With the serious problems facing the housing market including high delinquency rates creating a massive shadow inventory, a weak economy, tepid demand from owner-occupants, excessive consumer debt, a depleted buyer pool due to credit impairment, and artificially low interest rates, it’s a wonder housing prices aren’t still heading straight down. The recent uptick in prices is largely due to a successful attempt by the lending cartel to restrict for-sale inventory on the MLS. Without this inventory restriction, prices would almost certainly be headed lower.
At some point, the shadow inventory of delinquent mortgage squatters will be cleared out. The liquidation will either lower prices or limit appreciation for a long time while these properties are processed. The big question is, when will this liquidation happen? Right now, the banks are in no hurry.
For lenders to be motivated to process their backlog of foreclosures, they need some reason to act. Ordinarily, the cost push of paying for capital would force them liquidate non-performing loans and put that money to productive uses. However, with the federal reserves zero interest rate program to steal from savers and the elderly, banks have no cost of capital. Banks can borrow all they want from depositors or the federal reserve for nothing.
Since the banks have little or no cost of capital, they can sit on their bad loans indefinitely — and they are. Right now, it’s in the best interest of the lending cartel to sit on their bad loans. The lack of inventory on the MLS is causing prices to go up — although it is simultaneously causing sales rates to plummet. Higher resale prices make for better capital recovery on the loans the banks do process. As long as they all agree to continue delaying their foreclosure processing, they all benefit from higher prices. Of course, this is still a cartel arrangement, and as prices rise, each member has a strong incentive to cheat, particularly the weakest members, but right now, the cartel is enjoying great success driving prices higher.
Until the federal reserve raises interest rates, lenders face no cost pressure to liquidate their bad loans. With no pressure to liquidate, lenders will continue to allow squatters free housing in hopes resale prices will continue to rise. So when will the federal reserve finally start to raise interest rates? Well, they said they will leave them at zero through the end of 2014, but it may leave rates along much longer. In fact, it is likely the federal reserve will leave interest rates near zero until house prices regain their peak, and with 3.5% interest rates, that will be much sooner than most think.
The federal reserve cannot raise interest rates as long as so many loanowners are so far underwater. The member banks of the federal reserve hold hundreds of billions of dollars in second mortgages and HELOCs on their books. If house prices don’t rise enough to put collateral value behind these mortgages, the resulting losses upon liquidation will bankrupt our banking system. This really leaves the federal reserve no choice but to push resale prices back up to peak levels as soon as possible by any means necessary.
As rising home values bring properties above water, lenders will liquidate, but not before. With no cost push, they can afford to wait. And with the threat of bankruptcy looming if they liquidate too early, they must wait. Based on those circumstances, inventory will likely remain in the shadows for quite some time. Prices will go up, transaction volumes will be way down, and prices will not flatten out until they approach the peak where lenders will finally begin their liquidations.
I guess that makes me bullish. I now believe that perhaps the bottom callers were right. I wish one of them would have identified the reasons I gave above. Perhaps I may have been convinced months ago, but now, based on what I believe the federal reserve and the member banks are going to do, and why they are going to do it, I think we may be at the bottom. So much for the capitulatory liquidation regulators would ordinarily require.
Low housing stock yields epic bidding wars
Though many home shoppers who assume they are still in a buyer’s market find it hard to believe, one of the sobering fundamentals shaping real estate this summer is shrinking inventory: The supply of houses for sale is down significantly in most areas compared with a year ago, sometimes dramatically so. And that is having important side impacts — raising prices and homeowners’ equity stakes, and reducing total sales.
The one thing which could derail lender’s plans is affordability. In many markets, peak pricing is simply not affordable, even with 3.5% interest rates. Further, some markets will recover quicker than others creating “rebound bubbles” in strong markets while the federal reserve waits for the weakest ones to recover.
