Apr052012
Despite optimism, signs point to ongoing market weakness
Everyone seems to believe the market bottom is in. Investors are buying up cheap homes in beaten down markets, Calculated Risk called the bottom, sentiment among realtors has turned positive, and the mainstream media is flooded with optimistic spin about housing. But have we really hit the bottom?
Grim Housing Data Shows We Have Not Hit Bottom
By MICHELLE HIRSCH, The Fiscal Times — March 29, 2012
A new string of grim housing data confirms what economists and analysts have long predicted: the housing market has yet to hit bottom, and once it does, it will be a long slog back to health and stability.
The nation’s heap of completed foreclosures remained steep, barely budging to 65,000 in February compared to 66,000 one year earlier, according to new data released by CoreLogic Thursday.
The percentage of American homeowners more than 90 days delinquent on their mortgage payments, including those in foreclosure, rose to 7.3 percent in February compared to 7.2 percent a month earlier. …
According to today’s report, 3.4 million properties have gone into foreclosure since the financial crisis in September 2008. About 1.4 million, or 3.4 percent of all properties with a mortgage, were in the foreclosure process in February …
Delinquency and foreclosure rates remain well above historic norms.
That follows new data from the S&P/Case-Shiller Index that U.S. home prices sank in January for the fifth straight month to the lowest level since 2003.
Additionally, separate reports from the National Association of Realtors and CoreLogic show existing home sales and previously owned homes under contract shrank in February. The number of bank-owned homes either in the foreclosure process or seriously delinquent—the so-called shadow inventory—remained unchanged from six months earlier at 1.6 million units.
Shadow inventory may be unchanged from six months ago, but it is currently growing (see red below).
“We’ve still got millions of foreclosed homes waiting to come on the market, so we’re not going to see any dramatic rebound in house prices,” cautioned Paul Ashworth, chief economist at Capital Economics. He predicts over the next few months that home prices will slowly start to rise, which will slowly nudge homebuyers back into the market and lead banks to start loosening lending criteria. “But property is a slow-moving asset, unlike stocks or equity where things can go up or down ten percent in a day. We’re not going to get a rapid rebound after the housing bust we just went through.”
… “Our view is that foreclosures, excess supply, and weak demand will drive home prices as measured by the Case-Shiller indices down at least another 5 percent,” said Patrick Newport, a U.S. economist with IHS Global Insight. …
To foreclose or not to foreclose, that is the question.
Consider the current set of circumstances and how the banks are going to move forward. First, banks want their money back. In a normal lending environment when a borrower stops payment, the bank forecloses and gets back the outstanding loan balance plus lost interest, fees and costs, and they then loan that money to someone else. For lenders even a non-performing loan generally becomes profitable in the end — at least until the housing price crash. Now lenders are desperate to get back whatever money they can as soon as they can. They can’t make good loans with capital they don’t have, so their desire is to sell foreclosures as quickly as they can to get their money back. However, lenders learned painfully in 2007 and 2008, if they foreclose as quickly as they can, prices crash, and they recover smaller and smaller fractions of their outstanding loan balances, and their lending capital becomes depleted to the point they are no longer solvent.
This is the quandary facing lenders, and how they manage these competing forces will determine the fate of the housing market. If they foreclose and liquidate on the MLS too quickly, prices will go down. If they do not foreclose and liquidate quickly enough, they might go down — at least the banks that aren’t too big to fail.
Lenders are united in their actions right now. They are withholding inventory to reverse the downward momentum of house prices. Once prices turn, they will speed up their liquidations and sell into the resulting rally thus diminishing its impact. With the delayed feedback from the market, lenders may find they have released to many properties and prices start to fall again. If so, they will restrict the inventory once again.
This process of releasing inventory, evaluating the results and making corrections will be ongoing until all the delinquent loans are resolved through short sale, loan modification, or foreclosure.
