As anyone watching the housing market in the Southwest in 2012 can attest to, inventory is falling. At its current rate of decline, there will be literally no houses for sale by the end of the year.
We established that banks are cutting standing REO inventories by reducing new acquisitions by 50%. They are reducing their inventory by allowing delinquent borrowers to continue to live payment-free in houses. Of course the perpetual shadow inventory extends housing downturn and creates uncertainty, but lenders believe they can force house prices to bottom by restricting MLS supply. Perhaps they are right.
The success or failure of lenders’ efforts to force housing prices to bottom hinges on one thing. Will dwindling supply cause prices to rise or sales volumes to fall?
If you listen to realtors — a practice I advise against — they will tell you the reduced supply must make prices go up… and you better buy now or be priced out forever… But in reality, there is another alternative. If buyers do not raise their bids, sales volumes will decline, and the so-called housing recovery will prove as illusory as the bear rally of 2009 and 2010.
I believe it’s more likely that sales volumes will plummet rather than house prices go up. First, for house prices to go up, buyers must raise their bids. Many can’t. Borrowers today face real lending standards with income verification. Further, they need down payments that most don’t have. This spring many buyers put in bids they could not live up to.
The housing market witnessed an astonishing 50% escrow fallout rate. Appraisers aren’t playing the bubble game this time around, so contract prices significantly over recent comps get haircuts, and borrowers don’t have the cash to make up the difference on a low appraisal. Plus, some borrowers don’t want to. With all the accurate talk about shadow inventory, educated buyers do not fear being priced out forever. The low inventory may price people out the rest of this buying season, but eventually inventory must return to the market.
Banks are enjoying the lack of competition for their REO as they liquidate their holdings, but the banks would like to see more short sales come to market too. The shadow inventory of delinquent mortgage squatters needs to be cleared out, and with banks not forcing them out with foreclosure, banks hope more will voluntarily sell in short sales. Unfortunately, this isn’t happening. Most who enjoy free housing are in no hurry to sell and start paying rent. Banks increased their incentives to conduct more short sales, but it hasn’t made much difference. As inventory problems become acute, look for lenders to increase their incentives further to clear out the trash.
Mortgage Demand Wanes Despite Historically Low Interest Rates
Kevin Mahn, Contributor — 6/21/2011 @ 3:51PM
According to the Mortgage Bankers Association (MBA), in a June 8, 2011 report entitled, “Mortgage Applications Decrease in Latest MBA Weekly Survey” the average interest rate for 30-year mortgages decreased to 4.54%, which is the lowest rate observed since November 19, 2010.
Despite the historically low rate of interest, and the seemingly available supply of credit, applications for mortgages are not increasing, as one might expect, but actually are continuing to decline. According to the MBA, as of the week ending June 3, 2011, mortgage loan applications, as measured by the seasonally adjusted Purchase Index, decreased by 4.4% over the course of the previous week and by 3% over the month of May.
Let’s be clear about what the chart above says about the housing market. The talk about increasing demand is complete and utter bullshit. Sales volumes are still more than 20% below their historic norms, and the small increase in sales volumes this year are largely due to cash buyers. As you can see above, the increase in sales volumes is not due to more financed buyers active in the market. Cash buyers won’t drive up prices. Financed buyers are needed to do that.
Looking back even further, applications for mortgage loans are down over 15% on a year-over-year basis as of May 2011.
While applications for refinancing do not paint as dismal of a picture, the figures have also been on a negative trend since November 2010. So what gives?
It is our contention at Hennion & Walsh that the credit crisis was not, and is not, a question of the lack of supply (or cost) of credit but rather is based on a lack of aggregate demand for credit. In these uncertain economic times, individuals, and companies for that matter, are still focused on deleveraging as opposed to taking on or assuming new debt.
The critics of federal reserve policy consistently pointed out the “pushing on a rope” problem with demand for debt. It doesn’t matter how much you lower the price for debt, if people don’t want it, the federal reserve can’t make them take it on. The problem today is not the cost of debt, it’s the total amount of it. That’s why people need to deleverage.
With respect to refinancing, those individuals that could benefit from lower interest rates, and afford the associated cost of the refinancing process, likely have already refinanced their homes. Further, I cannot imagine mortgage rates going lower than their current historic lows. Hence, I do not anticipate any further significant increases in refinancing activity–which still account for the majority of overall mortgage applications.
As interest rates keep falling, some people refinance to take advantage of the lower rates, but we have long passed the point of diminishing returns.
As is relates to applications for homes purchases, the backlog in supply of unsold and foreclosed homes is serving as an anchor to the stalling housing market recovery and should curtail many new mortgage applications for some period of time.
