With the acute shortage of resale inventory across the Southwest, it’s hard to imagine prices going down, and in the short term, they won’t. Of course, circumstances could change quickly as they did this spring, so anything is possible. However, if the federal reserve can keep interest rates at record lows, and if the lending cartel can process the backlog of distressed loans without causing resale inventories to spike, then prices will not go down in the future. But is it realistic to think both of these circumstances will come to pass?
Mortgage interest rates hit all-time lows because the federal reserve took short-term treasury rates to zero and began buying 10-year treasuries and mortgage-backed securities to drive mortgage interest rates down to levels a free and unmanipulated market would never see. Over the last few weeks, a major selloff in government bonds has caused interest rates to rise, but we saw a similar correction in November of 2011 followed by a resumption of the downward trend. Is this latest correction the beginning of a new uptrend in rates? If so affordability will decline, bid competition will be far less intense, and prices may be under pressure again.
The federal reserve faces few limitations on its ability to manipulate mortgage interest rates, but the market is very large, and unless they want to buy trillions of dollars worth of overpriced mortgage-backed securities, they can’t keep rates low forever. But they don’t have to. They only have to keep rates low enough long enough for their member banks to process their bad loans. Unfortunately, there are so many of these loans, it may take a very long time; therefore, low mortgage rates may be with us a very long time as well.
So far, the lending cartel has proven adept at slowly processing their foreclosures to prevent inventory from flooding the MLS. Some markets like Las Vegas or Phoenix got out of control and crashed very hard, but many other markets like Orange County or the Bay Area have held up well despite high levels of mortgage distress. When government regulators removed any pressure to process non-performing loans with mark-to-fantasy accounting, they enabled lenders to embark on the amend-extend-pretend policy they still follow today. Until government policy changes, lenders will continue to slowly process their bad loans to keep prices high to maximize their capital recovery.
Based on the above two facts, and the acute shortage of homes caused by the policies of lenders and our government, prices across the Southwest are spiking higher, kool aid is returning to the market, and many people believe house prices will bounce back to the peak before resuming a “normal” level of appreciation thereafter. The road forward might be rockier than most imagine.
By Lucia Mutikani — WASHINGTON | Wed Aug 8, 2012 12:29pm EDT
(Reuters) – U.S. home prices are inching up as an ebbing tide of foreclosures creates a shortage of properties at a time of pent-up demand, but do not expect the housing market recovery to shift into higher gear.
Tightening house supplies have turned some parts of the country into sellers’ markets, marked by intense bidding wars among buyers eager to take advantage of rock-bottom mortgage rates and still-low home prices.
“It is encouraging that demand is flowing back into the market and buyers are getting off the fence at last,” Stan Humphries, chief economist at real estate group Zillow told Reuters.
Everyone is jumping on the bandwagon about pent-up demand and other such nonsense. The data shows buyers are not getting off the fence, and demand is not flowing back into the market. Purchase applications are down 60% from the peak in 2005, and the currently hover around 1997 levels. There has been no significant increase in demand over the last two years.
But it’s not off to the races for the housing market, the main trigger of the 2007-09 recession. Many homeowners remain saddled with properties worth less than the amount they owe banks and other financial institutions.
This means they cannot afford to sell their houses, even if they wanted to. As such, the supply of houses on the market will remain tight and weigh on sales.
Unless lenders increase their incentives for loan owners to sell short, or unless lenders increase their foreclosure rates, supply will be very tight because so few can complete the transaction. Last month we saw a 10% uptick in foreclosures, but one month is not a trend.
Ultimately, the continuing decline in sales volumes, probably to record lows over the next few months, will bring political pressure for lenders to bring more product to the market. The NAr might actually do some good if they lobby for more inventory.
Home resales declined 5.4 percent in June, with realtors blaming the drop on lack of inventory.
Contracts to buy homes, a forward-looking indicator of sales, also fell during the month for the same reason, casting a shadow on the budding housing market recovery.
“There is plenty of demand out there, but not much supply. What we need is increased sales volumes, not just stable prices. That’s what the economy needs,” said Glenn Kelman, chief executive officer at real estate group Redfin.
With low interest rates, we could increase sales volumes and keep prices steady. If prices go up too much, affordability will become an issue again, and if sales volumes keep falling, it will take that much longer for banks to process their bad loans.
“Right now I don’t think there is going to be a massive increase in sales volumes.”
Right now, we risk seeing record low sales volumes.