In major metropolitan markets from the mid-Atlantic to the West Coast, the stock of homes listed for purchase is down by sometimes extraordinary amounts — 50 percent or more below year-ago levels in several areas of California, according to industry studies. In Washington, D.C., and its nearby suburbs, listings are down by 28 percent, reports Redfin, a national online realty brokerage. In Los Angeles, available inventory is 49 percent lower than it was last summer, San Diego by 53 percent. In Seattle, listings are off by 41 percent. According to the National Association of Realtors, total houses listed for sale across the country in June were 24 percent lower than a year earlier. The dearth of listings is often more intense in the lower- to mid-price ranges, less so in the upper brackets.
Shevy recently told me about a short sale listing he has in Rancho Santa Margarita. He put it on the MLS on a Thursday evening, and by 9:00 Friday morning, his voicemail on his phone was full to capacity, he had received 117 emails about the property, eighty of which had offers, and 10 of those offers were all-cash at or above his listing price. That sounds like strong demand, but it really isn’t. It’s normal demand dealing with a lack of inventory to accommodate it. Even the builders are selling out quickly.
Peggy James, an agent with Erick & Co. of Exit Choice Realty in Prince William County, Va., says she gets calls “all the time” from buyers asking, “Where are all the new listings? Are you agents bluffing” — holding back? But the reality is that “there just haven’t been many” listings in some high-demand price categories lately, she says.
In Orange, Calif., Carlos Herrera, broker-owner of Casa Blanca Realtors, says “it’s really strange right now. We have many buyers but few sellers,” forcing purchasers to bid up prices on what’s available.
That’s exactly what’s happening. Anything priced at or near recent comps is getting multiple bids. The WTF priced homes still sit there, but reasonably priced stuff moves very quickly. Also, it is becoming increasingly difficult for borrowers with less than 25% down to get a deal. When faced with multiple offers, sellers will chose the one with the largest down payment, and they will demand the buyer waive their appraisal contingency. If the appraisal comes in low, the buyer must either come up with more cash or surrender their earnest money deposit. In those circumstances, only the strongest buyers with the most cash reserves get properties.
Just south of San Francisco, Redfin agent Brad Le says inventory in Silicon Valley is down so drastically — and demand so strong —that the bidding wars are spinning off the charts. “We’re not just talking about 10 or 15″ offers, he says, “but sometimes 40 and 50.” Some buyers are inserting escalation clauses into their contracts to keep pace with counter-bids, and waiving financing contingencies, inspections and even agreeing to increase their down payments to counter any differences between the accepted sale price and the appraised value. One modest, 1,700-square-foot house recently was listed at $879,000. It drew more than 50 competing offers and sold to an all-cash buyer for $1,050,000 in less than a month.
Earlier this week, my post on the high end getting whacked sparked a lively debate on Patrick.net. Many of the Bay Area readers posted properties getting bid up beyond reason. Lack of supply will do that.
Silicon Valley is in its own special economic niche, but declining inventories are nationwide. In its latest survey of 146 large markets, Realtor.com found that 144 had lower supplies of listings last month than a year earlier. Online real estate and mortgage data firm Zillow reports that some of the steepest declines in inventory are in places that got hit the hardest during the bust, and where sizable percentages of owners still are underwater on their mortgages. In Phoenix and Miami, for example, 55 percent and 46 percent of owners respectively have negative equity.
The huge number of underwater loan owners is contributing to the problem. Ordinarily, rising prices would prompt sellers to return to the market, but loanowners are not motivated to sell. Whether they are underwater by a lot or a little, they are still underwater. If they wait, they might have equity again, so most will chose to wait. Further, those who are underwater and delinquent are committed to squatting until foreclosure, so they are not motivated to list their properties either. So the greater the percentage of underwater loanowners, the more acute the inventory problem becomes. Only lenders can solve this by foreclosing and putting the REO on the market, but for reasons I outlined above, they are not motivated to do that.
Both cities have seen significant drops in inventory, and both are experiencing strong appreciation in home prices. According to data from research firm CoreLogic, Phoenix prices are up 14.7 percent for the year and Miami by 9.7 percent.
