1816 is known as the year without a summer. Due to an unusual combination of events, temperatures didn’t rise that summer causing widespread crop failures and starvation.
2012 is known as the year without a seller. Due to a dramatic change in foreclosure policy, festering delinquencies at the major banks, more than a quarter of all mortgage holders underwater, and hedge funds intercepting MLS inventory at the auction sites and renting them out instead, sellers did not bring properties to the market in 2012. This wasn’t a small phenomenon. Across most of the US, there were a third as many houses for sale this year as there were two years ago. In California, the reduction in for-sale inventory was even more extreme. Orange County ended the year with 63.6% fewer listings than the year before.
As one might imagine, a 63.6% decline in inventory coupled with continued stimulus from the federal reserve pushing mortgage rates to record low levels caused the housing market to bottom. In fact, the rebound has been very robust as buyers take advantage of a monthly cost of ownership that is the lowest relative to rents since the 1980s.
The big question for 2013 is whether or not inventory will return to the market. So far, it looks like it won’t.
First, the banks have no real incentive to process more foreclosures. They have a near zero cost of capital thanks to the federal reserve, and with prices going up, the longer they wait, the more they recover when they do finally foreclose on their legions of delinquent borrowers — and the major banks have a lot of delinquent borrowers. At last report, more than 10% of all mortgages at the major banks are delinquent. The modest decline from the peak came from a combination of foreclosures and aggressive loan modification programs. It has remained stubbornly high because loan modifications continue to fail and borrowers re-default.
With the banks content to kick the can into 2013, the only source of listings is short sales and organic sellers. The big concern for 2013 will be short sales. If Congress does not extend the short sale tax forgiveness, short sale listings will dry up. What incentive would a loanowner have to complete a short sale? If they just stop paying, they will be allowed to squat for quite a while, perhaps years. If the tax forgiveness is not extended, the short sale listings that do come to market won’t be real. Many will list their home just to fend off a foreclosure and squat for a little longer.
We have begun to see the organic sellers return. They are the ones with the WTF asking prices trying to make a profit from their peak purchases back in 2006. Some of those actually sell which shows how much reducing interest rates from 6.5% to 3.5% over the last six years has helped. An increase in organic listings is not a blessing for the market. They will all be unrealistically priced. Back in 2007, we had huge inventories, but since most of it was organic sellers prices well above market comps, the inventory was there but useless. If organic sellers make a comeback in 2013, we will have the same phenomenon. An MLS clogged with WTF asking prices serves no one.
2013: The Year Home Inventory Hits a Bottom
December 19, 2012, 12:39 PM
For the past two years, inventories of homes for sale have plunged. Low inventories have been a mixed blessing for real-estate agents. They have undoubtedly helped stabilize home prices, but they have probably also limited the volume of homes sold.
So far, the lack of inventory has not hurt sales volumes. There have been enough listings to satisfy demand, but at the super low inventory levels we have now, sales volumes will almost certainly be less in 2013 if more inventory does not come to market.
Supply-demand dynamics “have moved much more in favor of a sellers’ market,” says Ivy Zelman, chief executive of Zelman & Associates. Inventories are down because many homeowners are unwilling or unable to sell, particularly if they owe more than their homes are worth. Strong investor demand and fewer bank foreclosures have also contributed to inventory drops.
That’s exactly what’s going on, and those dynamics look to continue throughout 2013.
Inventory declines have been the most important development this year. It began when builders sharply cut back construction in 2007 and 2008. By 2010, mortgage delinquencies peaked, setting the stage for a decline in foreclosures. By 2011, rental demand rallied and housing demand began picking up among investors in neighborhoods where homes could be easily rented out. In March, the Journal traced the cycle of this recovery in Phoenix, which has had the strongest home-price rebound.
As prices pick up in more markets, more sellers could come out of the woodwork. In Phoenix, where prices are up 17% from a year ago, inventories of homes for sale have increased in each of the last four months. Inventories are up 10% from their July trough, though they are still down by 20% from one year ago, according to Realtor.com.
We have seen no such increase in inventory here in California. Inventories have been on a steady decline since July of 2011 when more than four times as many homes were for sale.
Large drops in inventories have whittled away the discount at which foreclosures sell in many markets, which has further contributed to big price gains. In some markets, especially throughout California and Arizona, an uptick in inventory would lead to more sales without putting too much pressure on prices.
We could see a doubling of inventory and prices would keep going up. If inventories tripled, and we got back to 2011 inventory levels, then prices might flatten out, but it doesn’t seem very likely that many houses will come to market.
But that’s not the case for soft markets such as St. Louis, New York’s Long Island, and Chicago, where inventory jumps could further depress prices.
The judicial foreclosure states of the East Coast are still going to get crushed.
