Apr272015
Are cloud inventory homes really for sale?
If a home seller asks a price buyers are unwilling or unable to pay, is the house really for sale?
One of my goals for the writing and analysis on this site is to provide readers a vision of the future of the housing market. Where are prices going? What will happen with sales? How do the variables affecting housing cause changes in prices or sales? I do this because I believe people should have accurate information to make sound decisions on what will likely be the largest single purchase of their lives, buying a home.
Most of what I write is opposed to the feel-good, Pollyanna nonsense served up by the financial media, a biased group beholden to realtors who pay their bills. Today, we look back on a topic I started covering back in early 2013, a topic the financial media only recently began to understand and write about — the causes and impact of cloud inventory.
In the post Must-sell shadow inventory has morphed into can’t-sell cloud inventory from March of 2013, I detailed the overriding set of circumstances created by the banks, the federal reserve, and government regulators that caused the elimination of must-sell REO inventory and maintains the restricted inventory condition causing prices to rise.
Every underwater loanowner is a potential loss for the lender. If that borrower stops paying or asks for a short sale before prices reach peak valuations, the bank will take a loss. Banks don’t want to recognize losses either by foreclosure or short sale. They would far prefer to borrowers to stay in their homes, pay something, and wait for house prices to reach the peak where lenders have no exposure. Most loanowners are happy to play along.
As I pointed out in Las Vegas: a case study in successful housing market manipulation, the relaxation of mark-to-market accounting rules circumvented the normal market-clearing mechanisms that would have forced the sale of millions of properties. As a result, shadow inventory kept waiting in the shadows, and it never hit the MLS. Finally, lenders went “all in” betting on success of loan modifications because each modified loan is one less unit languishing in shadow inventory, and one less potential sale for a loss through foreclosure or short sale.
In the post Inventory up, demand down, the standoff over cloud inventory begins from August of 2013, I noted the following:
We had a large number of cloud inventory listings. These sellers can’t reduce their price because they need to pay off a big loan. So no matter how much of this inventory comes to market, it won’t put downward pressure on prices. It isn’t must-sell inventory, it’s can’t sell inventory. Potential buyers can’t finance the asking prices these sellers need to complete a sale. What we have is an old-fashioned Mexican standoff where neither party can pull the trigger. The market may stall and go nowhere.
Buyers and sellers will be frozen in their unarmed Mexican standoff and sales volumes will fall. This scenario does seem likely. To some degree, this will come to pass over the next six to nine months.
And since August of 2013, the market has endured declining sales, just as I predicted. Although sales picked up in 2015, and everyone is celebrating the ongoing recovery, sales volumes are still below 8 of the last 10 years and 15% below the average of the last 27 years — not exactly a robust rally.
In April 2013, just prior to the “taper tantrum” in mid 2013 when mortgage rates rose from 3.5% to 4.5% in less than 60 days, I wrote a post No escape velocity as depleted inventory pummeled home sales in 2013. In that post, I noted the following:
Banks are counting on pent-up demand from frustrated buyers to liquidate their cloud inventory. They may be rudely greeted with an MLS loaded with inventory that either nobody can afford or it’s at prices they’re unwilling to pay.
Two years later, that’s exactly what analysts observe today.
‘Stale’ homes are tightening up the housing market
Diana Olick, April 23, 2015
The biggest barrier to a more robust spring housing market is simply a lack of listings, and there may be even fewer than we think, at least fewer homes people want to buy.
There are always WTF listing prices in any market. Each seller believes their property is special and worth significantly more than the market will bear. Most agents take these listings with hope they can talk the seller down to reality after 30 days when nobody looks at it.
Nearly three-quarters of the homes on the market are “stale,” which is to say that they have sat on the market for more than a month with little to no interest from buyers, according to a new report from Redfin.
The number of homes for sale rose 2 percent in March from a year ago, according to a report from the National Association of Realtors released Wednesday. That, however, includes both new listings and homes that have languished on the market for months. With demand and sales increasing, there is just a 4.6-month supply of listings; a six-month supply is considered to be a healthy market balance between buyers and sellers.
