Jun182012
When MLS inventory is tight, good deals are hard to find
Banks are slowing their acquisition of foreclosures to reduce their standing inventory of REO. They are also slowing the rate at which they are selling on the MLS and putting fewer and fewer homes for sale. Delinquent mortgage squatters are not taking up the slack and listing their homes as short sales, primarily because they get a free ride if they simply wait and do nothing until the bank finally forecloses. With both banks and loan owners choosing not to list their homes, the inventory available for sale on the MLS has fallen substantially. Until the incentives change, neither banks or loan owners are going to replenish the MLS inventory.
Tight supply is forcing potential buyers to compete for the few properties available, and prices have reached a temporary bottom. This benefits the banks who were recovering less and less of their original capital with each MLS sale as prices fell. Further, if prices were to rise on a sustained basis, new buyers would obtain equity and in a few years, the move-up market will begin to recover. The advantages of rising prices prompted the various homebuyer tax credits of 2009 and 2010, the last artificial boost to the housing market. It’s also what’s motivating lenders to restrict inventory today. The tax credit failed because artificial props generally do. Will this latest round of market manipulations fail as well? Only time will tell, but history suggests this spring’s bottom will not be a durable one.
The games bankers play impact buyers in today’s market. Any reasonably priced property is going to have multiple bids, and although they may look like a deal based on asking prices, the competing bid pressure often drives those prices up to unreasonable levels. Many of these deals fall apart because the properties do not appraise at the contract price, and the buyer cannot or will not make up the difference. Cancellation rates in Orange County are running nearly 50% because appraisers are doing their jobs well.
Shortage of homes for sale creates fierce competition
With housing inventory at a low, would-be buyers are scrambling to bid on homes before they’re even listed, and real estate agents are vying to represent the few sellers that do exist.
By Alejandro Lazo, Los Angeles Times — June 10, 2012
The newest problem for the slowly improving housing market isn’t a shortage of serious buyers, it’s a shortage of good homes.
Would-be buyers are packing open houses and scrambling to make offers on properties before they are even listed. Bidding wars are erupting. …
Housing inventory has sunk to levels not seen since the bubble years. The number of American homes with a “for sale” sign hit 2.5 million in April, the lowest number for an April since 2006, according to the National Assn. of Realtors.
Anything the NAr says should be treated with skepticism, but in this case, they are reporting the truth. Inventory is declining, particularly in the West.
David Dennick, who lives in Echo Park and works as a television editor, has been searching for a home with his wife, Denise, for about two months. The couple have already bid on three properties. They are hoping to find a home for less than $525,000, which is $25,000 more than they originally had hoped to spend.
“It is much more competitive than we thought,” said Dennick, standing in the entrance of an Eagle Rock open house on a recent Sunday. “It is just frustrating because we thought we would really be able to buy a house; we are a middle-class family.”
Active buyers are shocked at how quickly the dynamic of the market changed from a buyer’s market to a seller’s market. A 50% inventory reduction will do that.
The sharp drop in inventory along with rock-bottom interest rates have helped stabilize even some of the hardest-hit markets, including the Southland, Las Vegas, Phoenix and Miami. Some real estate professionals are concerned that the lack of inventory might turn off potential buyers, stifling the recent recovery in home sales.
The much-predicted foreclosure wave that was expected to dump more homes onto the market has not materialized.
Lenders are opting for squatting over liquidation. Just because lenders haven’t released the floodgates doesn’t mean the reservoir is empty.
Fewer borrowers are entering default,
Recent vintage loans have better underwriting, but with so many recent buyers underwater, many still are defaulting. Plus, lenders are not making substantial progress on the backlog in shadow inventory.
and banks are better managing the properties they do have on their books.
What does that mean? We know that Banks cut standing REO inventories by reducing new acquisitions by 50%. But is that a sign of better management?
In addition, professional investors bankrolled by private equity firms and hedge funds are pouncing on bank-owned homes, often turning them into rentals.
Pouncing? Really? Did Alejandro have a realtor help write this piece? Hedge funds are buying homes, but they are a drop in the ocean. Hedge funds don’t have enough money to make a difference in the housing market.
A dearth of new construction also is constraining supply. In April — the most recent month for which figures are available — the number of completed new single-family homes available for sale stood at 46,000, the lowest level since the Census Bureau began keeping track in 1973. Some 70,000 were under construction, also near historic lows.
