Economists are correct in their forecasts less often than weathermen. Some of the better ones have learned how to make their predictions vague enough so nobody notices, and the best ones revise history and make people believe they were right all along. Right now, the consensus among economists is that the housing market has bottomed. Perhaps it has, but there is also good reason to believe it has not.
First, although delinquency rates are dropping, they are still almost double their historic norms. Delinquency precedes foreclosure, and foreclosure rates are still 10 times historic norms, and these rates are not dropping. In fact, we have not yet turned the corner on foreclosures.
The reason foreclosure rates are so high and likely to stay there is because lenders are yet to empty the enormous reservoir of shadow inventory.Until these delinquent borrowers are removed from these properties through short sale or foreclosure, these sales will continue to pressure home prices.
It isn’t only delinquent borrowers who will contribute to distressed inventory sales. Until the ocean of underwater loanowners is drained, each of those borrowers who wants to sell will become a short sale. People won’t be willing to stay trapped in their underwater homes for a decade or more. Sellers who have no equity and want to move really don’t care about the resale price, so they are more likely to price a property aggressively to sell as quickly as possible. If the bank won’t let them sell, most will strategically default and become a foreclosure.
Lenders believe they can correct the negative equity problem by raising prices. With the dramatic slowdown of lender liquidations of late, they have been making some progress, but unless they are going to let millions of delinquent borrowers squat until prices rise back up to the peak, the liquidations of REO from processing their previous bad loans will keep prices from rising to far too fast. How does a market bottom in the face of such a large quantity of short sales and foreclosures?
Perhaps lenders are counting on resurgent demand? The only problem is this demand does not exist. Look carefully at the graph of purchase applications. Do you see an increase in demand?
So think about what these eminent economists are saying. Because inventory has been withheld from the MLS by bank artifice and prices have ticked up slightly, we should all ignore the problems with high delinquency rates, high foreclosure rates, an enormous reservoir of shadow inventory, and weak demand. Hmmm… Does that make sense to you?
Groupthink is the problem
One of the defining features of groupthink is a self-reinforcing consensus. Economists are among the worst at succumbing to this form of fallacious thinking. As you read through today’s featured article, notice the pattern of self-reinforcing delusion and squelching of other opinions. Just like 2007 when the consensus completely missed the collapse of the housing bubble, and like 2010 when the consensus called the first bear rally the bottom, groupthinking economists are often wrong. Few economists have carefully looked at the evidence pointing to continued declines, and of those who may see the problems, even fewer have courage to stand alone and state all the reasons the housing bottom may not be as durable as projected.
Housing Passes a Milestone
Updated July 11, 2012, 7:51 p.m. ET
The housing market has turned—at last.
The U.S. finally has moved beyond attention-grabbing predictions from housing “experts” that housing is bottoming. The numbers are now convincing.
Are the numbers now convincing? Let’s take a closer look.
The indices have still not turned positive (see chart on left). Further, the current price improvement is of a smaller magnitude than the bear rally of 2009 and 2010 that fooled the economists last time. If you look at the existing home sales chart on the right, you see that sales volumes are still about 10% lower than 2000 and about 35% below the sales volumes at the peak. Sales have not surpassed the tax-credit induced nonsense of the bear rally.
The chart on the left above is single family home starts. In 2009, single-family starts fell to the lowest level recorded since 1958 when records were first tallied. Since 2009, starts have remained in the doldrums. The nearly indistinguishable uptick in 2012 has not surpassed the bear rally of 2010, and is still nearly 50% below the lowest low recorded over the 50 years prior to the collapse of the housing bubble.
Ask anyone looking for work in the homebuilding industry, and they will tell you very little has changed. Perhaps homebuilding is contributing something to GDP again, but until employment picks up in the industry, we won’t see a broader economic recovery.
In short, nothing about these numbers looks particularly bullish, and they certainly do not conclusively prove the market has bottomed.
Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. “We finally saw some rising home prices,” S&P’s David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.
Since this is July, a season uptick in prices is normal and expected.
Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months’ worth despite all the foreclosed homes that lenders own.
