strong leadership in stopping the foreclosure crisis and making fair and sustainable housing a national priority.”
“I heard the Riverside County manager of KB Home quip, “I’m building 10% of the homes with 10% of the staff I had in 2006.” That’s no exaggeration.”
Riverside and San Bernardino Counties are never coming back like the way their were. Even if there is a mountain of easy credit again, the cost of gas and electricity is cost prohibitive from living out there with the those lower wages jobs. Many some of the communities closer to LA and Orange Counties.
At one point even Barstow got drunk and was drawing up plans, getting a developer ready to construct a new 25,000 home community to be built over 25 years. And remember the Tejon Ranch Project on the other side of the Grapevine? I don’t know what the status of that project, but it has be canceled or at least scaled backed.
In 2007 I worked on a property in Yucca Valley that an East Coast homebuilder purchased. After the crash, you couldn’t give away homes in Yucca Valley. That builder will never get his money back out of that property. I was amazed anyone would even consider buying property for large-scale development out there.
I remember driving through Yucaipa, Beaumont, and Banning on the way to Palm Springs, seeing all the fripperies of new real estate development: banners, signs pointing to model homes, and billboards with the usual “from only $xxx,xxx” and “starting at $xxx,xxx” statements.
Those “communities” are far closer to the habitable part of the solar system than Yucca Valley is, yet still a bad enough choice as to make Lancaster and Palmdale seem sensible locations for commuter suburbs.
I figured that the investors weren’t actually insane, just deluded by the cheapness of the land and some doctored market research foisted upon them by self-interested construction and financial interests.
Hey: there’s a reason why that land is cheap! Clearly, few would commute to work from such places, so retirees must have been the imaginary market for these lovely Tranquility Base Estates.
The prices builders and developers were paying out there was ridiculous as well. I worked on a project in Sanger, California, where the developer was paying $135,000 an acre. Today, the residual land value for development is less than zero.
Here’s the name of that development Centennial California. Further than Palmdale and Lancaster, but closer than Bakersfield. Is Bakersfield now considered a drivable suburb?
Tejon Ranch Project
Bakersfield was one of the mysteries of the housing bubble. Even in the best of times, there is high unemployment and low wages in Bakersfield, yet the built and sold a lot of houses.
Banks are not holding many REOs. They are allowing delinquent mortgage squatters to stay in place to prevent taking on more REOs. It has the same effect, but rather than taking the property themselves, the banks allow them to fester in shadow inventory.
Agents Suggest Banks May Be Holding onto REOs
A sharp drop in distressed sales is one of the main drivers behind the steady rise in home prices seen in certain areas throughout the country, according to the monthly Campbell/Inside Mortgage Finance HousingPulse survey.
The survey includes responses from about 2,500 real estate agents through the United States.
In September, the HousingPulse Distressed Property Index (DPI), which measures the proportion of purchase transactions involving distressed properties, hit a record low of 38.6 percent based on a three-month moving average.
The drop marks the fifth consecutive monthly decline and is more than 10 percentage points lower than the February’s near-record-high of 48.7 percent.
According to HousingPulse, the lack of foreclosures and REOs available for sale is the reason for the steep decline in distressed sales.
HousingPulse respondents reported major banks seem to be keeping many REO properties off the market this year, but suggested banks may look to release “significant amounts” of bank-owned properties next year, which could lead to lower home prices.
When real estate agents were asked about the impact of the upcoming national elections, responses were mixed, with some agents reporting would-be homebuyers are holding off until after November.
One Georgia-based agent said, “We are seeing middle-to-high-income buyers pausing due to the upcoming elections. We hear it daily.”
An agent in Pennsylvania said, “It [the election] is having a negative effect on home sales in our market. Everyone is waiting to see who gets elected in November.”
Other agents found the opposite was occurring.
“Many of my clients are worried about interest rates rising after the election and feel they may be artificially held down by the current administration,” said one agent in Virginia.
A New York agent said, “I think now people are in a hurry before the election and not knowing what the future will hold after the elections.”
I too, am waiting to see who will be elected. Will it be the guy with a proven track record of kissing banker ass well and often, or the other guy who kisses banker ass with sloppy, moist tender kisses?
Depending on who’s elected, we’ll either see yet another bail-out of the banks, or yet another bail-out of the banks.
The suspense is positively stifling!
Interesting article on Irvine’s Ray Watson.
Lansner: How Ray Watson built Irvine
“A lot of people have big ideas,” Rob Elliot says. “The difference was that this was actually achievable.”
Elliot is chief architect and planner at big developer the Irvine Co. – a job Raymond Watson first held when the land that is now the city of Irvine was a sprawling cattle ranch.
