Apr242013
No escape velocity as depleted inventory pummeled home sales in 2013
Typically, January is the slowest month of the year for real estate sales. Sales volume rises each month through July or August when it peaks as buyers rush to get into homes before their children start a new school year. When sales volumes decline on a monthly basis during the first half of the year, it’s often a troubling sign for the real estate market.
Sales volumes declined in March, and it is a sign of a problem in the housing market: a lack of inventory.
Why Home Sales Stalled in March
By Nick Timiraos — April 22, 2013, 11:46 AM
Sales of previously owned homes fell by 0.6% in March from February, causing some analysts to second guess the housing rebound.
In the post The bearish case for another leg down in housing, Mark Hanson flatly stated, “Market forecasts and sector stock multiples are forecasting sales, price and home improvement gains similar to what we saw in 2012 YoY. This will not occur.” Will Mark’s bearish prognostications proof correct?
What’s going on? Here are four takeaways from the National Association of Realtors’ report on Monday.
Why would anyone turn to the NAr for information on what’s happening in the real estate market? All they will provide is spin and bullshit.
1) The problem for the housing market right now is a lack of supply—not a lack of demand. This isn’t a surprise to anyone who’s tried to buy a house in many parts of the country over the last year. The number of homes listed for sale rose by just 1.6% in March, meaning just 30,000 net new units hit the market. The 1.93 million homes for sale in March was down by 16.8% from one year ago and is the lowest inventory level for the month of March in 13 years. “Inventory is definitely gating demand,” says Glenn Kelman, chief executive of real estate brokerage Redfin. Monday’s report showed that sales were still 10.3% above last year’s levels on a seasonally adjusted basis, continuing a streak of 21 consecutive months in which home sales have increased from their year-ago level.
Since we were coming off some of the lowest sales volumes in history, year-over-year increases are hardly surprising. Orange County home resale volume is very weak by historic norms.
2) Rising demand and falling supply continue to push prices higher. The median home price in March rose 11.8% from one year ago to $184,300. (Changes in the median price often reflect a shift in the “mix” of homes being sold, meaning they can rise when more expensive homes transact in a given period.) In the West, median prices were up by 26.1% from one year ago, a clear sign that more homes are selling at higher price points. Median prices have risen from their year-ago levels in 13 straight months.
The current median sales prices are very distorted, but there is no question market prices are rising. I was looking through the OC Housing Market Report for this month, and I was floored by the price increases in areas dominated by condos. The speculators who bought condos in 2011 are sitting on a mountain of equity. Prices on a per-square-foot basis are up nearly 40% in Irvine’s Orangetree over the last six months. Based on the relative degree of undervaluation, these prices won’t move much higher as the window of opportunity in these units is closing fast. Note the rapidly increasing cost of ownership.
3) Buyers are getting frustrated, and some sellers are getting greedy. Some sellers are hearing that it’s a sellers’ market and are becoming more determined to ask for more. Inventory is low, of course, because many sellers aren’t willing or able to sell at prices that are down sharply from seven years ago.
The problem isn’t a lack of willingness, it’s a lack of ability. Low housing inventory is an indicator of residual mortgage distress. People aren’t listing their homes because they can’t sell it for enough money to pay off their loan. The more extreme the lack of inventory, the more problem the market has with underwater loanowners. This inventory will stay off the market until prices reach near-peak levels when loanowners can finally get out of their properties without trashing their credit scores.
Some have a “reservation price”—a price at which they’ll sell. Ultimately, rising prices should lead more sellers to put their homes on the market.
(See: Must-sell shadow inventory has morphed into can’t-sell cloud inventory)
But until then, buyers may give up. “There are not enough homes to buy,” says Mr. Kelman. “We see so many people dropping out of the process because they’re tired of getting outbid.”