It was a surprise that lenders abruptly changed their policies and stopped taking on new REO. What isn’t a surprise is that lenders are manipulating the market.
The fraction of homes that are vacant is at its lowest level since 2006.
The reduced inventory of unsold homes is key, says Mark Fleming, chief economist at CoreLogic, a housing data-analysis firm. For the past couple of years, house prices have risen in the spring and then slumped; the declining supply of houses for sale is reason to believe that won’t happen again this year, he says.
For the past couple of years? How about every year without fail. Perhaps Mr. Fleming is right and the total lack of inventory will prevent prices from dropping this fall and winter. There is no real reason to believe that will happen other than wishful thinking.
Builders began work on 26% more single-family homes in May 2012 than the depressed levels of May 2011. The stock of unsold newly built homes is back to 2005 levels. In each of the past four quarters, housing construction has added to economic growth. In the first quarter, it accounted for 0.4 percentage points of the meager 1.9% growth rate.
“Even with the overall economy slowing,” Wells Fargo Securities economists said, cautiously, in a note to clients, “the budding recovery in the housing market appears to be gradually gaining momentum.”
Economists aren’t always right, but on this at least they agree: A new Wall Street Journal survey of forecasters found 44 believe the housing market has reached its bottom; only three don’t. (The full results of the Journal’s July survey will be released at 2pm ET)
Economists are right about 50% of the time, and on many occasions they have all agreed and been terribly wrong. The quick change to form this new consensus is a classic example of groupthink.
Housing is still far from healthy despite the Federal Reserve’s efforts to resuscitate it by helping to push mortgage rates to extraordinary lows: 3.62% for a 30-year loan, according to Freddie Mac’s latest survey. Single-family housing starts, though up, remain 60% below the 2002 pre-bubble pace. Americans’ equity in homes is $2 trillion, or 25%, less than it was in 2002 and half what it was at the peak. More than one in every four mortgage borrowers still has a loan bigger than the value of the house, though rising home prices are reducing that fraction slowly.
It’s worth pointing out here again that most economists who quote the percentage underwater figures use Zillow’s estimate based on the current value as compared to the original first mortgage. Zillow does not take into account subsequent refinances or second mortgages, nor does it allow for transaction costs to get out of the property. The true percentage of underwater loanowners is closer to 50% with beaten down markets having much, much higher rates.
Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs.
Has common sense prevented economists from asking how the market is supposed to bottom with such low demand due to the “distressing dearth of jobs?”
For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. “A little tail wind is a lot better than a headwind,” says economist Chip Case, the “Case” in Case-Shiller.
From here on, housing is unlikely to drag the U.S. economy down further. It will instead reflect the strength or weakness of the overall economy: The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses. “Manufacturing had led growth and construction had lagged,” JPMorgan Chase economists said last week.”Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life.”
Plenty could go wrong. The biggest threat is a large shadow inventory of unsold homes, homes which owners won’t put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures; a flood could reverse the recent rise in prices. Or the still-dysfunctional mortgage market could get worse. Or overly zealous regulators or a post-election change in government policy could unsettle mortgage lenders or home buyers.
He acknowledges the elephant in the room, but proclaims this elephant won’t do any damage. Crazy.
But the housing bust is over.
Bullshit. This writer’s proclamation does not make it so.
Perhaps we have seen the bottom tick in nominal prices, but perhaps not. All the problems I outlined at the beginning of this post are still in play. Wishful thinking does not make a market bottom. It makes economists who indulge in it look like fools.
