Oct272015
The final wave of foreclosures proceeding briskly
As loan modifications redefault, and as the market can absorb the supply, lenders are finally foreclosing and resolving their bad loan permanently.
A wave of foreclosures flooded the housing market in 2008 and left millions of homeowners underwater. Most people believe the storm surge receded as lenders ran out of delinquent borrowers to foreclose on, but nothing could be further from the truth. In reality, lenders merely delayed processing millions of foreclosures by can-kicking bad loans in hopes that rising prices could bail out both the bankers and the homeowners with an equity sale.
For the most part, this policy worked. Distressed properties disappeared from the MLS, and fueled by record low mortgage rates, prices rose briskly once the supply was removed.
Bankers designed policies to promote loan modification over foreclosure, specifically to drive down the reported delinquency rates. Further, HUD sold off non-performing loans to hedge funds that don’t report their delinquencies, which also lowers the reported rate.
Lowering delinquency rates should be a big plus; however, lowering delinquency rates through methods that don’t permanently cure the loan (can-kicking) is a farce designed to influence public perception. Lenders want to report better delinquency rates to improve confidence in the housing market to encourage buyers to bid up prices to aid lenders in their capital recovery on their bad loans.
Most people believe the mortgage and foreclosure crisis of 2008 is behind us, a misperception fostered by a financial media eager to disseminate good news. The common perception is that an improving economy put people back to work, and those hard-working Americans cured their loans of past-due payments: all is well.
Unfortunately, that isn’t the reality. While the notion of the noble American borrower dutifully recovering from the perils of the Great Recession is appealing, most borrowers were overextended before the recession hit, and lenders cut deals with these borrowers to preserve the bad debts polluting the balance sheets of both bankers and borrowers.
These loan modification deals merely postponed the final resolution until a day when the value of the collateral backing these bad loans was restored. The final resolution of these can-kicked loans is mortgage and foreclosure crisis 2.0 — and it’s now upon us.
Back in July of 2012, I noted that Foreclosures dominance of housing market projected to end in 2015 or 2016:
I took the long-term chart of mortgage delinquencies from LPS and projected the current rate of decline forward to the future to see when we get back to a normal rate of delinquency. The result was January of 2015 (see chart below).
The data series for extrapolation was two and a half years of data, and the trend is easy to define. I feel confident that unless lender behavior changes, we will see normal delinquency rates by early 2015. …
The chart above is over three years old, and the rate of decline in delinquencies has occurred as projected; however, it’s time to revise the chart to reflect the echo bubble of delinquencies to come as the bad loans of the housing bubble era are finally resolved. The chart below is what I believe will happen, and so far, it’s been fairly accurate:
Mortgage delinquencies will rise again, and they will remain elevated above historic norms for much longer than anyone currently anticipates. This will “surprise” economists and others who accept the financial media spin without understanding why and how the mortgage delinquency rates were lowered in the first place.
Repossessions spike 66% as foreclosure crisis lingers
Diana Olick, Thursday, 15 Oct 2015
New foreclosures may be back to nearly normal, but the mess from the epic housing disaster in the last decade is far from gone. Bank repossessions, the final stage of the foreclosure process, jumped 66 percent year over year in the third quarter of this year, according to RealtyTrac, a foreclosure sales and analytics company. It’s the largest annual rise ever recorded in bank repossessions by RealtyTrac. More than 123,000 homes went back to the bank in just three months.
Despite the large increase, these foreclosures will generally be metered out at rates the local housing market can absorb. Bankers are finally cleaning up the trash from failed loan modifications given to hopeless borrowers. It’s time to put them out of their misery. (See: Repeat foreclosures result from failed lender can-kicking)
“In states such as New Jersey, Massachusetts and New York, a flood of deferred distress from the last housing crisis is finally spilling over the legislative and legal dams that have held back some foreclosure activity for years,” said Daren Blomquist, vice president at RealtyTrac. “That deferred distress often represents properties with deferred maintenance that will sell at more deeply discounted prices, creating a drag on overall home values.” …
This particular source of foreclosures was expected by most industry insiders. The financial media largely ignored this overhanging supply, so now the East Coast is going to be flooded with the foreclosures they should have processed years ago.
“Additionally, more nonbank lenders who purchased nonperforming loans over the past couple years are moving forward with foreclosure, having passed the foreclosure moratorium of six to 12 months required by many of these purchase agreements,” said Blomquist.