This is a real issue. Buyer fatigue is prompting many to give up the search. Perhaps this is latent demand that may return when inventory is more abundant, or perhaps these buyers will give up on owning because the asking price of cloud inventory is too high. Banks are counting on pent-up demand from frustrated buyers to liquidate their cloud inventory. They may be rudely greeted with an MLS loaded with inventory that either nobody can afford or it’s at prices they’re unwilling to pay.
Another problem: many sellers aren’t going to be willing to list until they’re more confident they can buy another home to move into.
We have a current client who won’t list their property for this very reason. It’s hard to measure how big an issue this is, but anecdotes are becoming more common.
4) The current market isn’t fun for real-estate agents, who make their living selling homes. But it is good for the home builders.
Yes, it is (See: Low MLS inventory a boon to homebuilders)
If would-be buyers are motivated to buy now to take advantage of low prices and low mortgage rates but can’t find a home on the resale market, they’re likely to turn to the new-home market. Already, new home sales have rebounded from their depressed levels of a year ago, and Tuesday’s report for March sales will provide the latest indication of just how quickly builders are regaining market share that they surrendered as the foreclosure crisis worsened five years ago.
What is escape velocity?
In rocketry, escape velocity is the speed required to propel an object into a stable orbit. In a housing market, escape velocity is a sustained increase in demand required to push prices higher for the long term. For a housing market to embark on a long bull rally, it needs rising prices predicated on rising incomes and increasing household formation. That’s not what we have. The only increase in housing demand is coming from investors, and the reason prices are rising is because inventories are so restricted by bank policy that the few active buyers in the market are being forced to pay more.
Nice Post “Irvine Renter”. It is always nice to stay informed on current events in the housing market.
I’m surprised the NAR hasn’t made commercials that banks holding back inventory is hindering the recovery! I’m sure the few that are selling love it.
If interest rates aren’t held down forever it’s going to be ugly when the shadow inventory finally goes up for sale. Or maybe the banks will just let millions squat until they die.
At this point, it looks like banks will let people squat until prices rise enough for them to sell without losing money, no matter how long that takes. In some markets, that will take 10 years or more. A lot of people are going to enjoy free housing while the banks wait.
10 years, that’s just astounding. They are renting, they are “title renting”.
You couldn’t convince them of that. The feeble hope of future equity and their names on title makes them feel like homeowners even when the only thing they really own is their debt.
Would bet that the “title renters” are not paying property taxes either.
To the best of my legal knowledge the taxing authorities are in a superior position to even the 1TD holders when it comes time to sell.
These banks may be waiting a long time for some feeble equity.
History provides clarity and a roadmap to what’s ahead for .gov controlled, policy-driven markets, so outcomes such as ”pummels home sales” should be expected.
btw, enjoyed the ‘faith in price appreciation’ post yesterday. Judging by the sensitivo nature of some of the comments, you touched some nerves. It was easy to tell who drinks the kool-aid.
See the durable goods order for March and the revision for February. This is the 3rd year in a row we had a “recovery” and in the 2nd half of the year it flames out. I though these homes sales and recent appreciation was going to save the economy.
Goldman Confirms Slowdown Accelerating
http://www.zerohedge.com/news/2013-04-18/goldman-confirms-slowdown-accelerating
That swirlogram doesn’t look so good. We are just one square away from contraction.
LOL! one square away from contraction. either or one foot in the grave…
Looks like an excuse for the federal reserve to print more money.
Printing will start October 8th…
http://blogs.marketwatch.com/election/2013/04/24/heres-the-new-100-bill-thats-due-to-enter-circulation/
I’m not buying the “low supply” story.
Low supply pushes up prices, but doesn’t do “jack” for demand.
Demand comes from people who are employed, who need a house.
The reason existing home sales tanked is because sales are already at trend.
There’s no reason for sales to improve absent another bubble.
Low rates alone won’t cause a bubble.
Sales are where they were in 2003, just before lax lending standards and no-doc, no-down loans became the rage.
Bottom line: If standards don’t loosen, no bubble.
