Jul242014
Owner-occupant sales stall while distressed sales plummet
Housing market optimists expected owner-occupants to pick up the slack from declining investor purchases. It isn’t happening.
In 2011, lenders aggressively pursued loan modifications to avoid foreclosures. They offered any deadbeat who would play along a sweetheart deal just to get some money back on otherwise non-performing loans. It beat the alternative of foreclosing on another property and selling it for a huge loss.
As this policy began working, the number of properties entering foreclosure began to drop considerably — the distress is still there, as the owner is unable or unwilling to make the contracted payment — but the negative results of this distress, delinquencies and foreclosures, were removed from the market. Some pundits have suggested this improvement comes from an improving economy and a lessening of financial distress among borrowers. That notion is complete and utter bullshit. Most of these Ponzi borrowers couldn’t afford the payments when times were good, and very few are better off today than they were 8 years ago.
Fewer foreclosures means fewer investor sales because only the presence of numerous foreclosures provided the right combination of price and inventory for investors to acquire significant numbers of single-family homes as rentals. As these foreclosures disappear from the market, so does the buying cohort for them. Many delusional financial reporters and housing market analysts predicted that 2014 would see a resurgence of owner-occupant buyers to take up the slack. Unfortunately, weak job and wage growth hobbles housing, and the hoped-for owner-occupants haven’t materialized.
The Foreclosure Fade, and What it Means for the Housing Market
By NICK TIMIRAOS, Jul 22, 2014
The U.S. housing market appears to be finding its footing after a sharp rise in mortgage rates last summer, on top of some big price gains, deflated sales.
The National Association of Realtors reported on Tuesday that sales of previously owned homes rose 2.6% in June to a seasonally adjusted annual rate of 5.04 million units. That’s the third straight monthly gain and the highest level since last October.
Is the recent bump really a sign of a market finding its footing, or is it the normal seasonal pattern in an otherwise awful year?
Housing became less affordable last summer after rates jumped from around 3.5% in May 2013 to 4.5% by July 2013. Since then, however, rates have drifted a little lower, and buyers and sellers have had time to readjust their expectations.
Rates have drifted more than a little lower; in fact, some banks dropped rates below 4%, putting rates well below where they were at this time last year. The sudden uptick in sales is largely explained by the increased affordability created by these low rates. When rates drift back up, sales will plummet once again.
Inventories of homes have stopped falling after several years of declines, but they haven’t risen much, either.
The supply coming to market is mostly cloud inventory priced to get the owner back above water. With such unrealistic pricing and no ability to lower it, most of this inventory doesn’t transact.
This has kept supply and demand fairly balanced, and it’s one reason why prices have continued to rise.
Yes, very low inventory is balanced by very low demand.
The Federal Housing Finance Agency said on Tuesday that home prices in May rose 0.4% from the prior month and were 5.5% above their level of May 2013. At June’s pace of sales, there was a 5.5 month supply of homes for sale. The Realtors’ group considers a 6-month supply to be a balanced market. Higher supplies favor buyers and lower supplies favor sellers.
But there’s another important factor that explains the housing market dynamic right now: the foreclosure crisis has faded. This isn’t to say foreclosures are over, but so-called “distressed” sales accounted for just 11% of sales in June, down from 15% last year, 25% in 2012, and 30% in 2011.
(See: Today’s loan modifications are tomorrow’s distressed property sales)
Foreclosures tend to sell at lower prices than comparable homes because they’re not as well maintained, they’re often vacant and not staged, and banks are motivated to sell quickly. Prices plunged from 2008-11 as the supply of foreclosures rose, but prices rebounded in late 2011 as the share of foreclosed-property sales fell.
While total home sales stood 2.3% below the June 2013 level, most of that can be attributed to the falling share of foreclosures and other distressed sales. Distressed home sales fell by nearly 40% in June from last year, while non-distressed property sales rose 2.3%.
Take a good look at the chart above. The light blue lines representing a decrease in distressed sales, mostly to investors, was supposed to be balanced by the dark blue lines representing owner-occupant sales. The purchase of homes by owner-occupants has barely changed because higher prices are not affordable to marginal buyers, and with weak job and wage growth, there simply aren’t enough qualified buyers at today’s prices.
The foreclosure fade is great news for the housing market, as it means homeowners don’t have to compete with banks to sell homes–and eventually, builders will have to ramp up construction to satisfy new demand if job growth continues. (Even if young households aren’t ready to buy, they’ll have to live somewhere–paying rent, and driving new construction.)
The foreclosure fade is terrible news for the housing market, as it means fewer transactions overall, less money spent by flippers on rehab, and buyers must spend a larger percentage of their income on housing, crowding out other expenditures that would stimulate the economy.
But the foreclosure fade also helps explain the eye-popping gains in sales volumes and prices that we witnessed in 2013. These bargains generated frenzied bidding wars, both from investors and owner-occupant buyers, and they’re largely history.