As each of the millions of borrowers default and go through foreclosure, their credit is harmed, and they must wait for several years to repurchase again. If lenders had moved quickly to remove the squatters, the cleansing stage would be over and many more borrowers would be regaining their credit to buy today. However, since this process has been dragged out, so will the recovery.
Finally, I understand that many lending institutions (i.e. banks) are now asking for higher down payments with new mortgage loans–at a time when many individuals can not afford them. While this, in fact, may be the appropriate stance for lending institutions to now/again adopt with respect to risk mitigation strategies, it will likely not result in any form of an increased demand for mortgages.
As a result of the factors described above, I do not anticipate mortgage applications to noticeable appreciate at any point in the short term.
With so many borrowers with bad credit, sales volumes should continue to be low for the next several years with cash buyers pulling more of the load. The lack of borrowers with good credit and significant down payments will weigh on the move-up market for the rest of this decade, perhaps longer.
Going out in style
Sometimes when I see a really large HELOC abuse case, I will Google the previous owner’s name to see if perhaps they were a realtor or a business owner or someone locally famous. When I searched for the former owner of today’s featured property, I came across an obituary from 2009. Apparently, the woman who lived here was 83 years old. I have no idea what an 83 year old woman needs a million dollars for, but whatever it was, she must have had a good time!
- Today’s featured property was purchased on 1/19/1990 for $475,000. My records don’t go back that far, but based on the subsequent mortgage activity, it’s possible she paid all cash.
- On 5/21/2004 she obtained a $500,000 HELOC.
- On 9/10/2004 she got a $1,000,000 first mortgage.
- On 9/6/2006 she opened a $75,000 HELOC.
- On 8/27/2007 she refinanced with a $1,500,000 first mortgage. That’s at least a million dollars in mortgage equity withdrawal.
- On 4/27/2012 the house was deeded over to the bank for $2,000,000 of unpaid principal balance and unpaid debt. I guess those fees really add up.
I hope the kids weren’t expecting an inheritance.
Anaheim Hills Overview
Median home price is $425,000. Based on a rental parity value of $568,000, this market is under valued.
Monthly payment affordability has been improving over the last 7 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased from $240/SF to $243/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates declined $0 last month from $2,358 to $2,357.
Rents have been slowly rising for 12 month(s). Price momentum suggests slowly rising rents over the next three months.
Market rating = 6
Proprietary OC Housing News home purchase analysis 
5150 East COPA DE ORO Dr Anaheim Hills, CA 92807
$1,625,000 …….. Asking Price
$475,000 ………. Purchase Price
1/18/1990 ………. Purchase Date
$1,150,000 ………. Gross Gain (Loss)
($38,000) ………… Commissions and Costs at 8%
============================================
$1,112,000 ………. Net Gain (Loss)
============================================
242.1% ………. Gross Percent Change
234.1% ………. Net Percent Change
5.5% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$1,625,000 …….. Asking Price
$325,000 ………… 20% Down Conventional
4.12% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,300,000 …….. Mortgage
$313,984 ………. Income Requirement
$6,297 ………… Monthly Mortgage Payment
$1,408 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$406 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$8,111 ………. Monthly Cash Outlays
($1,356) ………. Tax Savings
($1,833) ………. Equity Hidden in Payment
$473 ………….. Lost Income to Down Payment
$426 ………….. Maintenance and Replacement Reserves
============================================
$5,822 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$17,750 ………… Furnishing and Move In at 1% + $1,500
$17,750 ………… Closing Costs at 1% + $1,500
$13,000 ………… Interest Points
$325,000 ………… Down Payment
============================================
$373,500 ………. Total Cash Costs
$89,200 ………. Emergency Cash Reserves
============================================
$462,700 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # P825809 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$2,775,000 5114 East CRESCENT Dr |
0.09 miles 5 bd / 4.5 ba 7,479 Sq. Ft. |
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$3,899,000 5191 East CRESCENT Dr |
0.43 miles 5 bd / 7.25 ba 10,000 Sq. Ft. |
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$3,950,000 160 South BELLEZA Ln |
0.89 miles 7 bd / 7.5 ba 7,400 Sq. Ft. |
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$1,699,000 19041 CERRO VILLA Dr |
0.96 miles 5 bd / 4 ba 5,100 Sq. Ft. |
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$2,885,000 19081 CERRO VILLA Dr |
1.02 miles 5 bd / 5.5 ba 6,500 Sq. Ft. |
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$1,425,000 4235 East CERRO VILLA Dr |
1.07 miles 6 bd / 5 ba 5,100 Sq. Ft. |
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$1,250,000 9522 JAMES Cir |
1.42 miles 5 bd / 6 ba 7,479 Sq. Ft. |
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$2,488,000 18677 MESA Dr |
1.51 miles 5 bd / 5 ba 6,200 Sq. Ft. |
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$2,298,000 19102 RIDGEVIEW Rd |
1.64 miles 4 bd / 4.5 ba 6,325 Sq. Ft. |
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$1,998,000 18411 SERRANO Ave |
1.71 miles 5 bd / 5 ba 5,200 Sq. Ft. |
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The “experts” agree, so it must be so, right?