That doesn’t mean sales will go down. They probably won’t. But they will be flat thru the buying season.
Why?
High unemployment, falling wages.
If investors get tired of the rising prices, then their share of the market will shrink and prices will flatline. It will then take about 6 mionths for prices to retreat, just as they did in 2006.
And just as they are today in Canada where the bubble just blew sky-high.
Sales of Toronto condos down 47% year over year.
Kaboom!
As you noted, restricting supply does nothing for demand, and without demand, no recovery will last. The banking cartel hopes to restrict supply long enough for demand to come back, but by the time prices get pushed back to peak levels, the demand will not materialize. Right now, people can afford to finance the current price levels. If prices get back to peak levels, affordability won’t be so good. Further, once house prices are that high, what will motivate buyers to pay the higher prices? Kool aid? Once the cloud inventory appears and people realize prices won’t be going any higher, the kool aid will dissipate and the market will stagnate.
I don’t know what I find more astonishing about this article, the level of debt addiction in this country, or the surprise of the reporter that it’s not worse. Personally, I’ve gone years without checking my credit report. If you don’t use debt, what’s the point?
Survey: 22% of Americans Have Never Checked Their Credit Report
Although credit scores play a crucial role in the homebuying process, a recent FindLaw.com survey found nearly a quarter of Americans have never bothered to check their credit report.
Overall, 22 percent of the 1,000 adults surveyed said they’ve never checked their credit report even though credit reporting agencies are required to provide free copies when requested. Out of the 78 percent who said they have checked their credit report, 46 percent checked within the last year.
The survey also revealed women and households with higher levels of income were less likely to say they have never checked their credit report. When dividing responses by gender, FindLaw reported 25 percent of men never checked their report, while 18 percent of women shared the same answer.
For households where annual incomes were below $35,000, 37 percent of respondents said they have never checked their report. On the higher end of the income spectrum were respondents who made $100,000 or more, of which 12 percent said they’ve never checked their report. Households where annual incomes ranged from $50,000 to less than $75,000 represented the smallest share, with 11 stating they have never checked their report.
When categorizing respondents by age, the survey revealed Americans aged 35 to 44 were the least likely to say they’ve never checked their report, with 13 percent falling into this category.
“The accuracy of your credit report can have a major impact on your finances, and even your chances of obtaining a job,” said Stephanie Rahlfs, an attorney and editor with FindLaw.com. “Inaccuracies in information such as late payments or defaults could play a major role in whether you can obtain a home mortgage, credit card, car loan and other types of debt, and how favorable your terms will be, such as interest rates. Credit reports are increasingly used in background checks, and could determine whether you are offered a job or rental housing.”
Lenders are reducing delinquency rates by lowering or eliminating underwriting standards on loan modifications. These loans will sure fail in the future. This is can-kicking at its extreme.
In Utter Desperation to Reduce Delinquency, GSEs Allow No-Doc Modifications
Starting July 1, large numbers of non-paying borrowers will have the opportunity to modify existing mortgages through a more streamlined process.
This sounds like a good way to reduce foreclosures and prop up home prices, but as we will shortly see, the proposed program is oddly risky and likely to encourage additional defaults.
According to the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac will offer “a new, simplified loan modification initiative” to borrowers who are at least 90 days late with their mortgage payments. Modifications can include a lower rate, a loan term stretched to 40 years and principal forbearance in some cases.
“The loan,” says FHFA, “must be owned or guaranteed by Fannie Mae or Freddie Mac. Homeowners must be 90 days to 24 months delinquent, and have a first-lien mortgage that is at least 12 months old with a loan-to-value ratio equal to or greater than 80 percent. Loans that have been modified at least two times previously are not eligible.”
The program is open to borrowers who have already modified their loans once, perhaps a few years ago when rates were higher. This, at least, is a good idea.
So what’s the big difference between the new program and the modifications offered previously?