The “six-month balance” meme is a distortion of fact (lie) promoted by realtors so often it’s become accepted as truth. What’s worse is that even a cursory look at the facts reveals the truth, but nobody bothers to look at the data.
With few exceptions over the last 15 years, whenever the moths of supply has been below 5, prices appreciated. When it’s between 5 and 6, prices were flat, and when it’s above 6 prices fell sharply.
Of course, all real estate is local, but even in the most sought-after neighborhoods, some houses sit. …
“Everyone loves it; it’s the price,” said Ghada Barakat….
“People cannot come up with the down payment to qualify. Jumbo loans are very tough,” added Barakat.
This is the nature of cloud inventory. Buyers may like the house, but they can’t afford the price, and the seller can’t afford to lower it, so the property just sits there.
There is something else at play as well: information. With so many websites and apps pushing moment-to-moment market movement, today’s buyers are increasingly data driven. Especially after the epic housing crash that gave birth to all this data, buyer psychology and suspicion are in full swing.
“The trust is broken among buyers. …” noted Nela Richardson, Redfin’s chief economist. …
Years of realtors lying to buyers will do that.
In Charlotte, North Carolina, the scenario is much the same. The supply of properties for sale is at a three-year low, and fresh listings, less than 30 days old, accounted for just over 5 percent of Charlotte’s inventory as of March 31, also a low, according to Redfin. In other words, 95 percent of Charlotte listings are stale.
For those who truly understand how cloud inventory works, it should not be surprising that the MLS gets polluted with stale listings. When houses get priced based on outstanding loan balances rather than the market, it’s a recipe for stale listings. Thus we have a market where the few reasonably priced listings go quickly with multiple offers and the cloud inventory listings just sit there.
It may not be the new normal, but it’s a phenomenon we will see until fundamentals applied to mortgage rates elevate market prices above peak housing bubble levels all across the country, and in some markets that is another decade or more away.
[dfads params=’groups=3&limit=1&orderby=random’]
[dfads params=’groups=23&limit=1&orderby=random’]
[listing mls=”OC15085703″]
“There are always WTF listing prices in any market.”
There are quite a few currently in Irvine. The base prices in new developments are on par with similarly sized homes within a couple miles that are decades old. You’ll spend on upgrades at the new house, but you’ll spend more on the older house upgrading it.
Affordable and 1st-time apps decline
Cloud inventory hurts entry level the most
Modest-size mortgage applications shrink even as mid-level and jumbo applications have seen growth in the first quarter of 2015, the Mortgage Bankers Association says.
In its Chart of the Week, the MBA shows how in 2014, purchase applications for mortgages of less than $417,000 declined on a year-over-year basis.
But in the first quarter of 2015, purchase applications for amounts between $150,000 to $300,000 and $300,000 to $417,000 began to show growth over the previous year’s levels.
The $150,000 and under category continued to shrink by more than 10% in that time period.
Applications for some jumbo loan sizes increased in 2014, mainly in the $417,000 to $625,000 range and in the greater than $729,000 range.
This growth in jumbos was consistent with credit availability trends captured in the MBA’s Mortgage Credit Availability Index.
The MBA says that the home purchase market is slowly beginning to regain some footing as households have become confident in their income expectations and job prospects.
But as has been the case for a while, they note that entry-level buyers continue to be impacted by factors such as tight credit, student loan debt, and regulatory challenges.
http://www.housingwire.com/ext/resources/images/editorial/Trey-6/Screen-Shot-2015-04-24-at-123915-PM.png
Black Knight: Home prices tick up slightly in February
Las Vegas still has plenty of upside to come
U.S. home prices were up 0.7% for the month in February, and rose 4.6% from last year, according to the latest home price index report from Black Knight Financial Services.
This was the largest monthly gain in national home prices since June 2014.
At $242,000, the national level HPI is now just 9.5% off its June 2006 peak of $268,000.
The report also found that home prices in three of the nation’s 20 largest states – Colorado, New York and Texas – hit new highs in February.
Of the nation’s 40 largest metros, nine hit new peaks – Austin, TX; Columbus, OH; Dallas, TX; Denver, CO; Honolulu, HI; Houston, TX; Nashville, TN; San Antonio, TX; and San Jose, CA.