Part of the increase in demand reflects a modestly improving economy, especially the jobs market, which is encouraging some adult children to move out of their parents’ basements. High rental rates also are making homeownership attractive.
In June there were about 2.39 million previously owned homes on the market, down from a peak of 4.04 million in July 2007, according to the National Association of Realtors. The figure does not include new homes, where inventory is near record lows.
SUPPLY AND DEMAND IMBALANCE
In a short space of time, foreclosed properties have gone from a deluge to a trickle, creating an imbalance between supply and demand in the market that is squeezing prices up.
That’s exactly what happened, and there are few signs of the trend reversing.
Analysts partly attribute the ebb in foreclosures to tough regulations in some states in the wake of the “robo-signing” scandal in 2011, when it emerged that some bank employees were signing reams of foreclosure documents without properly reviewing individual cases.
Lenders are also aggressively pursuing alternatives to foreclosures, such as loan modifications. The steepest declines in housing inventories have been in Phoenix, San Francisco, Los Angeles, Minneapolis, and Miami.
Riverside in California has also seen a decline in supply.
Compliance with the settlement agreement is prompting lenders to seek other alternatives.
“These markets have seen demand pick up, pulling inventory off the market. Normally that would bring sellers off the fence and into the market. In some of these markets, negative equity is playing a big role in constraining supply,” said Humphries.
Actually, kool aid intoxication is actually keeping sellers out of the market: Expectation for Prices to Rise Deters Would-Be Sellers.
“Even though there is demand out there and the seller wants to sell, if the value of their home is less than the mortgage, then they are unable to put their home on the market.”According to the Commerce Department there were 1.6 million vacant housing units for sale in the second quarter, down from 2 million units in the same period last year. That constituted 1.2 percent of the nation’s total 132.72 million housing units.
The number of units held off the market rose to 7.61 million from 7.35 million in the second quarter of 2011. That accounted for 5.7 percent of the total housing stock.
With foreclosures waning, house prices across the country are stabilizing and rising in some cities, causing some prospective sellers to hold onto their properties.
Greed springs eternal. If prices head south again, I suspect some of those loan owners still struggling to make payments will capitulate. The squatters will simply hang out for the free ride. If prices rise high enough, even they might be able to sell for a profit. Wouldn’t that be a fitting punishment them? Not.
Average home prices rose 2.2 percent in May from April in the 20 cities tracked by Standard & Poor’s/Case-Shiller. They were down only 0.7 percent from a year ago.
“If you think we are at the bottom of the market, you wouldn’t want to sell, you would want to wait until prices recover a little bit,” said Redfin’s Kelman.
“The only folks who are selling right now are the folks who have to, you don’t see many opportunistic sellers. They believe time is on their side and if they wait, things will only get better for them.”
And if banks don’t bring more product to the market, and if interest rates remain low, they are wise to wait.
Tight supplies are fueling bidding wars among buyers, mostly prevalent in cities like Washington DC and Seattle. Bidding wars are also intense in California’s Silicon Valley.
“We have just listed a property in South Pasadena. We put it on the market at 10 a.m. and by 2 p.m. we had 20 people calling us trying to buy it. The closer it is to the urban core, the more likely it is to have multiple offers,” said Kelman.
“It was more intense in the spring. Usually you see this big run-up in listings in May and June. This year you didn’t because the banks weren’t putting up properties for sale and homeowners did not take the bait either.”
The shortage of houses is most acute in the low end of the market, which has experienced a surge in demand from first-time buyers. The luxury market has also seen an increase in demand, but not of the same magnitude as the first-time buyers segment.
The market above the conforming limit isn’t doing well, and it isn’t going to. This is the only market not subsidized by the government (yet), and far too many homes are precariously perched there. The high end will be the weakest market segment for years to come.
“The demand is greater than most people imagine because we have about a four-year build-up on the demand side,” said Diane Saatchi, senior vice president at realtor Saunders & Associates. “Buyers have been waiting for the market to go down and the perception now is we have hit a bottom.”
Another realtor who’s full of shit.
On the other end of the spectrum are cities like Chicago, Philadelphia, Cincinnati, Cleveland and Milwaukee where homes are staying longer on the market and price discounting is still the norm.
Gains in house prices are unlikely to follow a straight line as some homeowners, currently underwater, will probably want to sell their properties on the slight appreciation in value.