If inventories continue to decline, it will be hard to see big gains in home sales, and home builders will benefit in a big way. Builders are already ramping up construction but they face their own challenges, including labor shortages and rising land and building costs.
The builders are already loving the lack of inventory. If MLS inventory does not come back to the market, 2013 will exceed expectations for builder sales.
So will we see more MLS inventory in 2013?
Last year was very unusual in that there was no seasonal uptick in listings. Usually, inventory increases from January through July. I expect we will see a return to the normal seasonal pattern this year, but even at the peak, we will likely have low inventory. As a result, prices will probably continue to move higher, perhaps much higher.
Get us out at breakeven, please
The owners of today’s featured short sale just want out. They are hoping the lack of inventory will give them an opportunity to get out at breakeven. It just might.
They paid $645,000 back in 2003. Today their asking $700,000 which will get them out at breakeven after commissions and closing costs. They don’t have much room to negotiate.
Have prices appreciated in Newport Beach since 2003? We will find out soon.
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We're sorry, but we couldn't find MLS # S721311 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
311 BAY HILL Dr Newport Beach, CA 92660
$700,000 …….. Asking Price
$645,000 ………. Purchase Price
6/24/2003 ………. Purchase Date
$55,000 ………. Gross Gain (Loss)
($56,000) ………… Commissions and Costs at 8%
============================================
($1,000) ………. Net Gain (Loss)
============================================
8.5% ………. Gross Percent Change
-0.2% ………. Net Percent Change
0.8% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$700,000 …….. Asking Price
$140,000 ………… 20% Down Conventional
3.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$560,000 …….. Mortgage
$145,210 ………. Income Requirement
$2,487 ………… Monthly Mortgage Payment
$607 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$175 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$483 ………… Homeowners Association Fees
============================================
$3,751 ………. Monthly Cash Outlays
($550) ………. Tax Savings
($895) ………. Equity Hidden in Payment
$149 ………….. Lost Income to Down Payment
$108 ………….. Maintenance and Replacement Reserves
============================================
$2,563 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$8,500 ………… Furnishing and Move In at 1% + $1,500
$8,500 ………… Closing Costs at 1% + $1,500
$5,600 ………… Interest Points
$140,000 ………… Down Payment
============================================
$162,600 ………. Total Cash Costs
$39,200 ………. Emergency Cash Reserves
============================================
$201,800 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Mortgage industry fares well in fiscal cliff deal, debt forgiveness law survives
By Kerri Ann Panchuk January 2, 2013 • 7:56am
The mortgage industry can breath a sigh of relief with the final fiscal cliff deal bringing back a popular tax break on mortgage insurance premiums and debt forgiveness for borrowers who go through a short-sale or some other type of debt reduction.
A topic that is still up for discussion and likely to surface later in the year is whether the popular mortgage interest tax deduction will be part of a long-term deficit reduction plan.
Still, the deal passed by the Senate and House on Jan. 1 is one that leaves room for hope in the housing market.
The American Taxpayer Relief Act of 2012 apparently extends a law that expired at the end of 2011, which allowed for the deductibility of mortgage insurance premiums, according to a research report from Isaac Boltansky with Compass Point Research & Trading. The law now applies to fiscal years 2012 and 2013.
“The law dictates that eligible borrowers who itemize their federal tax returns and have an adjusted gross income (AGI) of less than $100,000 per year can deduct 100% of their annual mortgage insurance premiums,” Compass Point said.
“Certain borrowers with AGIs above $100,000 may benefit from the deductibility as well but are subject to a sliding scale. The tax break covers private mortgage insurance as well as mortgage insurance provided by the FHA, the VA, and the Rural Housing Service. In 2009, about 3.6 million taxpayers claimed the mortgage insurance deduction,” the research firm added.
One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31.
The fiscal cliff deal extends it for another year, meaning homeowners who experience a debt reduction through mortgage principal forgiveness or a short sale are exempt from being taxed on the forgiven amount.
“The amount extends up to $2 million of debt forgiven on the homeowner’s principal residence,” Compass Point Research & Trading said. “For homeowner’s to qualify, their debt must have been used to ‘buy, build, or substantially improve’ their principal residence and be secured by that residence. The law, which was passed in 2007 with a 5-year sunset provision, will now be in effect until Jan. 1, 2014.”
Another minor win for housing is a provision tied to the government’s plan to increase the capital gains tax rate from 15% to 20% for individuals who earn more than $400,000. While in theory, this is harder on higher-income homeowners, Compass Point sees a silver lining through an exclusion.
Compass Point notes the law “states that only gains of more than $250,000 for individuals ($500k for households) are subject to taxes on the excess portion of capital gains. Point being, in order for an individual homeowner to be impacted by the increased capital gains tax rate they would need to have an adjusted gross income above $400,000 and gain more than $250,000 from the sale of the property. Since this exclusion threshold remained intact, the impact of the capital gains tax increase is limited.