(See: Investors buy non-performing loans to foreclose and obtain rental properties)
REO-to-rental investment hedge funds exhausted the supply of homes they could acquire at auction or on the MLS for the prices they need to make the investment profitable. Desperate for more homes to add to their portfolios, investors turn to lenders to buy the non-performing loans on their books so these investors can foreclose on the delinquent borrower and obtain a rental property. This new strategy caused a dramatic increase in the number of foreclosures.
With the backlog finally moving, New Jersey now has the nation’s top foreclosure rate, just beating Florida, which was once the poster child for the housing crash and which also has a judicial foreclosure process. Foreclosure activity in the Garden State is more than twice the national average. … bank repossessions jumped 351 percent from a year ago. Atlantic City now boasts the highest metropolitan foreclosure rate.
Yikes!
“The third-quarter increases are a sign that the foreclosure market has settled into a normalized pattern close to or even below precrisis levels, and in those states the overall housing market should easily absorb the additional foreclosure activity with little impact on home values,” added Blomquist.
This is how I see it too. The whole point of can-kicking was to manage the flow of foreclosures once prices were inflated to the peak. This increase in activity is merely the last step in the execution of a brilliant master plan.
Foreclosure activity in formerly hard-hit states, like Arizona and California, is falling. Those states had much swifter systems for processing foreclosures, and investors helped to put a floor on home prices.
“There are so many of them coming so quickly that investor demand hasn’t kept pace with the new supply. That will probably change,” said Rick Sharga, executive vice president at Auction.com, a real estate auction company.
The investors will step up their buying anywhere prices make sense for them to do so.
The Final Wave
The final wave of delinquencies and foreclosures is happening now; however, rising delinquencies and foreclosures will not cause another downturn. In the post Is San Francisco, the most overvalued US housing market, going to crash?, I challenged housing bears to construct a realistic scenario where house prices crashed, and I still stand behind my conclusion: “As long as supply continues to be restricted and the percentage of all-cash purchases is high, prices simply won’t go down. Sales volumes may continue to decline, but prices will remain suspended where more buyers can’t afford them unless something changes at the banks and they begin approving more short sales or foreclosing on their delinquent borrowers rather than modifying their loans.”
I want to add one nuance to the above observation: even when lenders do start foreclosing on their delinquent borrower rather than modifying their loans again and again, the rate at which they process these foreclosures will be slow enough for the market to absorb them without pushing prices lower.
Slowing the sales rate of must-sell inventory is the key to preventing housing market crashes. It’s the reason can-kicking began in 2009, and it’s still the focus of all lender policies toward resolving bad loans now.
Lenders would like to kick the can until prices reach the peak in order to avoid recognizing any losses. Eventually, lenders will realize this fantasy will not become reality, and unless they do something, some of their bad loans will never be resolved. As they become more solvent, and as they give up on their most hopeless borrowers, they process more foreclosures.
[dfads params=’groups=3&limit=1&orderby=random’]
[dfads params=’groups=23&limit=1&orderby=random’]
[listing mls=”OC15233281″]
I wonder how effective can-kicking would’ve been had mortgage rates remained in the ~6.5% range? The confluence of factors causing mortgage rates to fall to ~4% seems to be the biggest factor allowing can-kicking’s success.
We floated-down to 3.5% yesterday (paying an eighth). That’s effectively a ~2% fixed rate for 30 years when you consider our current tax situation.
I don’t think it would have been successful at all. Prices inflated to the maximum allowed by financing terms, then hit a ceiling they can’t push through. If rates were 6.5%, the ceiling would be much lower, and prices would be bouncing along the bottom rather than reflated to the top.
Inside the Secretive Circle That Rules a $14 Trillion Market
http://www.bloomberg.com/news/articles/2015-10-27/inside-the-secretive-circle-that-rules-a-14-trillion-market
If I understand this, we have an unaccountable and opaque decision-making body loaded with conflicts of interest attempting to regulate a $1.5 market.
What could go wrong?
The fact that Greenspan didn’t want to regulate this industry underscores what a complete failure he was as a Central Banker. It also underscores why we have regulated and transparent exchanges for most financial instruments.