Costa Mesa Overview
Median home price is $434,000. Based on a rental parity value of $577,000, 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 from $292/SF to $292/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $41 last month from $2,316 to $2,358.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 6
Proprietary OC Housing News home purchase analysis 
939 West 19TH St Unit A2 Costa Mesa, CA 92627
$334,900 …….. Asking Price
$187,000 ………. Purchase Price
1/10/1990 ………. Purchase Date
$147,900 ………. Gross Gain (Loss)
($14,960) ………… Commissions and Costs at 8%
============================================
$132,940 ………. Net Gain (Loss)
============================================
79.1% ………. Gross Percent Change
71.1% ………. Net Percent Change
2.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$334,900 …….. Asking Price
$11,722 ………… 3.5% Down FHA Financing
3.67% …………. Mortgage Interest Rate
30 ……………… Number of Years
$323,179 …….. Mortgage
$95,329 ………. Income Requirement
$1,482 ………… Monthly Mortgage Payment
$290 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$84 ………… Homeowners Insurance at 0.3%
$337 ………… Private Mortgage Insurance
$270 ………… Homeowners Association Fees
============================================
$2,463 ………. Monthly Cash Outlays
($224) ………. Tax Savings
($494) ………. Equity Hidden in Payment
$14 ………….. Lost Income to Down Payment
$62 ………….. Maintenance and Replacement Reserves
============================================
$1,821 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,849 ………… Furnishing and Move In at 1% + $1,500
$4,849 ………… Closing Costs at 1% + $1,500
$3,232 ………… Interest Points
$11,722 ………… Down Payment
============================================
$24,651 ………. Total Cash Costs
$27,900 ………. Emergency Cash Reserves
============================================
$52,551 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # S703884 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$1,200,000 1143 AVIEMORE Ter |
0.66 miles 3 bd / 1.75 ba 1,496 Sq. Ft. |
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$659,000 2289 PACIFIC Ave #3 |
1.03 miles 3 bd / 2.5 ba 1,600 Sq. Ft. |
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$445,000 2208 PUENTE |
1.08 miles 4 bd / 2 ba 1,369 Sq. Ft. |
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$1,199,000 346 62ND St |
1.11 miles 3 bd / 2.5 ba 1,325 Sq. Ft. |
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$679,000 9762 CLEARBROOK Dr |
1.17 miles 3 bd / 3 ba 1,718 Sq. Ft. |
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$449,000 2161 MINER |
1.17 miles 4 bd / 2 ba 1,314 Sq. Ft. |
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$879,000 259 COLTON St |
1.19 miles 3 bd / 2 ba 1,608 Sq. Ft. |
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$429,000 9745 VERDE MAR Dr |
1.23 miles 2 bd / 2.5 ba 1,462 Sq. Ft. |
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$595,000 21661 HILARIA Cir |
1.39 miles 3 bd / 2 ba 1,729 Sq. Ft. |
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$739,000 9572 CHEVY CHASE Dr |
1.47 miles 3 bd / 2.5 ba 1,732 Sq. Ft. |
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48 Responses to “The housing bottom consensus could be very wrong”
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Increase in Calls to HOPE Hotline Could Signal Next Foreclosure Wave
A surge in increased calls to the Homeowners HOPE Hotline, which helps distressed homeowners navigate financial challenges, could signal a possible new wave of foreclosures according to a report released by the Homeownership Preservation Foundation (HPF).
The independent nonprofit reported that calls to the hotline from homeowners who are current with their mortgages are up 70 percent this year. Of those counseled, half stated that “mounting instability” to continue payments could cause them to default. More than 75 percent of those current borrowers had credit scores above the subprime threshold when they took out the loan.
However, factors like job reduction and increased credit card spending could have caused those numbers to drop.
Colleen Hernandez, CEO of HPF, said there are a number of issues that could be affecting homeowners who were initially considered “low risk”.
“We are seriously concerned about the rise in homeowners who were classified as low risk when they took out their mortgages, and as a result of a combination of circumstances-job loss, healthcare crisis, and various recession-related issues-have seen their economic situations severely deteriorate,” Hernandez said in a statement. “This could result in the proverbial ‘second shoe to drop’ for the housing crisis, especially considering the limited options available to homeowners who are struggling but not yet delinquent.”
While the Home Affordable Refinance Program (HARP 2.0), a federal program designed to allow homeowners with loans back by Fannie Mae and Freddie Mac to refinance at a lower interest rate, may be an option for some, Hernandez said that only 40 percent of callers appeared to qualify.
“This foreclosure crisis is far from over,” she warned. “As lenders are learning to comply with new service standards set in place by the National Mortgage Settlement and the Consumer Financial Protection Bureau (CFPB), make no mistake that notices of default are once again landing in mailboxes across the country at a rapid clip.”