This should mean that short sale listings will return in 2013.
Higher fees starting to impact mortgage rates
December 31, 2012, 11:16 AM
Liberty Street carries an intriguing post Monday pondering why 30-year mortgage rates aren’t even lower than their current levels.
Andreas Fuster and David Lucca, both economists at the New York Fed, note that yields in the mortgage-backed-securities market have seen even more dramatic declines than retail mortgage rates.
“Had these declines passed through to loan rates one-for-one, the average [30-year] mortgage rate would now be around 2.6 percent,” they write.
However, a number of technical factors, including higher guarantee fees charged by Fannie Mae and Freddie Mac and capacity restraints in the mortgage origination business may be keeping rates higher, they argue.
– Tom Bemis
GSE delinquency rates still three times normal
Fannie Mae reported that the Single-Family Serious Delinquency rate declined in November to 3.30% from 3.35% October. The serious delinquency rate is down from 4.00% in November last year, and this is the lowest level since March 2009.
The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.
Freddie Mac reported that the Single-Family serious delinquency rate declined in November to 3.25% from 3.31%, in October. Freddie’s rate is down from 3.57% in November 2011, and this is the lowest level since August 2009. Freddie’s serious delinquency rate peaked in February 2010 at 4.20%.
In 2009, Fannie’s serious delinquency rate increased faster than Freddie’s rate. Since then, Fannie’s rate has been falling faster – and now the rates are at about the same level.
Although this indicates ongoing progress, the “normal” serious delinquency rate is under 1%. At this pace, it will take several years until the rates are back to normal.
California Democrats signal they want to reform Proposition 13
The third rail of California politics may not be as deadly as once thought.
Three and a half decades after the passage of Proposition 13 shook the political landscape in California and sparked a taxpayer revolt across America, voters appear to be warming up to the idea of reforming the initiative as long as protections for homeowners stay intact.
And the apparent sea change in public attitudes, combined with the two-thirds majorities Democrats now hold in both chambers of the Legislature, has emboldened some politicians to take aim at the iconic measure.
“It is time for a fix, because Proposition 13 is broken,” said Assemblyman Tom Ammiano, D-San Francisco, who plans to introduce a bill next year aimed at forcing businesses to pay higher property taxes.
The landmark 1978 measure rolled back property taxes and capped yearly increases until a property is sold, but critics say one of its unintended consequences was shifting more of the Golden State’s property tax burden from businesses to homeowners.
The most overlooked housing news story, but it will have a big impact on lending standards.
Qualified mortgage rule may come in early January
By Kerri Ann Panchuk December 31, 2012 • 12:10pm
Mortgage lenders and servicers are preparing for an “unprecedented” period in January when they will be forced to analyze some of the Consumer Financial Protection Bureau’s final lending, servicing and appraisal rules scheduled for release next month.
The rules do not take effect immediately, but will set in motion a yearlong frenzy as servicers and lenders analyze the guidelines, revamp their tech and regulatory strategies and, in some cases, change their product offerings to stave off litigation risks.
Richard Andreano Jr., a partner at Ballard Spahr, says the most watched of those rules – the qualified mortgage rule that defines guidelines for determining a borrower’s ability-to-repay a mortgage – could come as early as Jan. 9.
The Jan. 9th date emerged as a possible drop-date for the final QM rule since the CFPB scheduled public hearings to collect feedback on Jan. 10 and Jan. 17, according to Andreano. Nothing has been officially confirmed by the CFPB, but the scheduling of those hearings is a suggestion the rules will be released right before the feedback sessions.
The month of January will bring final CFPB rules on ability-to-repay (qualified mortgage), loan originator compensation, servicing practices, appraisals, high-cost mortgages and escrow issues, Andreano said.
But the ability-to-repay rule is getting the most attention with it having the potential to change the product offerings of some lenders, especially smaller players in the market, Andreano told HousingWire. The effects of the rule hinge on how broadly or narrowly a qualified mortgage is defined.
“Overall, I don’t think there has ever been a period of time where an industry has had to implement so many wide-reaching changes,” Andreano said. “The interesting thing is going to be what is the mortgage marketplace going to look like after this in terms of who is still in the marketplace making mortgage loans.”
Andreano added, “Because of the amount of increased complexities, a lot of small banks were rethinking whether they want to be in the mortgage business.” He says after the final rules are released, the effects on small banks will be watched closely.
Andreano believes the rules may be released as “interim final rules,” leaving the CFPB open to make additional changes. And while the rules will be released in January, the CFPB can allow for lengthy implementation periods, Andreano said.
