May242012
Short sales damage house prices just like REO
Many market pundits claim lenders should focus on short sales rather than foreclosures. They contend short sales offer better capital recovery than foreclosures and they are less harmful to market pricing. This is not an accurate assessment.
First, not all foreclosures become REO. About a third of all foreclosures are purchased by third parties who either flip them or hold them as cashflow investments. Flippers generally improve the property and sell for full market value, so their activities don’t push prices lower. And obviously, cashflow investors don’t push prices lower because they don’t sell their properties.
Both short sales and REO resales require discounts to sell. REOs require a discount because lenders are loathe to spend any money fixing them up. Short sales require a discount because buyers won’t put up with the arduous process unless there is a reward for their patience. Sales prices of REOs or short sales do not differ much because both require discounts to sell (REOs -34% and short sales -21%). And since short sales and REO don’t differ much, and since both negatively impact prices, whether lenders choose to sell as short sales or as REO is irrelevant to the health of the market. Both short sales and REO are distressed sales.
As Foreclosures Fall, Fears of Crisis Abate
Filings in April hit the lowest level seen since July 2007.
By Claire Easley — From: BUILDER 2012, Posted on: May 17, 2012 12:03:00 PM
After months of ominous warnings that a second title wave of foreclosures was coming, the impending tsunami seems to have been downgraded to something more akin to a tropical storm, thanks in part to an increase in the use of short sales by some of the largest mortgage servicers.
A torrent of short sales will hurt the market just as much as a tsunami of foreclosures.
Foreclosure filings hit the lowest level seen in nearly five years in April, down 5% from the previous month and down 14% year-over-year, according to data released today by RealtyTrac.
While there is still plenty of pain to be felt in many regional markets with backlogs to work through, “More and more, it’s looking like short sales are going to take the air out of that expected bubble in foreclosures we were thinking would happen this year,” said Daren Blomquist, vice president at RealtyTrac, on a call with Builder this week. “At the end of the day, foreclosure activity will be up slightly this year compared to 2011. We’ll still see increases in filings in local markets … but short sales are helping to siphon off a lot of the potential foreclosures that are out there.”
Banks tried to do more short sales in early 2010, but were unsuccessful in resolving more loans that way. Perhaps with more government bailout dollars to pay off second mortgage holders and with requirements for write offs with the mortgage settlement deal, lenders will be in the mood to approve more short sales.
That’s promising news for home prices, which have been pummeled by the onslaught of distressed sales in recent years.
Why? Short sales are also distressed sales requiring a significant discount to sell. This is the kind of poorly reasoned nonsense pervading the mainstream media. 
As of January, the latest month for which RealtyTrac has pricing data available, the average price of a short sale was 21% lower than that of a non-distressed sale; meanwhile REOs averaged a 34% price drop compared to non-distressed prices.
If lenders have fewer REOs and begin approving more short sales, the discounts will likely reverse. Short sale discounts will go up, and REO discounts will lessen. There is no reason for short sales and REO to sell for different prices on comparable homes. In the past REOs have sold for deeper discounts merely because lenders were more motivated to liquidate properties they already owned. If they own fewer REOs, their motivation to liquidate will lessen, and with less motivation, they will hold out for higher prices. 
The shift may be due in large measure to the deal struck between the states’ attorneys general and mortgage servicers. Among the five largest lenders involved in that settlement—Ally, Bank of America, Chase, Citi, and Wells Fargo—the ratio of REOs to short sales is less than 1.5 to 1. Other lenders are averaging more than 2.5 REOs for every short sale performed. “That to me is an indication that the lenders in the settlement are more motivated” to avoid the foreclosure process, Blomquist said. “Those lenders account for a huge percentage of the loans being serviced. That alone is going to impact the industry, because the way they do things will be repeated by others.”
The lenders in the settlement deal have to write off a large dollar amount through short sale, so they are shifting gears until they reach their write-down targets. This is the kind of politically motivated change that’s very difficult to forecast. If not for the settlement, lenders likely wouldn’t have changed gears.
The post 8.7 years to clear Orange County distressed inventory at stable liquidation rate, had some astute observers who took exception to my numbers because they said many of the REO I said were coming were going to be resolved as short sales. To that I say, “so what?” Both REO and short sales are distressed sales, and both negatively impact the market. Resolving bad loans through short sales does not help the market in any way. As evidenced by articles like the one above, many people don’t understand that basic fact.
Does this sound like a healthy real estate market to you?
Zillow: One-Third of Homeowners Underwater, 1 Out of 10 Delinquent
About 15.7 million U.S. homeowners were underwater in the first quarter of 2012, according to Zillow’s Negative Equity Report released Thursday. This translates to about one-third, or 31.4 percent, of homeowners with a mortgage, an increase from 31.1 percent in the previous quarter and a decrease from 32.4 percent a year ago.
Yet, most underwater homeowners are current on their mortgages, with nine in 10 continuing to make their payments on time. Also, just 10.1 percent of underwater homeowners are more than 90 days delinquent, Zillow reported.
“While it was disappointing to see negative equity numbers remain so high, it is important to note that negative equity remains only a paper loss for the vast majority of underwater homeowners,” said Zillow Chief Economist Stan Humphries. “As home values slowly increase and these homeowners continue to pay down their principal, they will surface again.”
While negative equity is never beneficial for homeowners, a large percentage of underwater borrowers are at least wading in shallow waters. Nearly 40 percent of underwater homeowners owe between 1 and 20 percent more than their home is worth, and another 21 percent owe between 21 and 40 percent more than their home’s value.
However, when looking at the total amount of negative equity that exists when combining all underwater homeowners, the number is $1.2 trillion. Through the $25 billion multistate settlement, $10 billion was allotted to reduce principal for underwater homeowners, an amount analysts have said is not enough to make a dramatic impact on recovery.