Survey: Experts Agree Market to Hit Bottom in 2013
Experts surveyed by Zillow expect home prices to decline slightly in 2012, and predict they will bottom in 2013, according to the June 2012 Zillow Home Price Expectations Survey.
The survey included 114 respondents with backgrounds ranging from economists, real estate experts, and investment and market strategists.
The respondents’ June prediction for home prices is that they will fall 0.4 percent in 2012, and then rise by 1.3 percent in 2013. In 2014, they expect home prices to rise by 2.5 percent, then rise by 3 percent in 2015, and then go up by 3.3 percent in 2016.
The survey, which was conducted by Pulsenomics LLC, is based on the projected path of the S&P/Case-Shiller U.S. National Home Price Index during the coming five years.
The average cumulative prediction to 2014 was 3.5 percent. Although prices are expected to move on a positive track, two years ago in June 2010, the average prediction among respondents for cumulative appreciation into 2014 was 10.3 percent.
The most optimistic quartile of experts predicted, on average, a 1 percent increase in 2012, and the most pessimistic quartile of respondents expected to see an average decline of 2 percent.
“It’s good to start to see some convergence of expectations among economists, as it lends further support to the claim that a bottom is real,” said Zillow Chief Economist Stan Humphries.
Not all the gathered data was positive for the housing industry.
Most respondents, 56 percent, believe the homeownership rate will, in five years, drop below 65.4 percent, the rate recorded in the first quarter of 2012.
One in five also think the homeownership rate will be at or below 63 percent; the lowest rate on record was established in 1965 and is 62.9 percent.
“However, the fact that more than half of respondents believe that the homeownership rate will fall lower should be a sobering reminder that significant challenges remain ahead for the housing market, from negative equity to millions of foreclosed homeowners who now have impaired credit, making a return to homeownership harder than it would be otherwise,” said Humphries.
I would be rich if I got a dollar for every “market to hit bottom this year article.” We saw this in:
2009
2010
2011
2012
……. obviously this isn’t a “normal” real estate market.
Falling sales is stalling the so-called recovery.
The decline in the seasonally adjusted annual rate of sales was the third in the last four months and steeper than expected
Existing home sales dropped to 4.55 million in May while the median price of an existing home rose to $182,600, the National Association of Realtors reported Thursday. The decline in the seasonally adjusted annual rate of sales was the third in the last four months and steeper than expected. Economists surveyed by Bloomberg forecast 4.57 million in sales.
Despite the month-month decline, existing home sales continue a steady, longer-term increase. Sales have averaged 4.574 million in the last five months compared with 4.358 million in the previous five months and 4.274 million in the first five months of 2011.
The median price of an existing home climbed 5.1 percent from April to its highest level since October 2008 when it was $186,400. The median price is up 7.9 percent in the last year, the strongest year-year increase since February 2006 when it showed an 8.3 percent year-year increase.
Distressed homes – foreclosures and short sales sold at deep discounts – accounted for 25 percent of May sales (15 percent were foreclosures and 10 percent were short sales), down from 28 percent in April and 31 percent in May 2011, the NAR said.
Foreclosures sold for an average discount of 19 percent below market value in May, while short sales were discounted 14 percent.
The inventory of homes for sale in May fell to 2.49 million, bringing the months’ supply of homes on the market to 6.6 from 6.5 in April.
Even with the month-month drop in sales, the NAR said May sales were up 9.6 percent in the last year. Sales in April had shown a 10.0 percent year-year growth.
Total housing inventory, as tracked by the NAR, slipped 0.4 percent from the end of April to the end of May. Listed inventory, the NAR said, is 20.4 percent below a year ago when there was a 9.1-month supply. Unsold inventory has trended down from a record 4.04 million in July 2007; supplies reached a cyclical peak of 12.1 months in July 2010. Anecdotal evidence though suggests there is still a large “shadow” inventory of homes available for sale, especially bank-owned properties.