“In talking with some of the supervisory folks over there (CFPB), they were well aware of the fact that it’s going to be typically burdensome on the industry, and they are not going to flip the switch and implement everything.”
The big sub-story within these rules is the percentage down payment required. If this gets pushed down to 10% or lower, we will have a lot of speculation backed by taxpayers. If the QRM is defined at 20%, housing markets will be much more stable, and any speculation on mortgages with less than 20% down will be a risk borne by lenders — assuming they don’t get future bailouts.
And if I understand this right, if down payments get pushed to 10% then the mortgage is considered qualified with 10% down. Then Fannie, Freddie, or any other agency can’t sue the banks if borrower then defaults. The lenders then have Safe Harbor with this rule.
The banks would still be subject to buy-back provisions if their underwriting standards were lax. The safe harbor rule prevents the banks from having to retain any of the risk on their own books. Any loan originated as a conforming loan does not impact their capital ratios. Basically, they can make an unlimited number of those loans whereas if they make a riskier loan, they have to retain some of the risk. The originate-to-sell business model will be most impacted by this rule.
The chart on OC Housing inventory tells the whole story. Very informative chart Larry!
Thanks, Blair. It’s obvious from the chart that the first six months of 2012 was really an aberration. The supply that ordinarily would have come to the market didn’t. The last six months of the year saw the normal pattern of declining inventory, but since it started from such a low base in the summer, by the end of the year, the inventory was very low. It will be interesting to see how much inventory comes back to the market in the first six months of 2013 and what the composition of that inventory will be. If more bank REOs come to the market, sales will really take off. If it’s all WTF priced organic sellers, sales will languish.
AIA for off-topic post
http://www.pbs.org/wgbh/pages/frontline/untouchables/
FRONTLINE investigates why Wall Street’s leaders have escaped prosecution for any fraud related to the sale of bad mortgages.
Airs Tuesday, 22-Jan
Anybody’s who’s been paying attention already knows why: because Democratic President Obama, Demoratic Senator Majority Leader Reid and Democratic House Minority Leader and ex-Speaker Nancy Pelosi don’t want anybody poking too deep into the history of banking practices that might lead to questions about the Congressional careers of Democratic Senator Chris Dodd (Chairman of the Senate Banking Committee 2007-11) or Democratic Representative Barney Frank (Chairman of House Committee of Financial Services 2001-11).
We can also keep in mind that the securities and investment sector (aka “Wall Street”) was the fourth largest donor to President Obama’s campaign in 2008, and the third-largest in 2012.
Wait! Bush and WMDs! How much taxes did Romney pay? Didn’t he once say something mean about women? Look over there! A 1%er squirrel objecting to Paying His Fair Share(TM) in taxes!
Even if they end up prosecuting someone, that person will just be a scapegoat. Mozilo should go to jail, but most of the people who ruined our economy did so legally. The heart of the problem wasn’t the bad underwriting standards, it was the bad loan programs. They could have put the best borrowers in the country into Option ARMs, and the bubble still would have popped. The lack of standards at the end of the bubble made the bubble build higher and pop quicker, but it would have happened anyway. Plus, the lax underwriting standards were known to the investors who bought securities where it was disclosed that the borrowers were using stated-income loans and had low FICO scores.
One day is not a trend, but lets see when we get closer to the debt ceiling cliff. If rates go too high you’ll see more money creation.
30-Year Fixed Mortgage Rate Ticks Upward After Fiscal Cliff Resolution
Date:January 2, 2013 Author:Camille Salama
Mortgage rates for 30-year fixed mortgages rose this week, with the current rate borrowers were quoted on Zillow Mortgage Marketplace at 3.31 percent, up from 3.24 percent at this same time last week.
The 30-year fixed mortgage rate hovered between 3.18 and 3.25 percent for the majority of the week, jumping to the current rate this morning.
“Last week, rates remained fairly flat until Congress approved a plan to avoid fiscal cliff tax hikes, pushing mortgage rates up slightly,” said Erin Lantz, director of Zillow Mortgage Marketplace. “Even though Congress still has to work out a plan on spending cuts, we expect rates will continue to drift upward for the next few weeks as markets refocus on economic data instead of fiscal cliff deliberations.”
Additionally, the 15-year fixed mortgage rate this morning was 2.63 percent, and for 5/1 ARMs, the rate was 2.54 percent.
What are the rates right now? Check Zillow Mortgage Marketplace for up-to-the-minute mortgage rates for your state.
There are 2 sources of inventory. Existing homes and New homes. Banks can only control the inventory of existing homes that they own. As prices rise you will see more homeowners with equity and a need to move get back in the market.
I’m sure Larry is aware of Mission Viejo Company’s projects in South OC. They built the “city” of Ladera in a few years. They have all the entitlements to build another one. This is the kind of incentive they need.
Markets work.