Colorado leads the 20 largest states tracked by the Black Knight HPI at 9.4% Y/Y growth.
Of the 20 largest states, Connecticut, Massachusetts, New Jersey and Pennsylvania all saw prices decline in February; only Connecticut saw a yearly decline.
Las Vegas continues to lead the 40 largest metro areas in distance from its pre-crisis peak; home prices there remain almost 41% off their May 2006 highs.
Are the big investors starting to exit the market or were the houses packaged in a buy and hold fund?
I thought LV was doing better
Las Vegas is doing very well. The fact that it still has 41% to go in order to reach the peak is testament to how low prices got there. Prices are already up about 40%, and they still have another 41% before they reach the peak. Of course, because the peak was artificial, the market will hit affordability limits before it reaches the peak, but since so many are still underwater, cloud inventory restrictions will keep supply off the market there for many more years.
That’s what I thought, are investors in LV starting to exit the market and flip that house posers entering?
There is some of that going on, and more foreclosures are coming to market out there as well, but for the most part, the investors are hanging on to their houses in anticipation of more upside. Since most of these properties were purchased as such low prices, the cashflow is still compelling, so unless or until appreciation grinds to a halt, there is no better place for investors to park their money, so they are leaving it where it is.
Thanks, Do you know if the large investors like Blackstone have the houses locked into long term investment vehicles?
I don’t know the details of the deal of some of the large players. I know from the details of the deal I was involved with that the hedge fund had flexibility to cut off funding and liquidate the assets at any time. My suspicion is that once they packaged these into larger investment vehicles, they gave up some of that freedom.
If recent statements from Blackstone are any indication, they are likely locked into these properties for quite a while.
Blackstone: Housing a “good investment”
Even though home prices are not increasing as rapidly as they have been, housing is still a good investment according to Blackstone (BX) CEO Steve Schwarzman. Per CNBC:
“It’s been coming back for quite some time,” Schwarzman told CNBC from the Milken Institute conference in Los Angeles.
“The market continues to go up for the value of houses,” Schwarzman said.
However, a recent Gallup report shows that Americans might not be as optimistic.
Currently, 69% of Americans say it is a good time to buy a house, down from an average 74% during the prior two years.
However, this level is similar to what Gallup measured from 2009-2012. Americans are still more positive about buying a house now than they were between 2006, when home values stopped rising and interest rates increased, and 2008, after the housing bubble.
Interesting I knew the Blackstone types would never liquidate all at once for cartel reasons… I was curious on whether these rental homes would be come zombie houses in rental perpetuity, seems possible.
These firms just like the irvine company understand that even if salary increases are only 3% they can increase rent 2-3X that because rent is only a fraction of expenses.
Yes,
Most of these funds were put together because at the time, you could get 6% to 8% cap rates when comparable apartment complexes were bid up to prices where they were only getting 3% to 4% cap rates. The financiers realized they were better off putting their money into single-family homes, and their prospects for appreciation were likely better too because the entire asset class was undervalued. The biggest risk they faced was the uncertainty of how to manage so many homes without the efficiencies of centralized management of an apartment complex. Realistically, they haven’t figured out how to do this efficiently, but since their basis is so low, the additional cost structure isn’t hurting them.
Homebuilder economists maintain delusional optimism
Same erroneous spin they peddled in 2009, 2010, 2011, 2012, 2013, 2014
The housing market will move steadily in 2015 driven by solid labor market improvements, low mortgage rates, an economy that is growing, and pent-up demand–but the pace should really pick up next year, according to economists who attended the National Association of Home Builders (NAHB) 2015 Spring Construction Forecast Webinar earlier this week.
“This should be a good year for housing, buoyed by sustained job growth, rising consumer confidence that is back to pre-recession levels and a gradual uptick in household formations,” said NAHB chief economist David Crowe. “We expect 2016 to be even better, due to a significant amount of pent-up demand and an economy that will be entering a period of reasonable strength and consistency.”