The same culprits are re-inflating the housing bubble
Through easy money, housing policies that pushed people into low down payment loans that many could not or would not ever repay, and a tsunami of debt, the stage was set.
Evidence abounds that the bubble is now being re-inflated by these very same culprits:
Fannie Mae and Freddie Mac are once again offering 3% down payment loans, albeit with purported underwriting “safeguards.”
Janet Yellen has yet to pull the plug on zero-interest rate loans that have only benefitted Wall Street and their congressional “partners,” which means that interest rates will no doubt begin to rise in 2016.
*Government debt has climbed from just under $10 trillion in 2008 to more than $18 trillion.
*Federal Housing Administration loans have become the “new sub-prime” loans according to many high-profile members of our industry.
*There remains significant concern that the recasting HELOC loans will drive delinquencies upward.
*If those aren’t troubling signs enough, other reports, including one from RealtyTrac, recently indicated that bank repossessions have spiked 66% year-over-year in Q3 of this year.
This is the greatest annual rise ever recorded by RealtyTrac. The foreclosure sales and real estate analytics company stated that more than 123,000 single-family homes went back to the lenders in just three months.
While it is true that in states such as Florida, Massachusetts, New York and New Jersey, a virtual flood of deferred foreclosures from the previous housing crisis are finally cascading over legal and legislative dams in these judicial foreclosure states, other states, such as Nevada, are seeing dramatic increases in mortgage delinquencies.
And, a dramatic rise in foreclosure activity will impact values in certain markets. A very large percentage of the homes being foreclosed upon have deferred maintenance, which means they will be sold at discounted prices. The added inventory of homes will in itself drive down or slow rising home prices, but the discounted sales will have an even greater negative impact.
Whether They Want to Rent or Buy a Home, Millennials Are Basically Out of Luck
It’s hard out there for a millennial navigating the housing market.
If you’re an American man or woman under the age of 35, there’s a historically large chance that you’re living with your parents. And if not, you’re very likely to be renting, and paying too much for the privilege. Only 34.8 percent of young adult households actually own their home, the smallest fraction since at least 1994, and among those who are forking over cash to a landlord, nearly half are considered “rent burdened”—meaning housing eats up around a third or more of their income.
And what about those who’d at least like to buy? Well, there’s a pretty good probability they’re getting boxed out of the market. On top of the challenges posed by tough post-crash mortgage standards, Bloomberg reports Thursday that prices for typical starter homes have been on a tear due to a lack of supply, and are now actually above their past bubbly heights:
Prices for the least expensive previously owned homes—properties at 75 percent or less of the median—were up 10.7 percent in August from a year earlier and now represent the only one of four price tiers to surpass the peak reached during the housing bubble, according to a housing index from CoreLogic Inc. The August pace was 5.9 percent above its pre-recession high in October 2006.
Why are cheap houses getting so expensive? Because nobody’s building them, for starters. In the years immediately following the recession, there was a sense among many urban planners and others in the real estate industry that developers would have to shelve their McMansion blueprints and start marketing smaller, more affordable new homes—possibly in slightly urban or at least walkable settings—in order to adjust to millennial tastes and finances. But that hasn’t really happened, even as more young adults have hit home-buying age. Instead, builders, convinced that all the market really craves is size, seem to have gone back to erecting large houses in far-out subdivisions. The median new home hit a record square footage in the first quarter of 2015, and shrank only slightly in the spring.
New home sales collapse 11.5% in September
Sales of new single-family houses in September 2015 cratered to a seasonally adjusted annual rate of 468,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.
This is 11.5% (±11.3%) below the revised August rate of 529,000, but is 2% (±17.9%) above the September 2014 estimate of 459,000.
The median sales price of new houses sold in September 2015 was $296,900; the average sales price was $364,100.
Now for the thoughtless spin…
“When you take a step back and look at year-over-year growth, the overall housing picture looks promising despite September’s drop in new home sales,” Quicken Loans vice president Bill Banfield. “However, a lack of inventory pushing up prices continues to be a thorn in the side of the overall housing market.”
‘Million Dollar Shack’ documentary looks at Bay Area’s insane housing market
http://milliondollarshack.com
Bring out the violins…
“I drive a Toyota Corolla that’s about eight years old, and I’ve been noticing recently that all the cars driving by me are Teslas and Mercedes. Something just isn’t right.”
Oh the humanity!