Regionally, existing-home sales fell in May in three of the four Census regions, improving only in the Midwest and there by a scant 1.0 percent from April. Sales fell 4.8 percent month-month in the Northeast, 3.4 percent in the West and 0.6 percent in the South. Sales were up year-year in every region led by a 19.5 percent surge in the Midwest and followed by gains of 9.2 percent in the Couth, 7.3 percent in the Northeast and 3.6 percent in the West.
The median price of an existing home rose month-month and year-year in all four regions. The median price of an existing home in the South cracked the $200,000 barrier for the first time since last June, increasing to $206,000, a 7.1 percent year-year gain. The median price of an existing home in the West rose to $281,200, up 9.6 percent in the last year, to $178,100 in the Midwest, up 4.9 percent in the last year and to $288,400 in the Northeast, up 2.5 percent in the last year.
If something cannot continue, it will end….
current price model is based on the continuance of:
1) negative real rates
2) accounting fraud
3) stimulus
The deflationary washout is coming.
el O can’t Uncle Ben print $5 trillion to reverse the deflationary washout? In fact, I was surprised he didn’t do it last week.
Of course he could… but Sovereigns have already begun to subvert the petro$ system and post WW2 US hegemony is now at-risk.
Nonetheless, Uncle Ben already printed $16+trillion (since 2008; fed audit) yet could not inflate its way out. The compounding equation has rolled over on itself, ie., now must create $2.5 of debt to generate $1 of growth.
What it all boils down to is restructuring is going to happen no matter what.
Funny – it’s the appraisers that are at fault now.
APPRAISERS SLOW TO MAKE UPWARD ADJUSTMENTS
By Union-Tribune
Originally published June 24, 2012 at 12:01 a.m., updated June 22, 2012 at 2:55 p.m.
Are some appraisers failing to see the improvements in real estate values under way in local markets that have recently bottomed out and turned positive? When multiple bids push a house price thousands of dollars above what the seller is asking — not unusual in neighborhoods where demand is particularly robust — are appraisers still coming in with values below the agreed-upon contract number?
Yes. Growing numbers of mortgage loan officers and realty agents say appraiser reluctance to report local appreciation is becoming a significant complication in sales transactions. In a new poll of its members, the National Association of Realtors found that 33 percent of them reported appraisal problems during the month of May. Moe Veissi, president of the association, said poor appraising “in markets that are no longer in decline is the single most important” valuation obstacle “to seeing a real recovery.”
Even appraisal experts concede this is a troubling issue. Frank Gregoire, former chairman of the Florida Real Estate Appraisal Board and an appraiser in St. Petersburg, says that many appraisers are reluctant to make the upward adjustments they know to be justified by recent positive appreciation trends because they fear criticism that they are potentially overvaluing the property — exposing lender clients to costly “buyback” demands by Fannie Mae or Freddie Mac, or future litigation.
“Even if they have the (local) data to support” adjustments reflecting positive trends that affect value — pending home sales and new listings of similar houses at higher prices, for example — “they take the easy way out” and go with a lower valuation so as not to upset hyper-cautious reviewers at the appraisal management companies that now control the bulk of all home real estate appraisal assignments, Gregoire said in an interview.
One appraiser in his area recently assembled strong supporting data to make an upward adjustment to a valuation based on recent sales activity on comparable houses. When he delivered the report to the appraisal management company that hired him, however, an official of the firm sent it back immediately with instructions to “revisit” the upward adjustment, i.e., get rid of it.
Joseph Petrowsky, owner of Right Trac Financial Group Inc., a Manchester, Conn.-based mortgage company, says too often valuations in upward-trending markets “aren’t catching up with the new values, let alone a property that was involved in a bidding war.” He cites a series of recent loan applications where the appraisal was thousands of dollars below the agreed-upon final contract price, endangering or blowing the deals. In one case, the buyer signed the contract at $312,500 but the appraisal came in at just $280,000, despite readily available evidence that the local market has experienced appreciation in recent months.
“Appraisers are scared to death” to report rising values, Petrowsky said. “I talk to them and they are beside themselves. They feel they have to (deliver) appraisals they know should be higher.” Much worse, though, is the impact on sellers and buyers. When an appraisal comes in much lower than the mutually agreed contract price, the buyers typically need to revise their loan request by increasing the down payment — which may not be feasible — or renegotiating the contract price with the unhappy seller.
Dennis Smith, a co-owner of Stratis Financial in Huntington Beach, says the problem is magnified when the appraiser assigned by the management company travels from 30 or 40 miles away, and has no insights into neighborhood appreciation trends that may be relatively recent. He cited an example where a client saw a bidding war — four offers that pushed the contract price from the listed $350,000 to $375,000 — but the out-of-town appraiser would not take this into consideration in arriving at the final valuation.