Hernandez also advised homeowners to not wait until an emergent situation to contact the HOPE hotline.
“If you are running a budget deficit and are nervous about payments on a monthly basis, you’re already in an emergency,” she explained. “It’s best to call the HOPE Hotline and address your housing situation as soon as possible.”
Delinquent loanowners prove they are committed to squatting until foreclosure.
BofA Give-Away Has Few Takers Among Homeowners: Mortgages
When Bank of America Corp. sent letters to 60,000 struggling homeowners offering to slice an average $150,000 off their loans, the lender got an unusual response from most of them: silence.
Homeowners who fell behind on their payments began receiving the mailings in May, part of the bank’s effort to meet terms of the $25 billion industry settlement over foreclosure abuses. More than half haven’t responded as “borrower fatigue” causes them to tune out the offers, said Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank.
“The number of customers responding is lower than we expected, given the significant assistance available,” Frahm said in an interview. “We are working very hard to determine why response rates are lower than expectations.”
Bank of America, which pledged almost half of the fines and assistance in the February settlement with state and federal officials, is critical to determining how many U.S. homeowners are helped by the landmark deal. Housing advocates say that relying on the same companies that committed loan servicing abuses to avert foreclosures may result in yet another program that helps fewer people than intended.
BoA is targeting their worst loans, as they should; but these loans come with the “worst” borrowers. Meanwhile, I sit and wait with a BoA serviced and owned second purchase loan that’s underwater, and all I receive is the standard, “We continue to review all eligible loans for assistance related to the settlement.”
We’ll be hearing a lot about ‘funding fail’ in the coming weeks and months…
Industry Shocker: Wells Calls It Quits
Wells Fargo is calling it quits on wholesale lending, dealing yet another devastating blow to this struggling origination channel.
http://www.nationalmortgagenews.com/dailybriefing/wells-quits-wholesale-1031322-1.html
The article requires member access. Can you cut and paste the relevant section? Thanks.
wouldn’t want to violate their ToU
so… from another source….
July 12 (Bloomberg) After tomorrow, the company won’t accept new applications for loans originated by independent mortgage brokers in its wholesale channel, according to a statement today.
The company made $7.4 billion of mortgages through brokers in the first quarter, the most of any lender and 21 percent of the industrywide total, according to Inside Mortgage Finance, a trade publication.
http://www.businessweek.com/news/2012-07-12/wells-fargo-to-exit-wholesale-channel-after-fair-lending-accord
Wells is the biggest player in the correspondent channel right now (smaller lenders originate and sell immediately to Wells). A huge shockwave would rumble through the market if they exited their correspondent business.
Calculated Risk has been bad about this. Since he called “a bottom” a few months ago, he’s been digging very hard to vindicate the call by constantly citing low inventory. Of course, he also minimizes the short-term market manipulation responsible for the tight inventory, as well as the fact that people ain’t got no money and they got no jobs.
A while back he cited increasing expectations of appreciation among buyers and sellers as further evidence of recovery, as if economists such as himself hadn’t been the ones pimping the recovery story. Complete circle-jerk.
Even the sharpest economists get into this pissing contest about being first to call bottom, and then rationalizing away contrary trends to defend the correctness of their calls or squeezing all data into their preconceived conclusion. And of course there’s the classic weaseling about different bottoms, definitions of recovery, and other ways of plausibly denying you were wrong.
I like CR, you are right. If fact he discussing housing recovery now, use the homebuilding data. This economic down cycle is not over yet.
“Even the sharpest economists get into this pissing contest about being first to call bottom, and then rationalizing away contrary trends to defend the correctness of their calls or squeezing all data into their preconceived conclusion.”
Thank you for your comment. I’m relieved to find I am not the only one who sees this.
I try to bang on Scott over at Califia Beach Pundit on housing, but he likes to ignore the obvious and sticks with his “preconceived conclusion”.
I enjoy his writing and analysis, however his take on housing really makes me question the rest of his work.
Spot-on post.
Clearly, driven by confirmation biases; as are most economists.