As I noted before, As lenders withhold product, the homebuilders will flourish. They have. The Irvine Co. sells out 4 new-home projects. Despite improving numbers, new home construction is still very low by historic norms.
The inventory problem has been exacerbated by the plunge in home prices since the go-go years. Many people who bought at the top of the cycle are so deeply underwater, they can’t get the price they need to sell and are therefore not bothering to put their homes on the market.
Is isn’t that people are not “bothering” to list their homes out of a sense of indifference. Loan owners have a strong incentive not to list their homes. If they do nothing, they don’t have to make any payments, and they don’t have to pay rent. If they go through the hassle of a short sale, once it’s complete, they will need to move into a rental and start incurring housing costs again. Why would anyone be in a hurry to do that?
“We know negative equity holds back home sales, but it also holds back the listing of sales,” said Sam Khater, an economist with CoreLogic, a company that tracks the mortgage market. “Today it is holding the market back.”
The lack of available homes is maddening for those consumers who thought 2012 would be the year to buy.
In Southern California, inventories have plunged over the last year. The number of homes listed for sale in April fell 35% in Los Angeles County and was down 42% in Orange, 39% in San Bernardino, 42% in Riverside, 53% in Ventura and 43% in San Diego counties, according to online brokerage Redfin.
The inventory decline is remarkable. Ordinarily, the first business day of the year in January is the lowest point of inventory for the year. That was not true this year.
… “It is a precarious situation, but the real issue is that nobody wants to sell a house right now,” Kelman said. “So now we have classes for our real estate agents on how to win a bidding war.”
As I’ve noted on many occasions, why would they be motivated?
… Also important is having enough cash to make up the difference between the negotiated price and whatever the appraised value of the home turns out to be, he said. (Lenders won’t provide a mortgage for more than a home’s appraised value.) Many deals these days are falling apart because appraisals are coming in low, given how many recent comparable sales have been foreclosures or other distressed properties.
“The appraisal is blowing up the deal half the time,” he said.
And I hope they continue to do so. That is their job. As independent third-parties, they are supposed to be impartial arbiters of value. With the new system of randomly picked appraisers, they are under no pressure to “hit the number” to please a realtor to get future work. That one change in the system is doing much to prevent another housing bubble.
So how do you get a good deal?
Finding a good deal always requires three things: (1) a bit of luck, (2) no buying competition, and (3) a motivated seller. There is no way to tell if a seller is truly motivated based on their asking price. realtors play far to many games. The only way to find out if a seller is motivated is to make an offer on the property and see what happens. One of Shevy’s favorite techniques is to offer on overpriced properties to see if the seller can be engaged in a negotiation. Most of the time, the sellers are not motivated, and their WTF asking prices stroke their egos and pollute the MLS. Those offers go nowhere. However, Shevy doesn’t advocate waiting for a price reduction because that will bring in competing offers. Many times the seller will start with a WTF asking price — often prompted by a realtor promising the world to get the listing — but then after getting no interest in the property, the sellers get anxious and want to sell. A reasonable offer may get traction, and if the seller is more motivated than the original asking price would suggest, the one-on-one negotiation yields a good result for the buyer. Believe it or not, this technique really works.
[…] stable – MarketWatch China May home prices fall, pace of declines picks up – Reuters When inventory is tight, good deals are scarce – O.C. Housing News How reliable are home price indexes? – O.C. Register The Fed: Once […]
Indeed, inventory is declining because of a coordinated, controlled release of REO. But…. mostly because would-be OC sellers can’t qualify for the home they currently live-in. Sad really.
Very true. The move up market is all but dead. How many organic sellers are going to sell their 500K “starter home” and move up to an 800K home in this environment? I would guess virtually zero. The only way that scheme worked is having continous housing price appreciation…not going to happen for a LONG time!
Consumer sentiment is down because without HELOC money, many Ponzis can’t live the lifestyle they want, and despite the hoopla about the housing market bottoming, most Ponzis don’t believe the housing ATM machine will be turned on soon. The fact that most economists don’t see a connection between the housing ATM and consumer sentiment shows how clueless they are.