(See: It’s no longer a seller’s market)
Through the first half of the year, home sales are running around 5% below last year’s level, though they’re still running ahead of 2009, 2010, 2011 and 2012′s levels.
A true and durable recovery based on fundamentals should display both price and volume growth. We had that in 2013, but the lack of volume in 2014 reveals the recovery was not built on fundamentals but on temporary stimulus with investor buyers and record low rates.
Now, the housing market is going to rely more heavily on traditional drivers of growth, including job and wage gains and demographics. Tighter credit standards, higher levels of student debt, and lower incomes for young adults will keep pressure on homeownership, and they could make the housing recovery far bumpier than the steady gains of 2012-13 would have suggested.
It was only suggested by a hopeful financial media that the housing recovery was real and durable. The fact is the market is being continually manipulated to drive up prices to save the banks. As these artificial props give way to reality, the market will stumble, like it did in early 2014. We still don’t have an organic market dominated by individual buyers and sellers responding to strong job and wage growth. When we get there, if we get there, then we’ll have a real recovery.
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If something cannot continue, it will end…..
New Home Sals Collapse 20% From May To Dec 2012 Levels; Biggest Miss In A Year
New Home Sales in June plunged to 406k vs 504k in May… (remember that 504k print was the catalyst for ‘weather’ is over and the market to surge 10%) Now that has soaked in, consider this is equal lowest sales print since September 2013 (and Dec 2012) and the biggest miss since July 2013. The last 3 months of exuberance have all been revised significantly lower (most especially May’s appartently make-believe number).
What is even more troubling in the “survey” vs “reality” world is this collapse in sales when NAHB Sentiment surged to near cycle highs. For context, this is a 5-standard-deviation miss from economists’ expectations.
New Home Sales revised lower:
March: 410K to 408K
April: 425K to 408K
May: 504K to 442K
http://www.zerohedge.com/news/2014-07-24/new-home-sals-collapse-20-may-biggest-miss-year
It gets worse…
CoreLogic slashes 2014 mortgage origination estimate by 10%
Citing the shrinking mortgage market and current trends, CoreLogic (CLGX) has slashed its estimate for 2014’s mortgage originations by 10% to approximately $1 trillion.
CoreLogic made the proclamation in its earnings statement for the second quarter, which reported an increase in revenue of 13% over its subpar first quarter.
The shrinking mortgage market dragged down CoreLogic’s earnings in the first quarter of 2014.
In April, the company reported decreased first-quarter revenue due, in part, to a 60% “contraction” in U.S. mortgage origination volumes. The company’s first-quarter revenue fell to $310.4 million from $331.4 million in 1Q13.
But in 2Q14, the company reversed the first quarter’s negative results and reported a 13% jump in earnings.
CoreLogic’s second-quarter revenue increased to $349.4 million, which was also up 0.4% from 2Q13. The company said that the increase was “despite an estimated 50% contraction in U.S. mortgage volumes.”
The company has adjusted its earnings forecast accordingly. “The impact of lower volumes of originations, as well as continuing headwinds in the U.S. housing market, and expected reductions in discretionary client spending is reflected in the following updated 2014 guidance: revenues; adjusted EBITDA and adjusted EPS of $1.33 to $1.37 billion, $335 to $360 million, and $1.25 to $1.40 per share, respectively,” the company said.
It’s amazing how dramatic these articles are. The raw data shows new homes selling in a tight band between 400-450k for the past 10 months. In fact, other than two anomalous months last year when rates shot up rapidly by 100 bps, new homes have been selling within this band for the past 19 months. Sites like ZH take these snoozer data points and try to make them seem meaningful and exciting, but anybody honestly trying to determine what this means for housing isn’t going to find a very strong signal one way or the other.
What’s “honesty” got to do with anything?
The last big dip in new home sales was last July, and prices went up from there so… It appears you’re correct in stating this doesn’t necessarily indicate much.
What is with the big dips in sales of new homes in the middle of Summer?
A few days ago I asked, With flattening house prices how will 300,000 SoCal loanowners get above water?
1 in 6 homes still seriously underwater as home price growth slows
In the second quarter some 9.1 million U.S. residential properties were seriously underwater — where the combined loan amount secured by the property is at least 25% higher than the property’s estimated market value — representing 17% of all properties with a mortgage, RealtyTrac reports.
The second quarter of 2014 saw a percentage decrease in homes that were seriously underwater — 17.2% versus 17.4% in the first quarter of 2014 — bringing it to the lowest level since RealtyTrac began reporting negative equity in the first quarter of 2012.