No-Doc Modifications
FHFA says the “key difference is that borrowers will not be required to document their hardship or financial situation, but will be able to accept a Streamlined Modification Offer by simply making the trial period payments and agreeing to the terms of the modification.”
The new government initiative is in some ways commendable: We surely want fewer people foreclosed and if there’s a way to modify mortgages that makes financial sense for both lenders and borrowers then we should take a look.
Unfortunately, the FHFA program misses the mark. What FHFA is proposing would not attract any sober investor were it not for the guarantees that will be provided by Fannie Mae and Freddie Mac, guarantees that should not be given in this case.
Just as FHFA Acting Director Edward J. DeMarco has rightly resisted principal forgiveness because it doesn’t make financial sense for American taxpayers who are ultimately the investors backing Fannie and Freddie loans, so he should resist a program that encourages more defaults, resulting in deeper losses on those same loans.
In a statement provided with the announcement of the new program, DeMarco still encourages “borrowers to provide documentation to support modification options that would likely result in additional borrower savings.”
But the bottom line is that documentation is no longer required.
It is understandable and even laudable to give troubled homeowners the chance to prove themselves worthy of a loan modification by making three trial payments. But eliminating the requirement for these homeowners to show they have a financial hardship before entering the trial modification period creates a moral hazard.
Those who can afford to make their current mortgage payment will be rewarded if they strategically default, in which case they can qualify for a program in which their new monthly payment is lower. The end result: Fannie and Freddie—and ultimately taxpayers—get a lower rate of return on a loan without any evidence that lowering that rate of return was necessary.
The reason given for eliminating the hardship documentation requirement: it “eliminates the administrative barriers with document collection and evaluation.”
Sounds more like a rationalization for cutting corners rather than a solid defense of doing what is right for the American taxpayer.
But hey at least we are under that 5 million figure.
“Homeowners must be 90 days to 24 months delinquent, and have a first-lien mortgage that is at least 12 months old with a loan-to-value ratio equal to or greater than 80 percent. Loans that have been modified at least two times previously are not eligible”
This program is the banksters’ dream to take their worse (most defective) loans and convert the loans into good govt guaranteed and approved loans.
Greater than 80% loan to value is less than 20% equality which will not cover the FC and sales expenses. 90 days to 24 months delinquent already shows an inability or unwillingness to pay. The prefect cover of helping homeowners, but real purpose it to subvert the people’s demand to sue and recover the money for the defective loans (falsified paperwork and rating). With these listed criteria on LTV and prior delinquencies, the chances of repayment by the borrower are slim to none and chance of banks getting all the money from the government (or taxpayers) is 100 percent.
So far the program is limited to loans the GSEs already own, so the taxpayer isn’t getting any additional exposure, but it probably won’t take long before the banks can offload their crap as well.
There’s demands or cries for the GSE to sue the banks for making the defective loans to get reimbursement for the loss or take back the loans. The GSE’s have been very slow to do it in any significant volume. If the new loans or modifications are done with true information and risk rating, the GSE will have complete liability and banks none.
“If the new loans or modifications are done with true information and risk rating, the GSE will have complete liability and banks none.”
That is certainly the bank’s goal. They will undoubtedly lobby to get this program expanded.
“The current median sales prices are very distorted, but there is no question market prices are rising. I was looking through the OC Housing Market Report for this month, and I was floored by the price increases in areas dominated by condos. The speculators who bought condos in 2011 are sitting on a mountain of equity. Prices on a per-square-foot basis are up nearly 40% in Irvine’s Orangetree over the last six months.”
el O says:
March 5, 2013 at 11:35 am
MR says: Prices have essentially risen about 33% in the past 3 months.
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LOL.
Nice one!
Dude, stop being so naieve.