Consumer Sentiment Index Makes Steep Drop, Economists Respond
Following reports that the Reuters/University of Michigan consumer sentiment index had fallen significantly from 79.3 in May to 74.1 in June, economists offered commentary on the meaning behind the numbers. In addition to the consumer sentiment index, the current conditions index reportedly fell from 87.2 in May to 82.1 in June, while the expectations index declined to 68.9 this month from 74.3 the month before.
A breakdown
“This is not a good report. Consumer confidence is back in recession territory. The news from the retail sales report is clearly indicating that consumers are cautious and holding back….The Reuters/University of Michigan consumer sentiment index fell in mid-June to its lowest level since
December. Consumers are more pessimistic across the board. A considerable deterioration on job prospects and household net worth are taking their toll on consumer mood.”
Yinbin Li, IHS Global Insight Principal Economist
“The negative impact on sentiment from the pull back in stock markets in the last two months, driven by the turmoil in Europe, outstripped the positive from the sharp fall in gasoline prices. The recent slowdown in job creation and the continuous uptick in the weekly jobless claims figures has cast a cloud on the strength of the overall recovery. The drop back in the headline index was the first in nine months and was in line with the recent falls in other consumer confidence indices.”
Amna Asaf, Capital Economics Economist
On the upside
“The one piece of good news is that pump and food prices have fallen. Falling gasoline prices offered positive support for the Reuters/University of Michigan consumer sentiment index in April and May.”
Li, IHS Global Insight
Looking ahead
“IHS Global Insight is now forecasting consumer spending (adjusted for inflation) to grow 1.7% in the second quarter, significantly lower than the first quarter’s 2.7% gain.”
Li, IHS Global Insight
Banks not foreclosing on homes is the new way to “destroy” excess supply. However, they do have to eventually release this inventory. There is no re inflating this bubble.
I agree, but I am still perplexed:
Who is paying carry costs such as property tax, insurance, maintenance, HOA dues, etc.?
Even if the bank picks up the tab, at some future point in time a tipping point will be reached in which the total cumulative costs sunk into carry will exceed any net benefit of virtually “destroying” the property.
Here in Irvine, I believe typical carry costs are easily 2-3% of purchase price. Thus, the total yearly carry for a $1mm home is $20K-30K.
I just don’t understand where this carry cash is coming from?
Any ideas?
I think it’s a combination of taxpayers via backdoor bailouts and banks creating money out of thin air by borrowing “free ZIRP money” from the Fed that they can put to work.
Reply to wheresthebeef
A real possibility I suppose. I don’t know enough about the internal gearing of banks to make a call one way or another.
Having said that, I wonder if anyone as taken a current list of distressed OC properties and determined if property taxes are current?
To float a general idea, I would think that if the current list of distressed properties show no unusual statistical deviations of paid/unpaid property taxes from the county as a whole, a logical conclusion would be that someone is fronting the money. If not the banks then who? Would a squatter have *any* motivation to pay property taxes?
“I think it’s a combination of taxpayers via backdoor bailouts and banks creating money out of thin air by borrowing “free ZIRP money” from the Fed that they can put to work.”
That’s where I think they are getting it from. They can hold out indefinitely as long as interest rates are 0%.
“Would a squatter have *any* motivation to pay property taxes?”
None. What’s the worst that could happen? The taxing authority might slap them with a lien? They won’t end up paying it.
In a normal unmanaged market, the house price should of dropped dramatically. Just as there are far less great deals on clothing, sporting goods, etc., the supply has limited by cutting inventory. The banks are have become the gatekeepers for the supply/inventory as written by IR.
The housing ATM is still a productive well for those underwater and squatting. Free rent and no RE taxes. If they are smart, that money can be saved for a new house loan’s down payment or income tax-free rental payment for x years.
Mike, I think the banks will be able to reinflate a housing bubbles in select areas if they get their way with GSE backed jumbo loans with low to no down payments. With low to no down, who cares what the buyer will pay, since there’s almost no down and a squataway the price is of little concern. The loan-owner’s best option in a non-recourse state is to have no down and then squat if the market heads south. Why should the bank care about a walk away if the GSE is covering the note and the documentation is legit? The normal taxpayers are too busy working supporting their family. The special interest will craft legistlation to benefit their group. The banks and RE industry intestest are aligned with low to no down, GSE backed bubble producing loans.