Millennials will be a key demographic to jump-starting housing sales, since the share of first-time homebuyers has fallen from its traditional level of 40 percent down to about 30 percent following the housing crisis. Crowe estimates there have been about 7.4 million lost home sales over the past seven years due to slow recovery and uncertainty in the job and housing markets.
“While some of these sales will never take place, this does indicate how many sales were lost as fewer households decided to move,” Crowe said. “We expect at least some of these to return in the form of new home sales as job and economic growth continue to firm.”
Crowe said that as the unemployment differential shrinks between millennials and other workers, first-time buyers should provide a boost to the housing market.
“Housing demand is now being driven by population growth and employment and income growth,” Denk said. “We are reconnecting to underlying fundamentals. We really have turned the corner.”
“What we are seeing, no matter what bucket you are in, the numbers are getting better,” Denk said. “There’s a broader recovery all around.”
HELOC abuse on the rise
The housing bust taught people nothing
Could it be time to cash out some home equity by refinancing your mortgage? For growing numbers of owners, the answer this year is an emphatic yes, at least according to new data from some major lenders.
In a cash-out refinancing, you convert part of your home equity into money, adding to your mortgage balance. Say you have a $400,000 home with a $200,000 first mortgage. You have $200,000 of equity and a couple of worthwhile projects in mind — paying off high interest rate credit card balances and renovating the house — that will cost you around $50,000. Since mortgage rates remain attractive in the 4% range and you can handle the higher monthly payments on a larger balance loan, you refinance your $200,000 existing loan and take out a new $250,000 loan to replace it. You end up with more debt, but you also walk away with roughly the $50,000 you need, less transaction fees.
Cash-outs were the rage during the housing boom years of 2004-07. At their peak, in the third quarter of 2006, nearly 9 out of 10 owners who refinanced pulled out money from their homes, according to mortgage investor Freddie Mac. But by late 2008, the bubble had imploded. Equity holdings plunged. Cash-out refis virtually disappeared.
What’s going on? Some lenders clearly are tapping into pent-up demand from owners who find themselves with growing equity and have financial needs prompting them to put some of it to use.
Nobody Said That
Imagine yourself as a regular commentator on public affairs — maybe a paid pundit, maybe a supposed expert in some area, maybe just an opinionated billionaire. You weigh in on a major policy initiative that’s about to happen, making strong predictions of disaster. The Obama stimulus, you declare, will cause soaring interest rates; the Fed’s bond purchases will “debase the dollar” and cause high inflation; the Affordable Care Act will collapse in a vicious circle of declining enrollment and surging costs.
But nothing you predicted actually comes to pass. What do you do?
You might admit that you were wrong, and try to figure out why. But almost nobody does that; we live in an age of unacknowledged error.
Alternatively, you might insist that sinister forces are covering up the grim reality. Quite a few well-known pundits are, or at some point were, “inflation truthers,” claiming that the government is lying about the pace of price increases. There have also been many prominent Obamacare truthers declaring that the White House is cooking the books, that the policies are worthless, and so on.
Finally, there’s a third option: You can pretend that you didn’t make the predictions you did. I see that a lot when it comes to people who issued dire warnings about interest rates and inflation, and now claim that they did no such thing. Where I’m seeing it most, however, is on the health care front. Obamacare is working better than even its supporters expected — but its enemies say that the good news proves nothing, because nobody predicted anything different.
Go back to 2013, before reform went fully into effect, or early 2014, before the numbers on first-year enrollment came in. What were Obamacare’s opponents predicting?The answer is, utter disaster. Americans, declared a May 2013 report from a House committee, were about to face a devastating “rate shock,” with premiums almost doubling on average.
And it would only get worse: At the beginning of 2014 the right’s favored experts — or maybe that should be “experts” — were warning about a “death spiral” in which only the sickest citizens would sign up, causing premiums to soar even higher and many people to drop out of the program.
What about the overall effect on insurance coverage? Several months into 2014 many leading Republicans — including John Boehner, the speaker of the House — were predicting that more people would lose coverage than gain it. And everyone on the right was predicting that the law would cost far more than projected, adding hundreds of billions if not trillions to budget deficits.