Sep 2010: ”The housing market is clearing and has apparently stabilized. It’s time to worry about other things” –Grannis
“Even the sharpest economists get into this pissing contest about being first to call bottom, and then rationalizing away contrary trends to defend the correctness of their calls or squeezing all data into their preconceived conclusion.”
Thank you for your comment. I’m relieved to find I am not the only one who sees this.
LOL – and you think you are any better about this? Once the recovery starts, be it now, or 10 years from now, it will be interesting to see how many articles you write casting doubt on the recovery, and how long they continue. (i.e. 2-3-4 years in still casting doubt). Better yet, track those statements vs a price chart graph. Kinda like those who mocked Lawrence Yun’s calls 2006-2009 as prices kept going down, down, down.
Its quite obvious that this is a permabear blog, and you are deeply biased. Nothing wrong with that mind you. Just dont think you are different than anyone else when it comes to sticking with your preconcieved conclusion.
If you say so. My writings speak for themselves.
I have pointed out over the last 9 months that prices have been below rental parity, and for those with a long holding time, it is okay to buy. The true permabears have accused me of being too bullish. I look at data and call them as I see them. Apparently, you don’t like what I see, but that is your problem, not mine. Further, my family owns several investment properties, so I am benefiting from any increase in prices. I do not have a position bias coloring my interpretation.
I don’t think the bottom is far away, and 2012 may be the nominal bottom, but there are real problems hanging over the market which I detailed in this post, and which you obviously ignored, and so has everyone else.
I am not ignoring the market problems. You have no idea what my position on the market is, and im not going to tell you.
Long and short of it. I am a troll. I laughed hilariously when in 2006 the permabulls said we were going to keep going up 20% a year – now I laugh just as hard at the permabears who tell us we are nowhere close to the bottom.
That aside, I only called you out because I think its obvious…if the market turns in 2012, you wont think its “safe” til 2015. If the market turns in 2015, you wont think its “safe” til 2018, etc. That much is obvious.
When we sold our home in 2005, I said the “nominal” bottom would be in the winter of 2012, and I will hold to that until shown wrong. If shown wrong, I will say, “I was wrong.” I doubt anyone will care either way.
The “real” bottom in real dollars will not occur for another 5 to 10 years.
The reason IR dos not know Goran’s position on the market and other’s position on the market is because they are too scared to say what their position is because they are too scared to be wrong.
Always hold to a Winter 2012 bottom? Yeah… sure…
You’ve shifted your bottom calls for nominal and real prices too many times to count.
awgee says:
November 30, 2010 at 11:52 am
The bottom for residential real estate will be June 15, 2011 in nominal dollars. In real, inflation adjusted dollars, the bottom is years away, maybe 2015.
Wow! That is some darn good research. How did you do that? Seriously.
Anywhooz, I think I have only changed my mind on the bottom once, but came back to the winter of 2012. If you can show different, I have no problem saying, Oops.
Agwee says: The reason IR dos not know Goran’s position on the market and other’s position on the market is because they are too scared to say what their position is because they are too scared to be wrong.
Nope. As I said, I am a troll. Just like I laughed at the permabulls in 2006, I now laugh at the permabears. Truth is, I live on the east coast – in a house bought in 1992. I dont know enough about your local market to form an opinon one way or another. However that doesnt stop me from being a troll
I assume that Irvine Renter didn’t want to criticize a generally well-respected financial blogger who often posts about real estate, therefore I was glad to read your criticism of Calculated Risk’s glaring confirmation bias. For the past month or so, I kept wondering why no one brought it up on this blog in the “Thoughtful Remarks” section.
Thanks for finally posting that, “The emperor has no clothes.” Much of the evidence Calculated Risk uses to support his theory that housing has bottomed is, I will be polite, flimsy. It saddens me to think that many people are reading his blog posts about a real estate bottom, as if they were based on well-reasoned arguments.
Although many of Irvine Renter’s arguments tend to be repetitious such as, “The government, hold onto your hats, is corrupt!” or “The National Association of Realtors purposely issues press releases that, shockingly, support their own interests!” or “Most people, believe it or not, tend to be blinded by greed and act like sheep!”, his analysis of basic economic fundamentals generally seems to be very sound.