So why not withhold all product and make prices go back up to the peak? That would certainly please loan owners and lenders, but it won’t happen. The lending cartel is still a cartel, and each member has a strong incentive to foreclose and get their capital back. Remember, they need that money to cover their operating costs and make new loans. Each member of the cartel who cheats will sell properties to recover capital. Other cartel members will see this behavior and copy it for the same benefit. In short, lenders don’t have the discipline to withhold enough product to force prices to move significantly higher.
Over the next several years, the market will chop around. We will see rallies and drops as lenders liquidate. We may bottom this year, or next year, or any of the next several. It all depends on how lenders release their REO, and luck. Timing the bottom won’t be a big deal. The bottom won’t be a single buying opportunity. We will bottom over and over again over the next several years, which bottom will be the lowest drop is anyone’s guess. I predict they will all be pretty close.
I find studies like this asinine. You can’t exclude distressed sales from a market when distressed sales represent 1/3 of the market, particularly since distressed sales will continue to be 1/3 of the market for the next several years as lenders manage the liquidation of their inventories. It’s like saying prices are going up if you exclude those sales where prices went down. More bullish spin.
When Excluding Distressed Sales, Home Prices Continue to Rise
When excluding distressed sales, such as short sales and REO transactions, prices actually increased on a month-over-month basis in February, according to the February 2012 Home Price Index released by CoreLogic Wednesday. Though, when including distressed sales, prices decreased compared to the month before.
Month-over-month home prices increased by 0.7 percent in February when not factoring in distressed sales and decreased 0.8 percent compared to the year before.
When including distressed sales, prices dropped 0.8 percent compared to the prior month in January, which is the seventh consecutive monthly decline, while year-over-year prices fell 2 percent, according to the report.
In response to this data, Capital Economics noted in its report the 2 percent yearly drop is the smallest annual decline in 18 month.
Although prices continue to decline, Mark Fleming, chief economist with Corelogic, said it is at at a decreasing rate, and when excluding distressed sales, modest price appreciation has been seen month-over-month in January and February.
“The continued strength of sales activity and tightening inventories in many markets are early and hopeful signs that prices will continue to stabilize and improve in the coming months,” said Anand Nallathambi, president and CEO of CoreLogic.
Nallathambi also added that non-distressed home sale prices represent two-thirds of all sales and have appreciated by just over 1 percent since the beginning of the year.
The 0.7 percent increase is from the end of January to end of February.
In the Capital Economics report, authored by economist Paul Diggle, the 35 percent rise in homes sales and the 20 percent fall in visible inventory over the past year-and-a-half are attributed for the stop in the dropping of home prices. The research firm forecasts another 10 percent rise in home sales this year.
“That said, widespread negative equity and still-tight credit conditions mean that significant and sustained gains in house prices are still some way off,” Capital Economics stated. “However, a few years of stability is hardly unusual following steep adjustments. And once the various constraints on demand ease, the sheer extent of undervaluation in the housing market should eventually lead to a period of stronger growth.”
For the largest core based statistical areas (CBSAs), Chicago-Joliet-Naperville, Illinois depreciated the most at 7.3 percent, while Phoenix-Mesa-Glendale, Arizona appreciated the most at 7 percent when including distressed sales. Both CBSAs had the same ranking when excluding distressed sales, but fell 3.8 percent and increased 3.9 percent, respectively.
Five states with highest appreciation
(Including distressed sales)
West Virginia (+8.6 percent)
Michigan (+5.8 percent)
Florida (+4.7 percent)
Arizona (+4.5 percent)
South Dakota (+4.1 percent)
Five states with the greatest depreciation
(Including distressed sales)
Delaware (-11.2 percent)
Connecticut (-7.9 percent)
Rhode Island (-7.8 percent)
Illinois (-7.1 percent)
Georgia (-6.6 percent)
Five states with the highest appreciation
(excluding distressed sales)
South Dakota (+5.9 percent)
West Virginia (+5.6 percent)
Maine (+4.5 percent)
Utah (+3.7 percent)
Montana (+3.6 percent)
Five states with the greatest depreciation
(excluding distressed sales)
Delaware (-8.7 percent)
Connecticut (-4.9 percent)
Nevada (-4.6 percent)
Vermont (-4.0 percent)
Minnesota (-3.3 percent)
(Source: CoreLogic)
Some indications that the Spring Selling Season may be stalling
I think the best way to describe the housing situation is that both buyers and sellers are confused about one another. Buyers want much lower prices even with record low rates and some sellers are hearing that it’s turning into a selling market and they are trying to increase their listing price. I’m even starting to hear the old buy now line from some Realtors thinking it’s 2006 again. What is the result is a lot of cancelled sales and homes that have been in escrow four times in one year.