What actually happened? There was no rate shock: average premiums in 2014 were about 16 percent lower than projected. There is no death spiral: On average, premiums for 2015 are between 2 and 4 percent higher than in 2014, which is a much slower rate of increase than the historical norm. The number of Americans without health insurance has fallen by around 15 million, and would have fallen substantially more if so many Republican-controlled states weren’t blocking the expansion of Medicaid. And the overall cost of the program is coming in well below expectations.
Advertisement
One more thing: You sometimes hear complaints about the alleged poor quality of the policies offered to newly insured families. But a new survey by J. D. Power, the market research company, finds that the newly enrolled are very satisfied with their coverage — more satisfied than the average person with conventional, non-Obamacare insurance.
This is what policy success looks like, and it should have the critics engaged in soul-searching about why they got it so wrong. But no.
Instead, the new line — exemplified by, but not unique to, a recent op-ed article by the hedge-fund manager Cliff Asness — is that there’s nothing to see here: “That more people would be insured was never in dispute.” Never, I guess, except in everything ever said by anyone in a position of influence on the American right. Oh, and all the good news on costs is just a coincidence.
It’s both easy and entirely appropriate to ridicule this kind of thing. But there are some serious stakes here, and they go beyond the issue of health reform, important as it is.
You see, in a polarized political environment, policy debates always involve more than just the specific issue on the table. They are also clashes of world views. Predictions of debt disaster, a debased dollar, and Obama death spirals reflect the same ideology, and the utter failure of these predictions should inspire major doubts about that ideology.
And there’s also a moral issue involved. Refusing to accept responsibility for past errors is a serious character flaw in one’s private life. It rises to the level of real wrongdoing when policies that affect millions of lives are at stake.
I’d like to be the first to congratulate el O on this New York times feature about his bold predictions:
But nothing you predicted actually comes to pass. What do you do?
You might admit that you were wrong, and try to figure out why. But almost nobody does that; we live in an age of unacknowledged error.
Finally, there’s a third option: You can pretend that you didn’t make the predictions you did...and ask for links as proof they never existed. 🙂
Back in late 2012, one of the smug posters at Patrick.net was expressing his surprise and dismay that I failed to see the bottom in early 2012. One of the other posters on that site went back to their archives and put a timeline to the frequent bottom calls the first guy made that were very wrong.
I was wrong about the bottom in early 2012. I didn’t believe a cartel of banks would be able to control the flow of REO and dry up the MLS inventory. I’m surprised and impressed to this day that so many banks and servicers acted together and enjoy the cartel benefits that come from restricting supply. When the evidence of their success became impossible to ignore, I changed my mind.
The worst part is that in late 2011, the housing market report that I publish was giving a buy signal because valuations were so low, but I ignored the signal because I thought the overhead supply would continue to push prices lower. I watched that happen in Las Vegas from 2009 through 2012, so I know the momentum of falling prices is hard to reverse. If I had it to do over again, I would have written more about the bullish signal my system was broadcasting rather than focusing on what I believed would happen.
I almost missed this ‘lil gem.
‘trust(ha) and verify’
LOL, dude, you post here as ‘Mellow Ruse’, so I always read your comments in that context. I only ask for the direct links to verify.
Simple as that 😉
https://www.youtube.com/watch?v=OWwOJlOI1nU
With economy uncertain, no Fed rate hike is seen before fall
“Don’t look for it soon”.
That’s the view of most economists, who say a still-subpar economy and still-low inflation will keep rates at record lows at least until September.
“I don’t think the Fed will have the necessary ingredients in place for a rate hike in June, but I expect economic growth and job gains to accelerate during the summer and that will lay the basis for a rate hike at the September meeting,” said Mark Zandi, chief economist at Moody’s Analytics.
http://finance.yahoo.com/news/economy-uncertain-no-fed-rate-153058237.html
As usual, Mark Zandi sounds “reasonable” but he will be totally wrong. The federal reserve will not raise rates this year. If they do raise rates, they will raise it 1/4 of a point just to see if the markets have another taper tantrum, then they will leave the rate at 1/4% until Spring of 2016.