Additionally, 2.4 million homeowners with mortgages owe more than double what their home is worth. In Las Vegas, nearly 90,000 homeowners owe double their home’s value.
On a state level, Nevada has the highest percentage of negative equity, with 66.9 percent of all homeowners with mortgages underwater. Other states with high percentages include Arizona (52.3 percent), Georgia (46.8 percent), Florida (46.3 percent) and Michigan (41.7 percent).
The metro areas with the the highest percentage of homeowners with underwater mortgages were Las Vegas (79 percent), Phoenix (55.5 percent), Atlanta (55.2 percent), Orlando (53.9 percent), and Riverside, California (53.4 percent).
The metro areas with the lowest percentage of homeowners dealing with negative equity were Pittsburgh (16.7 percent), New York (21.3 percent), Boston (22 percent), San Jose (22.7 percent), and Philadelphia (25 percent).
Zillow also included an interactive map of the data organized by counties.
The Zillow Negative Equity Report looks at current outstanding loan amounts for individual owner-occupied homes and compares them to those homes’ current estimated values. Loan data are provided by TransUnion. According to Zillow, this is the only report that uses current outstanding loan balances on all mortgages when calculating negative equity, as opposed to basing outstanding loan balances on the most recent loan on a property, such as the original loan amount at the time of purchase or refinance.
Sort of throw a big cold wet blanket on the trade up market part of the housing sector. I wonder what is the percentage of home with a mortgage that have 50% or greater equity in their house?
I’d like to hear about just one household today that’s planning a move-up in the Irvine area. Even if you have $200K equity in a house you could sell for $700K, do you really want to move-up to a $1M Irvine house? Why not wait to see what happens with rates over the next couple years? Of course, this all assumes you like your current house…
We’ll be “dead move-up buyers” for some time. If we refi our underwater house soon, it’ll likely take 2-3 years to rebuild our savings to have a 20% downpayment on a move-up house. This doesn’t bother me, but it does my wife.
I really don’t know how lenders hope to sell the abundance of houses priced over $800K. There is no move up market, and there won’t be for quite some time.
That 800K and up market will be the sweetspot for qualified buyers. You will have plenty of properties to choose from and very little competition. Since that price point will be in shambles for years to come, buyers can fish around for deals…aka super low ball offers.
Great article on how home price indices are measured.
Kolko: Dissecting the House Price Indices
by CalculatedRisk on 5/23/2012 05:16:00 PM
CR Note: This is from Trulia chief economist Jed Kolko:
Dissecting the House Price Indices
Each month, several data releases track house price changes. Case-Shiller, CoreLogic, the Federal Housing Finance Agency (FHFA), the National Association of Realtors (NAR) and others report monthly sales-price trends, and the Trulia Price Monitor reports trends in asking prices, a leading indicator of sales prices. These indices often show different trends even for the same time period. Some of the differences among these indices are well-known, such as the fact that FHFA’s traditional index is based on transactions involving conforming, conventional Fannie Mae & Freddie Mac mortgages, while other indices (including the newer FHFA expanded-data index) cover a broader set of homes. But other, more technical differences help account for why some indices go up while others go down, including how they handle:
• The mix of homes listed and sold.
• Seasonal patterns in home prices.
• Weighting of homes and metros.
How much do these issues really matter for price trends? A lot, it turns out. In constructing the Trulia Price Monitor, we (1) adjust for the mix of homes listed, (2) adjust for seasonality, and (3) “weight” homes equally so that our national trend best represents what’s going on with the typical home in the largest 100 metros. Using this approach, we found that asking prices nationally rose 0.2% year-over-year and 1.9% quarter-over-quarter in April. Other price indices take different approaches, and mix-adjustment, seasonal adjustment, and value-weighting all have pros and cons. To see how much these issues matter, we used our data to see what the price trends would look like using different technical approaches.
MORE
To determine the home price trend, forget price indices (way too much noise in the data capture to be considered accurate, plus they’re based on lagging components). Thus, should be viewed as marketing tools, nothing more 😉
Instead, simply take a look at the prevailing economic influence currently underway which is deleveraging.
Deleveraging is deflationary in-nature = the price trend is down.
“A bill was introduced last Friday in Congress requesting that the Federal Housing Finance Agency cease its plan to sell Fannie Mae-owned foreclosed properties in California to large investors.
The “Saving Taxpayers from Unnecessary GSE Bulk Sale Programs Act of 2012” bill would prevent the FHFA from moving forward with its initiative to sell government-sponsored enterprise REO homes in bulk to institutional investors who would then offer them on the market as rental units…”
http://www.mortgageservicingnews.com/dailybriefing/california-bill-bulkreo-sales-1030554-1.html?ET=mortgageservicing:e2835:101415a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=MSN_REO_052312&site=default_reo
I’m covering that one in tomorrow’s post. The NAr bought a politician to sponsor this stupid bill to preserve their commissions. There is no other reason to oppose bulk sales other than they want more MLS sales.
IR — Your example today of the HELOC abuser is a real gut-turning one. I have lost all faith in politicians. There’s almost no one out there standing up for the people who didn’t abuse the system.
Those people have no money to sue. However, I would love to give them 100 hours of community service to either clean up trash on the freeway or clean out storm drains in the flood control channels in mid summer.
[…] sales hinder property values just like REO Short sales hinder property values just like REO Many market pundits claim lenders should focus on short sales rather than foreclosures. They […]
There’s still a difference of 10% between a short sale and REO. With a squatter occuppied REO, the buyer doesn’t really know how long the squatter will remain in the house and the condition of the house upon receipt. The REO that are empty and being sold by the banks should less like regular motivated seller, but not always.