As anyone watching the housing market in the Southwest in 2012 can attest to, inventory is falling. At its current rate of decline, there will be literally no houses for sale by the end of the year.
We established that banks are cutting standing REO inventories by reducing new acquisitions by 50%. They are reducing their inventory by allowing delinquent borrowers to continue to live payment-free in houses. Of course the perpetual shadow inventory extends housing downturn and creates uncertainty, but lenders believe they can force house prices to bottom by restricting MLS supply. Perhaps they are right.
The success or failure of lenders’ efforts to force housing prices to bottom hinges on one thing. Will dwindling supply cause prices to rise or sales volumes to fall?
If you listen to realtors — a practice I advise against — they will tell you the reduced supply must make prices go up… and you better buy now or be priced out forever… But in reality, there is another alternative. If buyers do not raise their bids, sales volumes will decline, and the so-called housing recovery will prove as illusory as the bear rally of 2009 and 2010.
I believe it’s more likely that sales volumes will plummet rather than house prices go up. First, for house prices to go up, buyers must raise their bids. Many can’t. Borrowers today face real lending standards with income verification. Further, they need down payments that most don’t have. This spring many buyers put in bids they could not live up to. The housing market witnessed an astonishing 50% escrow fallout rate. Appraisers aren’t playing the bubble game this time around, so contract prices significantly over recent comps get haircuts, and borrowers don’t have the cash to make up the difference on a low appraisal. Plus, some borrowers don’t want to. With all the accurate talk about shadow inventory, educated buyers do not fear being priced out forever. The low inventory may price people out the rest of this buying season, but eventually inventory must return to the market.
Banks are enjoying the lack of competition for their REO as they liquidate their holdings, but the banks would like to see more short sales come to market too. The shadow inventory of delinquent mortgage squatters needs to be cleared out, and with banks not forcing them out with foreclosure, banks hope more will voluntarily sell in short sales. Unfortunately, this isn’t happening. Most who enjoy free housing are in no hurry to sell and start paying rent. Banks increased their incentives to conduct more short sales, but it hasn’t made much difference. As inventory problems become acute, look for lenders to increase their incentives further to clear out the trash.
Kevin Mahn, Contributor — 6/21/2011 @ 3:51PM
According to the Mortgage Bankers Association (MBA), in a June 8, 2011 report entitled, “Mortgage Applications Decrease in Latest MBA Weekly Survey” the average interest rate for 30-year mortgages decreased to 4.54%, which is the lowest rate observed since November 19, 2010.
Despite the historically low rate of interest, and the seemingly available supply of credit, applications for mortgages are not increasing, as one might expect, but actually are continuing to decline. According to the MBA, as of the week ending June 3, 2011, mortgage loan applications, as measured by the seasonally adjusted Purchase Index, decreased by 4.4% over the course of the previous week and by 3% over the month of May.
Let’s be clear about what the chart above says about the housing market. The talk about increasing demand is complete and utter bullshit. Sales volumes are still more than 20% below their historic norms, and the small increase in sales volumes this year are largely due to cash buyers. As you can see above, the increase in sales volumes is not due to more financed buyers active in the market. Cash buyers won’t drive up prices. Financed buyers are needed to do that.
Looking back even further, applications for mortgage loans are down over 15% on a year-over-year basis as of May 2011.
While applications for refinancing do not paint as dismal of a picture, the figures have also been on a negative trend since November 2010. So what gives?
It is our contention at Hennion & Walsh that the credit crisis was not, and is not, a question of the lack of supply (or cost) of credit but rather is based on a lack of aggregate demand for credit. In these uncertain economic times, individuals, and companies for that matter, are still focused on deleveraging as opposed to taking on or assuming new debt.
The critics of federal reserve policy consistently pointed out the “pushing on a rope” problem with demand for debt. It doesn’t matter how much you lower the price for debt, if people don’t want it, the federal reserve can’t make them take it on. The problem today is not the cost of debt, it’s the total amount of it. That’s why people need to deleverage.
With respect to refinancing, those individuals that could benefit from lower interest rates, and afford the associated cost of the refinancing process, likely have already refinanced their homes. Further, I cannot imagine mortgage rates going lower than their current historic lows. Hence, I do not anticipate any further significant increases in refinancing activity–which still account for the majority of overall mortgage applications.
As is relates to applications for homes purchases, the backlog in supply of unsold and foreclosed homes is serving as an anchor to the stalling housing market recovery and should curtail many new mortgage applications for some period of time.