Obama’s bid for more affordable homes is lifting house prices, making homes less affordable
WASHINGTON (MarketWatch)—President Barack Obama was in Phoenix earlier this year to talk up something as hot as the desert sun—housing.
In a January speech, he announced a new Federal Housing Administration policy to lower the mortgage insurance premium enough to save the typical borrower $900 a year, assuming a $180,000 mortgage.
That FHA fee drop was aimed at helping middle-class families. “Over the next three years, these lower premiums will give hundreds of thousands more families the chance to own their own home, and it will help make owning a home more affordable for millions more households overall in the coming years,” Obama said.
In fact, what’s happened—for those on the outside, trying to get in—is that owning a home has become less affordable, directly as a result of the FHA move.
If they want to make homes actually more affordable just cap how much people can finance a home for. The move should pretty much put in a price ceiling for most housing.
That’s basically what Dodd-Frank does with the ability-to-repay rules and a DTI cap. It’s one of the reasons I like that legislation.
The article equates home prices with affordability and causation with correlation. A double fail.
Millennials: Forever Renters?
One of the most frustrating truths about the current housing market is that, month to month, it’s still significantly cheaper to own a house than it is to rent, and that’ll remain the case as mortgage rates stay low and rental prices climb ever higher. Yet despite this fact, the rate of homeownership remains below what it was a decade ago. And the rate of young people buying their first home is in an even bigger slump. Why aren’t more people flocking to an ostensibly cheaper housing option?
That might be true, but that argument overlooks one of the biggest reasons young people aren’t buying houses: Most of them simply don’t have enough money saved to clear the hurdle of a down payment. A mortgage might well be cheaper overall, but the one-time cost of becoming a homeowner is simply too high for most of them. While the job market is slowly getting better, Millennial wage growth remains pretty slow and student-debt loads continue to rise. On top of that, they’re expected to save up the little they can spare as they continue paying rent that’s only getting more expensive.
Calling it: There won’t be a rate hike this week
I’m not exactly going out on a limb here with a wild bet, but I’m going to go ahead and call it that the Fed won’t be raising interest rates this week.
Leave aside global unrest, the ongoing uncertainty of the migration crisis in Europe, and the widely predicted GDP slowdown in the third quarter — the housing outlook is pretty weak right now, and it had been one of the few silver linings in this anemic economy.
Meaning there won’t be much will to push interest rates up or, depending on your perspective, out of the negative rate they’re at now.
Jonathan Smoke, chief economist for realtor.com and one of the more optimistic-leaning realists in the trade, isn’t exactly at my level of pessimism, but even he concedes things are slowing.
“The new home sales report covering September released today shows a rate well below the consensus estimate and indicates that real issues emerged late this summer in the new homes market, questioning the supposedly strong growth signals that were previously interpreted by many,” Smoke says. “Last year we picked up momentum in the late summer and fall. This year seems to be the opposite—we are losing momentum.”
Pending and existing home sales declined in August as well.
“That decline was likely a result of the stock market declines in August and September,” he says. “If builders are not focusing on first-time buyers, they are focusing on the segments most likely to be disrupted by declines in stock portfolios and retirement plans.”
That’s got to weigh on the Federal Open Markets Committee when it meets this week. This meeting does not include a press conference or updated economic projections, so it should be interesting to see how they spin all this.
So the rate hike went “up in Smoke”?
I’m still surprised so many believed rates would rise this year. When the dollar rallied at the end of last year, it seemed obvious a rate hike was off the table. Everyone tried to convince themselves it would still happen, but it never seemed a realistic possibility to me. I wouldn’t be surprised to see a rate hike put off until the 3rd quarter of next year.
Homebuilder economists prove they are clueless shills
With so many positive reports on the housing market thus far in 2015, economists believe that growth in 2016 will keep the upward trend going, but not without a few headwinds.
In 2016, economists that participated in National Association of Home Builders (NAHB) Fall Construction Forecast Webinar say that employment and economic growth, pent-up demand, affordable home prices, and low mortgage rates will continue to improve the housing market, but shortages and lot and labor availability and rising building material prices could hinder a more robust recovery.
Concerns about cost and availability of labor were reported from 61 percent of builders in 2014, up from 13 percent in 2011, according to the NAHB. In terms of lots, 58 percent of builders indicated that they were concerned about this in 2014. Building materials worries also hit 58 percent of builders, an increase from 33 percent in 2011.