However, I suspect Calculated Risk’s “bottom call” will turn out to be correct for houses that are under 150K, although not for the reasons he set forth. I expect that the US government will continue to inflate it’s way out of the current debt problem. In other words, I expect the US government will cause so much inflation (monetize the debt so much) that house prices under 150K generally across the USA are at the bottom.
Although Calculated Risks seems to have missed what Irvine Renter and, say, Doctor Housing Bubble clearly comprehend: the bottom end of the housing market (150K and under) seems to have bottomed, but houses over 1 million dollars in places like Newport Beach and Palo Alto are still obviously in bubbles. Nominal prices for those properties will likely fall in value over the next 5 years. Then the elites will likely try to regain the prices of *their* house by pushing us back into double digit inflation.
Using that same line of reasoning, I was a bit surprised after reading:
Robert Shiller has completely lost his mind
http://ochousingnews.com/news/robert-shiller-has-completely-lost-his-mind
that no one commented on this blog that perhaps Robert Shiller’s family and friend’s were underwater. Ultimately, we’re all human. The elites are people, who tend to take care of one their family and friends first and foremost. That’s simply human nature. Sure, it leads to cabals launching nefarious schemes. But the motivation is simple: help the members of your tribe.
However, barring a new discovery of gold (such as the 1849 California Gold Rush) in ten years, if we were to compare the cost of houses that now sell for over 1 million dollars in the US to the price of gold (instead of US dollars), then I strongly suspect Calculated Risk’s bottom call will be proven to be wrong. In much of the USA (but not in, say, North Dakota) houses are simply too expensive compared to people’s incomes. But houses over 1 million dollars are ridiculously over-priced (in bubbles) in places like California, Arizona, Florida, New York, and New England.
This concept- in the long run consumers can’t buy things that they don’t have the money to purchase-is so simple that a bright 5 year old child could easily understand it. But it seems that most economists don’t or at least don’t publish writings about it.
Here’s a funny skit from Saturday Night Live that explains this remarkably simple concept as an amusing yet stinging satire:
Don’t Buy Stuff You Cannot Afford – a 1 page book!
http://www.youtube.com/watch?v=QzE76nUSjL8
I generally merely very quickly skim Calculated Risk’s blog (and ignore his ridiculous charts completely) in maybe 30 seconds, but I tend to read more of the Irvine Renter’s postings on this blog because Irvine Renter tends to focus on human nature whereas Calculated Risk tends to be blinded by numbers and looking in his rear view mirror (too many charts, not enough insightful analysis into basic human psychology).
We all have a very strong tendency to try to satisfy our desires now (in the short run), whether we be a street sweeper or the president of the USA.
Not the bottom. Bottom callers keep dreaming. 0% fed funds rate is buoying prices via inflation and subsidy, in various forms. There is no counter argument.
Has anyone done a run rate analysis on the cost of maintaining these underwater units. You would probably have to include taxes, insurance, HOA, general maintenance and broker fees? I think we have to know how much it cost the banks to maintain these units in order to see what’s the likely hood of them releasing the inventory to the market. They are not Real Estate/Property Management companies. After we determine the run rate cost then we can find the “inflection point” that could determine when a bank gives the green light. Once the banks start letting go of more inventory, we can finally determine the potential bottom. For now, just another day in government rigged markets.
The banks themselves are not holding these properties. They are clearing out their REO inventories. The inventory is in the hands of delinquent mortgage squatters and underwater loan owners trapped in their homes.
I am an economics teacher in Canada who follows all this very keenly. I am waiting for the collapse in our market, which looks a lot like the pre-crash US. Do you have any idea how much inventory sits within Fannie and Freddie and other government vehicles, as the result of sezing houses after paying off on mortgage insurance, or the F/F bond guarantee? I would have thought this was another significant pool of shadow inventory. Any numbers or thoughts would be appreciated. SB
The GSEs have been pretty good about clearing out their inventory. They don’t own much they are withholding from the market, and they haven’t allowed many of their delinquent borrowers to squat without trying to contact them to work something out. Most of the shadow inventory is on bank’s balance sheets and hidden in MBS pools.