You might have something there….Bubble 2 Electric Boogaloo
FHA rescinds $1,000 credit dispute ruleFHA rescinds $1,000 credit dispute rule
By Jon Prior June 18, 2012 • 10:24am
The Federal Housing Administration rescinded a rule that would have forced potential homebuyers to settle ongoing credit disputes of more than $1,000 before getting financing, according to an alert sent to lenders Friday.
The FHA quietly drafted the rule in March to mitigate risks to its emergency fund. The rule went into effect April 1. Borrowers had to either pay off the outstanding balance on collections accounts or document an arrangement to pay before the mortgage was approved.
Industry experts pushed back, particularly homebuilders and lenders with much of their business tied to first-time homebuyers.
Combined with the increasing insurance premiums to bolster an FHA emergency fund on the brink of a bailout, many claimed more business would be pushed to Fannie Mae and Freddie Mac, two mortgage giants the government wants to wind down.
On April 3, the FHA clarified a borrower can be exempted from the rule if the disputed collections account stems from a “life event,” such as a medical bill, death, divorce or loss of employment.
Lisa Marquis Jackson, vice president of John Burns Real Estate Consulting, said roughly 25% of the builders they surveyed the week FHA announced the revised rule anticipated either a delay or losing up to 60% of their sales.
“The ripple effects of the FHA credit dispute rule would have had a notable impact on the housing market,” Marquis Jackson said.
The FHA delayed the rule a week after it went into effect and said it would take comments from the industry until July.
According to the letter sent Friday, the FHA completely revoked the rule. Any loans written to fit the guidelines in the week between April 1 and April 8 will not be deemed in violation of HUD requirements.
An FHA spokesperson said they are still taking comments on the original proposal.
“We’ll issue new guidance very soon,” the spokesperson said.
Edward Mills, senior vice president at FBR Capital Markets, said the FHA has to strike a tough balance between helping potential homeowners who cannot get credit elsewhere and protecting the insurance fund.
“FHA killing off the rule is not a surprise when you take into account the resounding objection from the housing finance community and their concern that this would overly constrain credit,” Mills said. “This action shows how it can be incredibly difficult to make choices that move towards protecting the insurance fund over keeping mortgage credit available.”
“roughly 25% of the builders they surveyed the week FHA announced the revised rule anticipated either a delay or losing up to 60% of their sales.”
60% of the builder’s business is with borrowers who have pending claims against them greater than $1,000?
WTF are those people doing buying homes? Looking for a replacement ATM machine?
“The banks and RE industry intestest are aligned with low to no down, GSE backed bubble producing loans.”
And they just might get their way. I don’t see any way Orange County house prices over $800,000 sustain themselves without something like this. What private lender would want to underwrite a low-down 3.75% non-government-backed loan on a property in the absence of move-up equity? Any lender willing to do this would lose all their money relatively quickly.
That’s why the banks and RE industry buy the best government that money can buy.
What government needs are great statesmen, who put the welfare of the country before personal gain. I just pray that we have enough statesmen to prevent a recurrence, because people have learned that looting pays.
If we can have great statesmen, than special interest groups with conflict goals are need to balance the demands the other groups. Gridlock is something a very good thing.
True loyal opposition parties are essential to democracy for preventing of the tyranny of the masses or the selling of its people into slavery by the powerful. Unfortunately there’s really one American political party that goes by two different names.
Ewww! Is that crud along the baseboards in the laundry room mold?
I spoke to a few potential buyers, and they just decided not to bid up nany prices .
They rather spend the money on a cool summer vacation than over paid.
Let the dead beats stay as long as they want.
First they loaned money to people who could never pay it back and in so doing fraudulently jacked up the so called values. These crooks justified huge commissions on the so called deals by calling it a business.The pool of fools has shrunk quite a bit, but as long as the banks can find one person willing to sign for a crazy loan on an overpriced house, they can use that as justification to make believe they are holding assets that are valued above what they are really worth and that keeps the charade going and the bonus checks flowing. It’s a money laundering scheme folks, not a market.
“It’s a money laundering scheme folks, not a market.”
Sad but true. Super low interest rates and government props are all designed to recycle the bad loans into good loans with a minimal loss to banks.
This is a great great great ,!!!!! STATEMENT