Sara W. Stephens, president of the Appraisal Institute, the largest association in the industry, says it is every appraiser’s professional duty to arrive at valuations that “reflect the market,” including recent changes — whether positive or negative — if they can be verified with authoritative and accurate data.
How can buyers and sellers guard against the see-no-appreciation problem? Tops on the list: Make sure the realty agents on both sides of your transaction have assembled accurate data on “comparable” sales or pending sales that demonstrate how the market has changed in the past six months or less. Then make sure the appraiser sees the data.
Your purchase or sale doesn’t have to be jeopardized simply because the appraiser doesn’t have — or chooses not to collect — all the relevant recent facts.
Kenneth Harney is a columnist for The Washington Post Writers Group. Send email to kenharney@earthlink.net
“Make sure the realty agents on both sides of your transaction have assembled accurate data on “comparable” sales or pending sales that demonstrate how the market has changed in the past six months or less.”
But that’s the catch isn’t it?
“Realty agent”….. “assembled accurate data”….”..demonstrate how the market has changed….”
.
Honestly, are these the ingredients we’ve been missing all along. It was just behind the curtain of data, all you had to do was take a look. Oh those darned appraisers, they’ll getchya.
Yeah right.
“…With respect to refinancing, those individuals that could benefit from lower interest rates, and afford the associated cost of the refinancing process, likely have already refinanced their homes…”
Well, HARP2 just started, so many conforming borrowers are refinancing or will be very soon. In addition, there are a lot of us with non-conforming loans trying to determine the best course. With prices increasing, appraisals can come in high and allow more non-conforming borrowers to refinance.
The problem is that IR is using an article that is over a year old as the basis for this blog post. HARP 2.0 hadn’t been conceived, let alone implemented when that statement was written.
Unfortunately, the problem for HARP2 cheerleaders is the program only re-prices total debt. But, even if the welfare program reduced total debt, it wouldn’t matter because it can’t guarantee people’s future ability to repay.
Thus, availability of mort credit will remain uber-tight = sector negative.
OC realtors becoming more desperate to increase listings..
now declaring: “has the look and feel of a seller’s market with multiple, strong offers; sellers now in control”
http://lansner.ocregister.com/2012/06/25/analyst-sellers-now-in-control-of-o-c-home-market/163972/
LOL!
If it truely was a sellers market, current OC MLS inventory would be rising, not falling/sitting at record lows.
I have no faith in HARP 2.0. It’s just another program that is doomed to fail.
I dunno, IR. What your graphs suggest to me is that the banks are aggressively foreclosing on new defaults — but leaving the old ones in the shadows. Is there any reason they can’t do this almost indefinitely? After all, they’re already used to the old loan being nonperforming. They may have written it off, at least internally. They can cover any operating problem by borrowing money at negative real rates from the Fed.
For that matter, how much of these nonperforming loans are owned by the GSEs? And they really can operate at a loss indefinitely, because, being the government, they’re not disciplined by the market. The government can run a loss forever, as far as we know (and the present government is certainly making every effort to prove that).
I think until Congress requires the GSEs to stop hemorraghing taxpayer money, and until savers rise up in mass rage and demand an end to ZIRP, so that investors have a good reason to pull whatever cash they can get out of mortgages and put it somewhere it’ll make good money, not much will change.
They may be able to do this indefinitely. That is certainly their plan. Nobody seems to be stepping up to stop them.
I remember on the IHB when Irvine’s inventory went over 800, commenters were saying how that number is going to explode and Irvine’s house prices were going to freefall… recently, the inventory in in the 400s and it’s the summer selling season with record low interest rates.
What’s going on?
Like was mentioned, 2012 and 2013 will be the year of squatting. I don’t know the exact numbers, but I’m sure there are hundreds of families “living free” in Irvine right now…getting a stay of execution if you will. In addition, many people are either underwater or have little to no equity so the move up market is dead in the water. Add all this up and you get what you have today…record low inventory. The landlords are feasting right now, most renters are unable to buy and those that able to have very few houses to choose from and immense competition. I think this is all very strange since none of these conditons existed 6 months ago…the fall and winter will be VERY interesting!
What about all the buyers that foreclosed over 3 years ago? I thought it only took about 3 years before your credit was repaired enough from a foreclosure to purchase again.
2006 was 6 years … so those that foreclosed in 06′ definitely have had time to repair their credit.
An 83-year old might have needed a million dollars for medical bills.