As Foreclosures Stall Again, Warnings of Housing ‘Paralysis’
Published: Tuesday, 3 Apr 2012 | 9:00 AM By: Diana Olick
In an unexpected reversal, both newly started foreclosures and finalized foreclosures dropped precipitously in February.
So-called foreclosure starts fell 15.2 percent month-to-month. Foreclosure sales, the final stage of the process (not sales of already bank-owned properties) fell 19 percent month-to-month, according to a new report from Lender Processing Services.
Most had expected both starts and sales to ramp up, following the $25 billion dollar settlement between five of the nation’s largest banks and state attorneys general and federal agencies over the now infamous “robo-signing” scandal. The drop in finalized foreclosures was nationwide, in states where a judge is involved in the process as well as in non-judicial states.
The whole point of settlement was to protect the banks and allow banks to credit short sales are loan modifications. Also, FHA received a backdoor bailout from the banks. I say backdoor because banks receive low interest loans from the Fed, which can be used to pay this settlement.
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I agree with that article, especially sellers trying to increase their list price. Probbably on advise from their agent.
I have seen several houses in the area that I track go on the market, show a sale pending within a few days. Then I notice the house fell out of escrow and is back on the market a few weeks later. Price has been increased by 20K. I guess if buyers are dumb enough to fall for that, the sellers might as well extract every dime they can out of them.
Shevy told me he is seeing many houses fall out of escrow. realtors are complaining about tight lending standards, but the people who are falling out of escrow are simply not qualified for home ownership. Many of these were future foreclosures lenders avoided by not loaning them money.
The Second Foreclosure Tsunami Is Coming, And Is About To Kill Any Hopes Of A “Housing Bottom”
http://www.zerohedge.com/news/second-foreclosure-tsunami-coming-and-about-kill-any-hopes-housing-bottom
If all those houses get pushed through the MLS, prices will almost certainly go down. Bulk sales to investors who will hold for rental cashflow is the only hope of holding back the tide.
The govt’s attempt to keep up the housing market (inflated prices) is like saying the meth users can stay up 48 hours without sleeping. So we need to keep them on meth so they don’t have abnornal sleep. High housing price gives banks and home/loan owners a buzz, but are just a hidden tax on society by the banks.
Just thinks how much more efficient the US economy would be if workers could move to get work or lower commuting cost. It would end the oil strangle-hold on the US. Housing and transportation cost are likely 50% for Joe and Jill six pack. Then there’s taxes and not much left.
Condo prices hit new crisis lows in Chicago, Los Angeles and San Francisco
http://www.housingviews.com/2012/04/05/condo-prices-hit-new-crisis-lows-in-chicago-los-angeles-and-san-francisco/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+HousingViews+%28HousingViews+-+S%26P%27s+Blog+on+the+Housing+Mark
Are condo for housing, the canary for the mine?
There are many locations with reasonable housing cost to income levels. Most are in the mid-West and South. Many coastal states have reasonable cost in-land, but the jobs are along the coast.
Tight lending standards? I still see the transfer of liability from private banks to the taxpayer via FHA 3.5% loans. Even with a PMI of 2.2%, the PMI will not be able to cover the walkaways and squatters of the market goes lower.
I live in a condo will probably just turned into a rental when I purchase my house in a year or two.