“We will see a staircase recovery, where you will see price spikes followed by cooling because once prices have spiked, they will free some people from negative equity or these people who didn’t want to sell at the bottom will feel better about selling,” said Humphries.
“In a few markets, like Miami and Phoenix, are seeing a V-shaped recovery,” he added – good news for two of the cities that took a particularly hard hit when the housing bubble burst.
The market staircase
The next plateau on the housing market staircase will be caused by lenders shifting from short sales back to foreclosures. They have already laid the groundwork for the shift. As they get closer to fulfilling their obligations under the settlement agreement, they will crank up the foreclosure machinery to force out the squatters committed to free housing until foreclosure. The processing of this shadow inventory should provide enough supply to flatten prices out. Lenders hope this happens at near-peak pricing to get their capital back, but in the most beaten down markets, that isn’t very likely.
At some point, interest rates will go up, and if this is not accompanied by rising wages, that will create another stair-step plateau or perhaps a decline depending on how far and how fast interest rates rise. It isn’t a matter of if interest rates are going to go up, it’s only a matter of when. This must be accompanied by wage increases to keep affordability high. If not, prices will fall.
If the government wants to exit the housing market subsidy business, we could see another stair-step plateau based on changes in policy. If the home mortgage interest deduction is curtailed or eliminated, that will negatively impact values. If the GSEs are dismantled or if conforming limits drop, that will negatively impact values. If the FHA raises down payment requirements, that will negatively impact values. Policy makers may phase these changes in to spread the impact out and prevent a price drop, but these phase-ins are the stuff stagnant market plateaus are made of. In short, unless we want to sustain a nationalized housing market — which is what we have now — then government policy changes are inevitable. It’s only a matter of when and in what form they take.
All the people who took free money must be recycled
Each day we see another imploded Ponzi. These people should be sitting on mountains of equity ready to reignite a move-up market. Instead, they are part of the recycling effort, and their demand his removed from the housing market for at least three years, and when they return, they will be a first-time homebuyer with a minimum down payment.
- The former owner’s of today’s featured property paid $187,000 on 10/23/1998. They used a $168,000 first mortgage and a $9,000 down payment.
- On 10/14/1999 they obtained a $43,000 stand-alone second. In their first year of ownership, they got their down payment back plus $30,000 in HELOC booty. They already quadrupled their investment, and things were about to get much, much better for them.
- On 7/16/2001 they refinanced with a $209,000 first mortgage.
- On 1/14/2002 they refinanced with a $215,000 first mortgage.
- On 10/28/2002 they obtained a $86,800 HELOC.
- On 4/29/2003 they refinanced with a $300,000 first mortgage.
- On 6/21/2007 they refinanced with a $512,000 first mortgage and a $64,000 stand-alone second.
- Total property debt was $576,000.
- Total mortgage equity withdrawal was $408,000. Not bad for a $9,000 investment.
People like this are what’s holding back the housing market. Until their debts are wiped out, these properties will continue to hit the market — assuming lenders don’t allow them to squat forever.
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Proprietary OC Housing News home purchase analysis
$339,900 …….. Asking Price
$187,000 ………. Purchase Price
10/23/1998 ………. Purchase Date
$152,900 ………. Gross Gain (Loss)
($14,960) ………… Commissions and Costs at 8%
$137,940 ………. Net Gain (Loss)
81.8% ………. Gross Percent Change
73.8% ………. Net Percent Change
4.3% ………… Annual Appreciation
Cost of Home Ownership
$339,900 …….. Asking Price
$11,897 ………… 3.5% Down FHA Financing
3.66% …………. Mortgage Interest Rate
30 ……………… Number of Years
$328,004 …….. Mortgage
$86,073 ………. Income Requirement
$1,502 ………… Monthly Mortgage Payment
$295 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$85 ………… Homeowners Insurance at 0.3%
$342 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,224 ………. Monthly Cash Outlays
($227) ………. Tax Savings
($502) ………. Equity Hidden in Payment
$14 ………….. Lost Income to Down Payment
$105 ………….. Maintenance and Replacement Reserves
$1,614 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,899 ………… Furnishing and Move In at 1% + $1,500
$4,899 ………… Closing Costs at 1% + $1,500
$3,280 ………… Interest Points
$11,897 ………… Down Payment
$24,975 ………. Total Cash Costs
$24,700 ………. Emergency Cash Reserves
$49,675 ………. Total Savings Needed
The property above is available for sale on the MLS.Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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