The NAHB forecasts that single-family starts this year will come in much higher than last year at 719,000, up 11 percent from 647,000 in 2014. In 2016, single-family starts are expected to rise 27 percent to 914,000 units.
Trulia’s Housing Economist Ralph McLaughlin says that millennials prefer to own a home in the suburbs than rent in the cities despite popular belief.
“Many believe that home buyers are bucking the trend of previous generations in that they want to live in urban areas and want to rent,” McLaughlin said. “What we are finding from our surveys is just the opposite. Among millennial renters, almost 90 percent say they eventually want to purchase a home. That is significantly higher than Gen Xers, who were hurt by the recession, and quite a bit more than current baby boomer renters, who are at 40 percent.”
NAHB Senior Economist Robert Denk found that the housing market is improving in all regions, but the pace of recovery varies all over the country.
“We’ve gotten to the point in the recovery where we no longer have problems that came with the housing bust,” said Denk. “It now is really a matter of housing markets reconnecting to the fundamental drivers, and that is employment. Production has been rebounding in all regions, prices have been moving up and new foreclosures are back to more normal levels.”
NAHB Chief Economist David Crowe noted that housing recovery is “all about jobs and “if people can get good jobs that pay decent incomes, the housing market will continue to move forward.”
Crowe also believe that the potential rate increase, averaging 4.5 percent in 2016 and 5.5 percent in 2017 should not affect further recovery in the housing market.
“As the economy gets better, job and wage growth should keep pace,” he said. “So even though mortgage rates will rise, they will still be low by historical standards and very affordable.”
C/S LA/OC just updated..
stalled-out; ie.,
Aug 238.42
Jul 238.19
Jun 237.21
*YoY +6.2%
*Actual cost of living/inflation LA area: 11.2%
http://chapwoodindex.org/
*REAL LA area YoY home price gain: -5%
Tip: Ignoring reality won’t protect you from it
In no way, shape, or form did the cost of living in LA increase by 11.2% YoY. Give me a break. I would have checked the link but it isn’t loading for me. My guess it is the inverse of federal inflation numbers, i.e. it does some serious cherry picking.
For example, gas prices alone are down 10% YoY in LA county, and you know gas is a significant expense for most people in the Southland.
In terms of prices stalling out, don’t forget that foreclosures are being processed at a much higher rate now.
End of prime buying/selling season means that a larger portion of homes sold are foreclosures.
Does the model account for this?
Moot point, foreclosures are not factored-in to C/S data.
Other highly credible data sources back this up as well.. i.e..
DataQuick SFR Median for OC:
06/30/15 – 680,000
07/31/15 – 680,000
08/31/15 – 680,000
09/30/15 – 680,000
How long will this death grip last?
Depends…
I don’t know how anybody could look at that graphic and not see how badly the Fed has mismanaged the economy this past 20 years.
-Aside from one month, no rate increases from 1995-1999 during the tech bubble, one of the most “prosperous” eras in our history.
-Less than a year later, another sustained period of no rate increases from 2000-2004 during the most pronounced housing bubble in history.
-Finally, in 2004 they began raising rates with impotent 1/4 point increases after each meeting for 2 years. It wasn’t enough to quash the housing bubble and in a perverse way made the bubble worse by allowing Wall Street to encourage “risk layering” for higher yield.
-Then ZIRP.
Two things:
1. Agree bankers hold the strings on mortgages, but anytime you add inventory it will affect prices. We are looking at two different markets nationally and locally. Nationally the market has returned to historical levels. Lenders can foreclose as needed with no need to panic. Locally the markets haven’t yet returned, making them an even better time to foreclose but bigger chance of stirring up the pot. I definitely see the tide turning on rents and local SoCal real estate. The vast number of properties for sale in Los Angeles do not provide an adequate return in rent and the ones that do (at current market rates) are in an obvous peak boom where rents have historically been boom and bust. Seems like any combination of investor skeptislcism/panic and lower rent are going to let the air out of the bubble in LA and SF and could happen any time and at any rate depending on market phsycology.
2. I disagree that peak buyers prevent prices from falling. Most houses owned right now wern’t bought between 2002 and 2008. That’s only a 6 year window in the 60 years or so people alive have been buying houses. If investors disapear these houses will keep on getting sold.