If pure values have actually risen ”about 33% in the past 3 months”, inventory would not sit at record lows.
well he is not being naive. I am seeing it myself. Condos going for 150k more than 2011 pricing….my friends recently sold their detached condo bought in 2009 for 150k more than what they bought for. Area was quail hill…if they had bought in 2010-11 then they could have made 200k plus…
Paper profits in the housing market are like paper profits (equity) in the stock market. They only really materize when sold. Correction: Bank allowed 120% financing on house while WS only allows 50% financing on the stocks. Stock have their verison on FC but only takes one day instead of 5 years.
I completely agree with you. We had made an offer on a condo in woodbury in March 2011 for 500000 but then decided to back out. That condo sold in dec 2011 for 460000. In march 2013 it shows pending for 650000. In irvine it already 2006 pricing.
It’s astonishing how quickly they reflated the bubble.
The good news is that sales in Orange County are still 7% higher than last year even as prices have skyrocketed 26%. Perversely, higher prices will probably lead to even higher sales in the coming months as underwater borrowers come up for air.
Also, the 500k death grip now sits at 565k.
http://www.dqnews.com/Charts/Monthly-Charts/OC-Register-Charts/ZIPOCR.aspx
“What is dead may never die.” – House Greyjoy
Higher inventory may make sales volumes increase a little for a short time while frustrated buyers complete their purchases, but higher prices will make houses less affordable which will drive sales volumes down over time. Unfortunately for the OC market, the increase in price isn’t going to translate to more equity for a move-up market because about half the increase will go to banks and investors rather than homeowners.
Way way off topic bird flu now reported in Taiwan. The morality rate is 1 in 5. Several months from vaccine.
Modified mortgages show ‘alarming’ default trend
“The number of homeowners who have redefaulted on a HAMP permanent mortgage modification is increasing at an alarming rate,” the report said. “Treasury’s data shows that the longer a homeowner remains in HAMP, the more likely he or she is to redefault out of the program.”
The oldest permanent modifications made through the federal Home Affordable Modification Program, which launched in 2009, were redefaulting at a rate of 46.1% as of March 31, according to the report from the special inspector general overseeing the Treasury Department’s efforts to shore up the U.S. financial system.
HAMP’s permanent modifications from 2010 have redefault rates ranging from 28.9% to 37.6%.
http://blogs.marketwatch.com/thetell/2013/04/24/modified-mortgages-show-alarming-default-trend/
What lending operation makes a profit with a 46.1% failure rate?
There is good reason the recent movement to re-privatize the mortgage market fell flat on its face.
Lowering the default rate on these from 100% to 35% seems like a resounding success if your goal was to prevent foreclosures.
Page 6 shows default data for the oldest vintages:
http://www.treasury.gov/initiatives/financial-stability/reports/Documents/December%202012%20MHA%20Report%20Final.pdf
People were predicting 70% default rates when the program started.
“People were predicting 70% default rates when the program started.”
The definition of can-kicking.
The sooner people like you stop candy-coating realities, the sooner a real (sustainable) recovery will take root. Until that point, any unrealized paper gains–including recaptured home equity–will be subject to deletion.
People like me? LOL.. You’re starting to sound frustrated.
HAMP is a tiny slice of the outstanding mortgage market, so it doesn’t especially matter what the default rate is. If 100% of the loans went back to foreclosure status it wouldn’t have a drastic effect on what’s happening in the RE market.
Why are you so emotionally tied to declining home prices?
I think both of you are attached to the direction of home prices. I think you both suffer from confirmation bias.
“Confirmation bias (also called confirmatory bias or myside bias) is a tendency of people to favor information that confirms their beliefs or hypotheses. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs.”
MR:
“A presumption becomes a self-refuting assertion” –unknown
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Larry: No comment
You guys can have your arguments, I am still sticking to the fundamentals. Jobs and wages, you know the thing that actual drives market forces instead of bullshit.
Price rises will level off if they haven’t already because quite frankly the line of affordability is being hit.
It’s either that or start the risky bubble laiden disaster lending practices that caused all this in the first place. Which they’ve started to.