“Home price appreciation has slowed in the last few months in many of the markets with the most underwater homes, slowing the pace at which homeowners are recovering equity lost during the Great Recession,” said Daren Blomquist, vice president at RealtyTrac. “For instance, annual home price appreciation in California was at 16% in May 2014 compared to a high of 31% in July and August of 2013. In Arizona, home price appreciation has slowed to 6% annually compared to a high of 24% last year.
“In addition many of the properties that are seriously underwater are in a deep negative equity hole that will take some time to dig out of,” Blomquist continued. “The average loan-to-value on the 9.1 million homes seriously underwater was 133%, and the average loan-to-value on the homes in foreclosure that are seriously underwater was 134%.”
It’s moving day for me, so I won’t be participating much in the comments. Posts will continue as normal tomorrow, and I should be able to comment then.
Hope all goes well with the move.
Your Chinese lords of land are about to get the lesson in vacancy rates.
That’s gonna sting
The new normal also means a lower quality of housing for new buyers as the substitution effect kicks in.
Consumers Would Change Lifestyle to Avoid Default
It doesn’t take a financial catastrophe in the housing market to put consumers in danger. Epic meltdown or loss of work, hardship is hardship, and people often have to make tough decisions about how much they can afford and how much they can save on housing.
The prospect of default is scary. Actually defaulting on obligations is horrifying for most.
Jed Kolko, Trulia’s chief economist, Wednesday released the firm’s findings on how people would likely cope with having to spend less on their housing. More than anything, people downsize. According to the results of a survey Trulia conducted in March and April, 38 percent of respondents ‒‒ by far the largest single percentage of any option ‒‒ said they would move to a smaller house or apartment if they were forced to cut back on housing costs.
Of all the options, which include taking on roommates or moving in with others ‒‒ refinancing was not one of Trulia’s options ‒‒ respondents showed a heavy preference (about 60 percent) for staying as autonomous as possible. Homeowners in particular are significantly less willing to get a roommate than renters. According to the survey, 25 present of renters would opt to take on a roommate, compared to 16 percent of homeowners. Renters also were more likely to take more drastic measures, such as live in their cars or move back in with their parents, though none of these kinds of options got a lot of support from either group.
Still, 19 percent of respondents overall said they would take on a roommate rather than downsize, the same percentage of people who would opt to move to a less expensive area in order to keep the same general living space. Notably, middle-aged people are the most reluctant to go anywhere. Millennials (aged 18-34), said Kolko, are more willing than older age groups to move into someone else’s home or rent out part of their own home. “Young adults are, of course, more likely to have the option of moving in with their parents than older adults do, but they’re also far more likely than older adults to move in with a non-relative or rent to a roommate,” he said.
People age 55-plus, too, are more likely than the 35-to-54 set to move, whether to a smaller house, more affordable area, or into a relative’s or friend’s house, the study found. The middle-agers are also be twice as likely to stop paying the rent or mortgage in order to avoid moving as other age groups would be, though few people in any age group would take that step, Kolko said.
Status also has a lot to do with the decision-making, Trulia found. “Your strategy for cutting housing costs depends not only on who you are, but also on where you live,” Kolko said. “Respondents living in more expensive neighborhoods would be more likely to move to a cheaper neighborhood or city if a major financial hardship struck. After all, if you’re already in an expensive neighborhood, there are other neighborhoods that are cheaper by comparison.”
Another good graphic charting foreclosure sales. Quite a dramatic drop beginning mid 2012.
http://www.zillow.com/local-info/CA-Los-Angeles-Metro-home-value/r_394806/#metric=mt%3D29%26dt%3D1%26tp%3D5%26rt%3D6%26r%3D394806%252C12447%252C46298%252C16764%26el%3D0
I’m sure, even the most sold-out economic bulls, have to realize at this point in American/World history, that something is very wrong with the global economy.
Think about this …
Does it make and sense that long term US debt to currently be yielding near all-time lows, while equity markets are at all-time highs?
Does it make any sense for the govt to say things are improving economically for the last 5+ years, while the FED still has interest rates at 0-.25%?
I could probably layout 10 more crocked anomalies in our economy, but the 2 listed above are the most blatant.
Yes.
Yes.
In a world of ZIRP, false economic recoveries make sense.
Sustainability, well that’s another story.
1) US rates are near all time low because of relentless manipulation by the FED and Central banks left and right vastly understating inflation and constant bond buying spree. 2.5% for 10 year treasury is still better than sub 2% in West Europe and sub 1% in Japan. Rates down mean bond value goes up, so yes even the bond buyer is happy temporarily. Even if the yield is close to jack shite.
2) Again, market at all time high because of 1) and the belief that money is being devalued. This is setting up for either high inflation or massive deflation in the future depending on the Fed and banks does.
3) The government can say whatever and the FED is terrified of any rate increase as it would destroy their bond holdings. But than again, those are just digital digits that can be enter re-enter at any moment notice.
the FED doesn’t care about their bond holdings. They’ve put up no real capital, thus will suffer no real losses.