As each of the millions of borrowers default and go through foreclosure, their credit is harmed, and they must wait for several years to repurchase again. If lenders had moved quickly to remove the squatters, the cleansing stage would be over and many more borrowers would be regaining their credit to buy today. However, since this process has been dragged out, so will the recovery.
Finally, I understand that many lending institutions (i.e. banks) are now asking for higher down payments with new mortgage loans–at a time when many individuals can not afford them. While this, in fact, may be the appropriate stance for lending institutions to now/again adopt with respect to risk mitigation strategies, it will likely not result in any form of an increased demand for mortgages.
As a result of the factors described above, I do not anticipate mortgage applications to noticeable appreciate at any point in the short term.
With so many borrowers with bad credit, sales volumes should continue to be low for the next several years with cash buyers pulling more of the load. The lack of borrowers with good credit and significant down payments will weigh on the move-up market for the rest of this decade, perhaps longer.
Going out in style
Sometimes when I see a really large HELOC abuse case, I will Google the previous owner’s name to see if perhaps they were a realtor or a business owner or someone locally famous. When I searched for the former owner of today’s featured property, I came across an obituary from 2009. Apparently, the woman who lived here was 83 years old. I have no idea what an 83 year old woman needs a million dollars for, but whatever it was, she must have had a good time!
- Today’s featured property was purchased on 1/19/1990 for $475,000. My records don’t go back that far, but based on the subsequent mortgage activity, it’s possible she paid all cash.
- On 5/21/2004 she obtained a $500,000 HELOC.
- On 9/10/2004 she got a $1,000,000 first mortgage.
- On 9/6/2006 she opened a $75,000 HELOC.
- On 8/27/2007 she refinanced with a $1,500,000 first mortgage. That’s at least a million dollars in mortgage equity withdrawal.
- On 4/27/2012 the house was deeded over to the bank for $2,000,000 of unpaid principal balance and unpaid debt. I guess those fees really add up.
I hope the kids weren’t expecting an inheritance.
Anaheim Hills Overview
Median home price is $425,000. Based on a rental parity value of $568,000, this market is under valued.
Monthly payment affordability has been improving over the last 7 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased from $240/SF to $243/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates declined $0 last month from $2,358 to $2,357.
Rents have been slowly rising for 12 month(s). Price momentum suggests slowly rising rents over the next three months.
Market rating = 6
$1,625,000 …….. Asking Price
$475,000 ………. Purchase Price
1/18/1990 ………. Purchase Date
$1,150,000 ………. Gross Gain (Loss)
($38,000) ………… Commissions and Costs at 8%
$1,112,000 ………. Net Gain (Loss)
242.1% ………. Gross Percent Change
234.1% ………. Net Percent Change
5.5% ………… Annual Appreciation
Cost of Home Ownership
$1,625,000 …….. Asking Price
$325,000 ………… 20% Down Conventional
4.12% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,300,000 …….. Mortgage
$313,984 ………. Income Requirement
$6,297 ………… Monthly Mortgage Payment
$1,408 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$406 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$8,111 ………. Monthly Cash Outlays
($1,356) ………. Tax Savings
($1,833) ………. Equity Hidden in Payment
$473 ………….. Lost Income to Down Payment
$426 ………….. Maintenance and Replacement Reserves
$5,822 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$17,750 ………… Furnishing and Move In at 1% + $1,500
$17,750 ………… Closing Costs at 1% + $1,500
$13,000 ………… Interest Points
$325,000 ………… Down Payment
$373,500 ………. Total Cash Costs
$89,200 ………. Emergency Cash Reserves
$462,700 ………. Total Savings Needed
We're sorry, but we couldn't find MLS # P825809 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
5114 East CRESCENT Dr
5 bd / 4.5 ba
7,479 Sq. Ft.
5191 East CRESCENT Dr
5 bd / 7.25 ba
10,000 Sq. Ft.
160 South BELLEZA Ln
7 bd / 7.5 ba
7,400 Sq. Ft.
19041 CERRO VILLA Dr
5 bd / 4 ba
5,100 Sq. Ft.
19081 CERRO VILLA Dr
5 bd / 5.5 ba
6,500 Sq. Ft.
4235 East CERRO VILLA Dr
6 bd / 5 ba
5,100 Sq. Ft.
9522 JAMES Cir
5 bd / 6 ba
7,479 Sq. Ft.
18677 MESA Dr
5 bd / 5 ba
6,200 Sq. Ft.
19102 RIDGEVIEW Rd
4 bd / 4.5 ba
6,325 Sq. Ft.
18411 SERRANO Ave
5 bd / 5 ba
5,200 Sq. Ft.