I’m not a permabear, but I just don’t see it materializing. You can only use bullshit to prop something up for so long before the house of cards comes crashing down – in both literal and figurative sense.
It’s just crazy right now in Irvine. New developments in Woodbridge and Uni Park are offering 2,500 sq ft homes with postage stamp front/back yards starting in the millions. At these prices, we’re being pushed “down” to Newport!
I think we are approaching the creshendo of bubble 2.0. The transactions lately have been stupid. Shevy told me about a property where the recent sold comps were $625K. It just went into escrow at $780K. The new buyers are paying 20% over comps less than 90 days old. That is crazy. That is the behavior at the peak of a frenzy.
These comps will change the OCHN newsletter in the next few months. It will be very interesting to see change in the rental parity.
2008 Part Deux looms.
I think it’s time for Larry to come back to the IHB and tell everyone that Irvine is in a bubble again.
It is so ridiculous… those new homes actually start at 2209sft and are in the high 900ks or low $1mils… crazy. Lots of cash transactions too… gah.
The Irvine Company is using motorcourts as a sales tool… The California Court. And… you can get a California Garage too… with a dog wash!
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Escape velocity is associated with a parabolic orbit, not a circular orbit. To get out of Earth’s gravity well, you need to have sufficient kinetic energy to exceed the potential energy at the Earth’s surface. As such, escape velocity is approximately the square root of two greater than the orbital velocity, or 1.414 times more.
If you are in a stable orbit, you have merely increased the kinetic energy to the point of a higher potential energy at a higher altitude. This is what the housing market manipulation has done thanks to lower mortgage rates and inventory restriction. House prices have temporarily risen in response to market distortions.
Both the laws of physics and the laws of economics dictate that what goes up, must come down. Trees don’t grow to the sky, and housing prices are similarly tethered economic fundamentals.
Kepler’s third law states that for every action there is an equal and opposite reaction. If housing prices are rising to a higher orbit, what is the opposite reaction? For something to go faster, something else must go slower.
For first time buyers that are paying bubble prices, a transfer is being made from one industry, consumer spending for example, to another industry like real estate. At the same time, we have the government sector taking money out of discretionary spending through payroll tax hikes, higher sales taxes, and rising property taxes from appreciating housing prices.
For existing homeowners, there is a no transfer between sectors since their cash flow doesn’t change just because their house rises in value. If these homeowners take out a heloc, they are taking out a loan. Their cash flow is negatively impacted, and a transfer has been made from future earnings to present spending. This is a net-negative drag on future economic growth and represents a transfer to the financial industry from future consumer spending. Same thing happens for cash out refi. Debt is incurred for present consumption with no hope of later recovery.
For move-up buyers (and this includes anyone selling an investor priced home, or buying above that level as a first time buyer), the math is even worse than a first-time buyer. They are selling a house for x amt and buying a house for 1.5 times x. The .5 times x is either an increase from their current mortgage amount or comes from savings. Either way, they will have less discretionary income to spend, save or invest. This will impact consumer confidence and capital investment — both of which impact jobs.
When housing prices were falling, move-up buyers said that they may lose some on their current house, but the house they are buying is falling even more. What about now? Isn’t the move-up house rising even more?
For investors, higher prices doubly impact their bottom line by cutting cash flow margins and reducing forward appreciation rates. Investors also have higher maintenance costs because of fewer available skilled laborers thanks to increases in investor purchases of dilapidated foreclosures.
Another fundamental law is conservation of momentum. There is a lot of momentum keeping prices moving upward. But when the payroll tax hike, sequester cuts, and rising mortgage rates start to be felt in the next few months, momentum won’t be viewed so favorably. Face Meet Wall.
[…] in mid 2013 when mortgage rates rose from 3.5% to 4.5% in less than 60 days, I wrote a post No escape velocity as depleted inventory pummeled home sales in 2013. In that post, I noted the […]