What’s even more comical than the ‘Will Robinson’ clip above?
this…
http://finviz.com/fut_chart.ashx?t=GC&cot=088691&p=m5&rev=635657370753244114
Decoded: last Fri. gold was $680 away from “hitting $500”
Today, it’s a lot farther away from hitting $500.
Ribsplitter!
On Friday, el O was touting his brilliant short of the yellow metal, punctuated by the words “Cha-ching” (link provided upon request).
Today he antagonizes those that are bearish on gold.
Way to play both sides of the issue. That way no matter what happens you can claim victory.
Spot-on! That’s the beauty of the GLL hedge…. you CAN play both sides and have a great night sleep along the way, LOL.
The rise in car sales is largely due to the influx of subprime auto financing based on the chip that turns cars off if the borrower misses a payment. This isn’t due to any fundamental improvement in the economy, which is the implication.
Vehicle Sales Forecasts: Best April in “13 Years”
The automakers will report April vehicle sales on Friday, May 1st. Sales in March were at 17.05 million on a seasonally adjusted annual rate basis (SAAR), and it appears sales will be strong in April too. April sales (SA) will probably be the best since 2005.
Note: There were 26 selling days in April, the same as last year. Here are a couple of forecasts:
From WardsAuto: Forecast: April Daily Sales to Reach 13-Year High
A WardsAuto forecast calls for U.S. automakers to deliver 1.474 million light vehicles this month.
The forecasted daily sales rate of 56,706 over 26 days represents a 6.7% improvement from like-2014 (also 26 days) and would mark the industry’s best April, on a daily basis, since 2002, as well as the highest April sales volume since 2000.
…
The report puts the seasonally adjusted annual rate of sales for the month at 16.8 million units, down from March’s 17.1 million SAAR, but some 800,000 units above year-ago and slightly ahead of the 16.8 million first-quarter SAAR.
From J.D. Power: New-Vehicle Sales in April Strongest for the Month in a Decade
Total light-vehicle sales are projected to reach 1,463,700, a 5 percent increase compared with April 2014 and the highest level for the month since April 2005 when 1,500,624 new vehicles were sold. [Total forecast 17.0 million SAAR]
Another strong month for auto sales.
An influx of subprime auto lending is not a fundamental improvement in economic conditions
Meet Skopos Financial, The New King Of Deep Subprime
When last we checked in on the subprime auto ABS market Santander Consumer was busy paying the US government $9 million to settle charges that the subprime auto lender had illegally repossessed some 800 vehicles from active duty service members and had attempted to extract fees from another 350 soldiers in connection with repossessions the bank didn’t even execute. As we noted at the time, Santander wasn’t about to let a few disgruntled soldiers and a measly $9.35 million fine slow down the securitization machine which is why the lender was launching the DRIVE-2015 A deal, a $700 million securitization backed by car loans to borrowers with an average FICO of 552 although, as we pointed out, 13% of those whose loans wound up in the collateral pool had no FICO at all. That is what is known as “deep subprime.”
Well, things just got a lot “deeper,” because as Bloomberg reports, Texas-based Skopos Financial has both raised and lowered the bar at the same time by setting a new standard for what counts as questionable collateral while simultaneously proving that in a NIRP world, investors are willing to plumb the FICO depths for yield:
Skopos Financial, a four-year-old auto finance company based in Irving, Tex., sold a $149 million bond deal consisting of car loans made to borrowers considered so subprime you might call them—we dunno—sub-subprime?
Details from the prospectus show a whopping 20 percent of the loans bundled into the bond deal were made to borrowers with a credit score ranging from 351 to 500—the bottom 6 percent of U.S. borrowers, according to FICO. As a reminder, the cut-off for “prime” borrowers is generally considered to be a credit score of around 620. More than 14 percent of the loans in the Skopos deal were made to borrowers with no score at all. That means the Skopos deal has a slightly higher percentage of no-score borrowers than the recent subprime auto securitization recently sold by Santander Consumer, which garnered plenty of attentionfor its dive into “deep subprime” territory.
Another strong month for auto sales.
[…] This will be the fate of the late cloud inventory additions to supply. These sellers can’t lower their price, so their properties will sit there until they decide to remove the listing. (See: Are cloud inventory homes really for sale?) […]