Watson, who died last week at 86, came to the Irvine Co. in 1960. He helped create the renowned master-planned city – along with building the foundation for what is one of the world’s largest real estate fortunes, current Irvine Co owner Donald Bren’s empire – with little personal fanfare.
To see how Watson was able to turn a wild idea into a thriving city, I chatted with Elliot, who worked with Watson when the elder planner returned to the Irvine Co. after a stint with Walt Disney Co.
What I learned from Elliot is that Watson’s genius was seemingly so simple. Not surprising for a guy with very humble beginnings.
Like many great leaders, Watson was able to pull off his crazy idea by amplifying his immense technical skills with strong people skills and a steadfast discipline to stay the course.
MORE…
I have no thoughtful remarks this morning, only what I hope is an astute observation: Where the hell are the entry-level buyers? Where is the mass of entry-level folks who can actually afford even today’s prices? Where are the careers which will enable them to service their debt and afford the still-bloated prices boomers will be asking for their precious
homesboxes with doors?Apparently, with record low interest rates and a complete lack of MLS supply, we don’t need many entry-level buyers to push up prices. As the chart on purchase originations shows, the owner-occupant demand simply isn’t there.
OC’s ‘sacred-cow’ is going to be carved-up one way or another, simply because:
1) wages are not indexed to inflation
2) corporations are in the wage-suppressing business
3) demographics
Gen X Has Been Absolutely Clobbered By The Recession:
a census report released in June found Gen X saw a 59 percent decline in median household net worth between 2005 to 2010 –– the largest of any age group. According to Pew, in inflation-adjusted dollars, they now earn $56,000 less than their counterparts in 2001.
On the other hand, 45- to 64-year-olds saw a $50,000 decline
http://www.businessinsider.com/gen-x-was-clobbered-by-the-recession-2012-10
Very interesting data
12 years after mortgage default only 35% of borrowers return
Posted by Jacob Gaffney on October 29, 2012 05:24 PM Housingwire
The Federal Reserve Bank of San Francisco wonders how bad mortgage default is for getting future mortgage credit.
Well, it’s pretty bad.
Their research report finds that 12 years after a mortgage termination, just above 35% of borrowers with no prior defaults have taken out new mortgages. Only about 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default.
They also compared homeowner return-to-mortgage behavior from the more-modern years of 2001, 2003 and 2008. Those who dropped out in 2008, they found, are much slower to return.
“The Great Recession that began in 2007 was much deeper than the 2001 recession, and uncertainty about jobs or future income prospects may have made people unwilling or unable to demand housing at the rate seen after previous recessions,” write William Hedberg and John Krainer.
The good news is that the survey is not powerful enough to assume the mortgage termination is due to foreclosure.
“They could have moved, or adjusted their housing expenditures by trading up or downsizing. Or they could have paid down their mortgages and now own their houses outright. We might expect that most borrowers who have paid off their mortgages will never return to the market,” the authors say.
Given current events, for the 2008 mortgage defaults, the above pay-off explanation feels the least likely.
jgaffney@housingwire.com
That is a very interesting study. I will feature that in an upcoming post. Thanks.
So IR, what does this mean for upcoming Irvine-area developments? Will construction in the Great Park area ramp-up? Will Orchard Hills be taken off of the moth balls soon? Will they be filling in The District area with more homes soon?
I imagine they will do all of the above. They will strike while the iron is hot, and right now, new home sales are hot.
Wells Fargo mails checks to thousands with FHA-backed mortgages
October 30, 2012 • 2:44pm
Wells Fargo ($33.97 -0.09%)recently surprised thousands of home loan customers by sending refund checks to a fraction of its Federal Housing Administration-backed borrowers. The checks came with a letter informing recipients they had previously paid unnecessary mortgage-insurance related fees.
When the checks are cashed, the borrowers loses the right to sue the nation’s top home lender, on the grounds that the refunds came as a result of borrowers being placed into FHA-backed mortgages unnecessarily.
In an email to HousingWire, Wells Fargo stated: “During the course of our own internal review, we identified a small group of borrowers who had received FHA loans between 2009 and 2011 who may have qualified for conventional financing under circumstances where such financing could have been a preferred option.”
FHA loans, typically offered to borrowers who are unable to pay the 20% down payment required for traditional loans, may be more expensive in terms of fees and insurance.
“The FHA loans impacted by this remediation are less than 2% of our total FHA originations for this period and the bulk of the refunds are between $2,000 and $5,000,” said Wells Fargo.
These loans were granted on the upward journey of Wells Fargo to become the No. 1 originator of loans. In September, Wells Fargo identified their error and began mailing notifications to customers.
“FHA and conventional loan products have a great deal of overlap,” the Wells email said, “there are many times that a borrower qualifies for both products but that the FHA choice is the preferred choice for that customer given interest rate and down payment considerations, among other things.”
mhopkins@housingwire.com
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