Here in Oakland, banks seem to be holding on to LOTS of houses. The trackable foreclosure inventory of SFRs is nearly five times the number of active listings:
Oakland SFRs, per realtytrac, July 2:
Preforeclosure: 630 (IR has said there are likely 2-3 times this number of loan-owners in default, but since the banks haven’t taken action yet, they aren’t easily trackable.)
Scheduled for auction: 497
REO: 913
Total: 2,040
Active listings of SFRs (per Redfin, July 9): 403; about 45 of these are REOs (as of July 15)
So…the number of off-market REOs here in Oakland is more than double the total number of active listings!
And the market manipulation seems to be working: June inventory of SFRs in Oakland was down 52.5 percent vs June 2011, and median price was up 39 percent. Great for those who can afford it – but I’m not one of ‘em.
oops – already posted some of this elsewhere in this thread – sorry!
The Administration is putting a little more effort behind their HARP extension bills:
http://www.housingwire.com/news/donovan-expanding-refinancing-programs-will-be-fight-congress
HARP 2.0 (effectively eliminating the LTV requirement) has been huge for the big banks. They’re making record profits originating these refis. You would think they’d all be behind extending HARP to non-GSE loans, no? Not only would they make even more money originating all of the refis, but they might also be able to move many underwater loans off of their books and onto the taxpayers’.
So the Democrats are all behind it. Some Republicans too. The banks and mortgage industry should support it and pressure hesitant Republicans. The mortgage-backed securities market might even support it, no? I mean, you’d like to keep your performing mortgage paying 7%, but your risk of default is high and so is the prospective loss. If HARP is extended to non-GSE loans, then you’ll at least get your full principal returned. Although, I guess you’ll lose all of the “good” borrowers’ loans because they’ll refi, and you’ll be stuck with all of the worst borrowers’ loans in your pool…
I think the MBS pools would gladly take a haircut on the rate to get government insurance behind the principal. If this legislation goes through, the government will fully nationalize the losses on all underwater mortgages.
Weathermen predictions have no influence on what the weather will be and tend to be very accurate.
Economists have an effect on the economy and most tend to be wrong.
When the market makers want a stock or economy to go a certain way, they bring in their economists to the news media to pronounce the market is go ___(fill-in the blank)___. If people believe with action, the economy will go that way for a while (at least until the market makers cash out or go in). Long term market effects are brought on by real changes with the resources/reserves, technological advances and real demand that can pay for the goods or services. The large business’, federal employees and economists have been doing well, so they do feel recession/depression. It’s like Reagan said it’s a recession when my neighbor get’s laid-off and a depression when you get laid-off.
The bailouts will help a select few that will support the politicians in the future. These bailouts are not likely to help me. They’re more likely to hurt me and even more likely to hurt the next generation of Americans.
I know I will not be a recipient of any bailouts, and I will be contributing to paying for the bailouts for everyone else.
IR,
Welcome to the club.
I don’t recall if you’ve mentioned this in a previous post, IR, but Barry Ritholtz coined the term ‘Perennially Wrong Bottom-Callers’ (PWBCs) for those who engage in this group-think (economists, politicians, pundits, journalists, etc). Back in May, he posted a list of examples going back to 2006.
http://www.ritholtz.com/blog/2012/05/the-housing-bottom-is-here/
At the same time, up here in Oakland, it seems that a mini-bubble continues in the mid-tier, with a good number of houses selling for considerable amounts over asking. Inventory of SFRs continues to drop, as it has all year, and is now around 400, while the shadow inventory of REOs, preforeclosures, and SFRs scheduled for auction is about 2,000 (per realtytrac).
Per Redfin, June inventory in Oakland was down 52.5 percent vs last year, and median sales price is up 39.7 percent.
The result of this is that I can’t afford to buy in what I consider a half-decent neighborhood. Seems that high crime is not a deterrent to mid-tier buyers – and crime is out of control in Oakland, even in more affluent neighborhoods like Montclair; a recent SF Chronicle article reported how a sales rep from Logitech came to a packed meeting of Montclair residents to hawk video security systems. (For property crimes like burglaries, victims are encouraged to file reports online, and if you want a cop to show up, you have to wait several hours…)
The same is happening in Orange County. The inventory has shrunk to near nothing, and any decent property in a nicer neighborhood is being bid up. If more inventory doesn’t come to the market soon, the bulls will be right.