What’s behind the widespread declines in listings? Analysts say negative equity plays a major role. It discourages people who might otherwise want to sell from doing so. They don’t want to take a big loss, especially in a slowly improving price environment. So they sit tight rather than list. Banks with large stocks of pre-foreclosure and foreclosed properties are doing the same, creating a so-called “shadow inventory” of houses estimated to total 1.5 million units.
That’s exactly what’s happening. With the exception of potential buyers, everyone is benefiting from the withheld inventory.
Where’s this all headed? Stan Humphries, chief economist for Zillow, says the likely trend is for more of the same: Constricted supplies will lead to price increases, especially in segments of local markets where demand is strongest. Longer term, price increases will gradually rewind the cycle, increasing owners’ equities and convincing more of them to list and sell. This, in turn, should put a brake on price increases, especially under today’s super-strict mortgage underwriting and appraisal practices.
Mr. Humphries incorrectly identifies the mechanizm which will bring more houses to the market. Discretionary sellers with equity will not be who lists. When prices rise above the outstanding loan balances on the properties, lenders will foreclose to get their money back. They will not allow squatters to gain financially by allowing them to sell for a profit. As each property gets above water, that’s when the lenders will act, and it’s the lenders who will ultimately put more properties on the market. Right now, they benefit by waiting, so that’s what they will do.
These people were obviously Ponzis
When borrowers go to get a new loan, their entire borrowing history is on display for a lender. If lenders cared at all about loan quality, it’s pretty easy to spot Ponzis. When people consistently tap the housing ATM to cover routine lifestyle expenses, it’s obvious. And it’s equally obvious that Ponzis are going to implode in a default and foreclosure as soon as the music stops. Apparently, lenders thought the music would go on forever.
- The former owners of today’s featured REO bought back in 1995. They should have paid off over half their mortgage by now. Instead, they are living in a new rental. They paid $153,000 using a $150,103 first mortgage and a $2,897 down payment. How many of you have security deposits larger than that?
- On 7/2/1997 they obtained a $42,000 stand-alone second.
- On 12/1/1999 they refinanced with a $193,968 first mortgage.
- On 8/28/2001 they obtained a $40,000 stand-alone second.
- On 4/30/2002 they obtained a $75,000 stand-alone second.
- On 7/2/2003 they refinanced with a $296,000 first mortgage.
- On 9/14/2004 they refinanced with a $370,000 first mortgage.
- On 10/25/2006 they refinanced with a $455,000 Option ARM.
- Total mortgage equity withdrawal was $304,897 plus negative amortization. These borrowers tripled their mortgage!
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Proprietary OC Housing News home purchase analysis
$369,900 …….. Asking Price
$153,000 ………. Purchase Price
8/21/1995 ………. Purchase Date
$216,900 ………. Gross Gain (Loss)
($12,240) ………… Commissions and Costs at 8%
$204,660 ………. Net Gain (Loss)
141.8% ………. Gross Percent Change
133.8% ………. Net Percent Change
5.3% ………… Annual Appreciation
Cost of Home Ownership
$369,900 …….. Asking Price
$12,947 ………… 3.5% Down FHA Financing
3.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$356,954 …….. Mortgage
$92,816 ………. Income Requirement
$1,613 ………… Monthly Mortgage Payment
$321 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$92 ………… Homeowners Insurance at 0.3%
$372 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,398 ………. Monthly Cash Outlays
($241) ………. Tax Savings
($557) ………. Equity Hidden in Payment
$15 ………….. Lost Income to Down Payment
$112 ………….. Maintenance and Replacement Reserves
$1,727 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,199 ………… Furnishing and Move In at 1% + $1,500
$5,199 ………… Closing Costs at 1% + $1,500
$3,570 ………… Interest Points
$12,947 ………… Down Payment
$26,914 ………. Total Cash Costs
$26,400 ………. Emergency Cash Reserves
$53,314 ………. 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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