Since ‘preservation of failure’ is the basis of support, the bulls will be wrong.
Woohoo, low inventory 4EVA. If this is going to be the new normal then all future generations will have to overpay for housing and get into bidding wars.
Something tells me this won’t be the new normal.
If my company will be having lay-offs, it’s financially wise to buy a house with 3.5% down even it you bid up the house by 10%, especially if the seller will give you cash for “misc. house repairs” You’ll be likely to get free housing for a few years to get back more than the 3.5% down.
Yeap. First you would exhaust all of the FHA hardship programs (forbearance) for months, then pursue a mod for months, and finally move-out after the foreclosure.
I think you’d better close before 2012 just in case the Mortgage Debt and Relief Act does not get extended. You might end up having a significant tax liability.
LOL: Real Financial Heros Part 3
http://www.youtube.com/watch?v=TxylHPnoloI
All those calling out CR for cognitive bias for calling a real estate bottom…how many of you were thinking he was suffering from cognitive bias when he called for a bottom in the stock market in Feb/Mar 2009?? (see the “searching for the sun” posts)
Just curious…
“The true percentage of underwater loanowners is closer to 50% with beaten down markets having much, much higher rates.”
IR – How do you defend this statement? I’ve already pointed out to you that Corelogic includes HELOC’s and closed-end 2nd’s, and by their estimation 23.7% of homes with mortgages are underwater. If you really believe they are understating the problem by half, what in the world is their motivation? They are in the data selling business, so maintaining credibility is crucial. If it were proven that they understated these numbers, it would effectively shut the company down. In fact, they just altered their underwater borrower methodology to make the home valuations LESS FORGIVING just in case somebody was thinking of questioning it.
Here is one data point which questions CoreLogic’s estimates.
5-10-11 Mark Hanson – (Effective) Negative Equity at Epidemic Levels – Estimates Greatly Underestimate Distress
CoreLogic is not considering the effective negative equity when considering transaction costs.
“The amount of equity for each property was determined by subtracting the estimated current value of the property from the mortgage debt outstanding. If the mortgage debt was greater than the estimated value, then the property was determined to be in a negative equity position.”
I also criticize CoreLogic for their methodology and results on shadow inventory. Their estimates of delinquency are always the lowest published because they rely on voluntary reporting. Plus they make other adjustments which make the numbers look better. For example. CoreLogic says there are only about 1,000,000 seriously delinquent loans in the US, but BofA just reported they have over 1,000,000 customers currently delinquent, and they pools they service have even more. Perhaps it is a semantic difference between who is delinquent and who is seriously delinquent, but their numbers give the impression that the problems are smaller than they really are.
[...] The housing bottom consensus could be very wrong. … “We’ve gone through half of a lost decade since the crisis started in 2007,” said Robert Shiller, co-founder of the Case-Shiller U.S. housing price index and an economics professor at Yale University. [...]
[...] The consensus among economists for June home sales was that sales volumes would continue to increase. Proving their fallibility, the consensus of economists was wrong — very wrong. June and July are typically the best months for sales volume in the prime selling season, and sales volumes dropped in every region in the US. A large decline in existing home sales is further evidence that the house price bottom the consensus of economists is also predicting is in jeopardy. Nominal prices are moving higher, but it isn’t based on the strength of demand, it is due to the restriction of supply. And with millions of homes in shadow inventory, weakening demand is not a good sign for the housing market. The consensus of economists may turn out to be right with their bottom call, but not for the right reasons. Further, there is a real chance, the consensus could be very wrong again. [...]
[...] The housing bottom consensus could be very wrong. The Fed, in other words, would be working with the economic trends rather than against them. People already sense that the housing market is recovering, and that this might be the time to buy — in the unusual, self-perpetuating way of the economy, that’s part of why the housing market is recovering. But with an announcement like this and the attendant media coverage — people would know, with some certainty, that this is the time to buy, and there won’t be a better one for a long time. [...]