The End Of The Housing Crisis? Huh?

Posted on May 9th, 2008 in Mr Mortgage's Personal Opinions/Research

Recently, reports are surfacing everywhere about ‘THE END OF THE HOUSING CRISIS’ by the press, Governmenthedgefunds and former Fed officials talking their books. Most are looking at inventories of listed homes shrinking somewhat, while sales numbers are not falling as fast, as one of their primary indicators. I say ‘hogwash!’.

First, the ‘listed’ universe in not representative of the entire ‘for sale’ universe.  For example, DataQuick reported that in CA in March 24,565 new and existing homes sold of which 38.4% had foreclosure activity within the past year, meaning much was bank REO (Real Estate Owned). Most bank owned REO, including homes sold through the major auction aggregators such as REDC, never make it to the official MLS. 

Bank REO is the shadow inventory on which very few have a handle, and that is growing much faster than sales.  This inventory, flooding onto the market at 20-60% below appraised values and/or note amounts, is ‘correcting’ prices in entire neighborhood’s overnight. These ‘non-organic’ sales are wreaking havoc with appraisers and mortgage lenders across the nation and in my opinion, one of the largest threats to buying a home today. CONTINUED…. 

We can track future shadow inventory relatively easily through the Notice-of-Default (NOD) and Trustee Sale (foreclosure) data at firms such as ForeclosureRadar. However, this still does not account for all the shadow inventory, just the bulk of it. NOD’s are the first step to a foreclosure, filed when a borrower misses payments for 90-120-days. If that is not cured in 30-90 days, it goes to Trustee Sale. If it doesn’t sell, the bank gets it as REO. Once per month, Foreclosure Radar puts out a free foreclosure report. The findings for March, which was the last month reported due to the time lag in the data, were startling.

High-level findings include:

  1. Notices of Default – the first step in California’s foreclosure process – jumped 14.3 percent during March, reaching a record high of 42,704. These new entries into the foreclosure pipeline will produce a jump in foreclosure sales and bank owned (REO) properties for months to come.
  2. Notices of Trustee Sale, which are issued approximately 3 months following a Notice of Default, jumped 47.9 percent in March setting a record high of 27,571 filings.
  3. Foreclosure sales at auction declined 6.5 percent in March to 15,833 with a combined loan value of $6.87 Billion. Lender inventories continue to swell as they failed to sell 97.7 percent of these properties despite offering an average discount of 21 percent off of loan value.

Bank REO sales are picking up in total BUT also as a percentage of total homes soldThat latter is the scary part. Bank-owned sales far below present market are essentially distress sales, not organic sales and are quickly becomming ‘the market’. But sales are not picking up as quickly as homes will be foreclosed upon in the near future according the NOD data above. The NOD count above at nearly 43k, dwarfs the total sales number in March of 24,565. NOD’s turn into Trustee Sales in about 75% of cases and in Trustee Sales turn into bank REO in 97.7% of the cases according to the data above.

The data also show we have a wave of foreclosures coming to CA (and likely other bubble states) that is much larger than the sales activity for months to come, unless sales can increase high double-digits in the next few months. But even at that, the sales pace would only keep up with the foreclosure activity and not account for any homeowner sales and builder inventory, which has not even been discussed in this report. Builder inventory, which is tough to get a handle on, also have to be added to the total inventory.

As sales prices of REO steadily drop, prices are reaching a point that are attracting buyers, that’s for sure. But, not at a large enough pace to solve our problems. Another side-effect of prices ‘correcting’ so quickly is the negative-equity snowball effect from other home owners that all of a  find themselves underwater, prompting even more defaults and foreclosures.

But even as prices fall, buyers are leery of foreclosures. Recently, came out with a survey about buyer sentiment over foreclosures.  In summary. interest in buying a foreclosed home is rising, but 69% of consumers have reservations about such a purchase. The survey found that more than half of U.S. adults would be at least “somewhat likely” to consider buying a foreclosed home despite concerns about hidden costs (expressed by 69%), risk (35%), and home depreciation (33%). “What’s striking about these findings is that while U.S. consumers recognize the purchasing opportunity presented by foreclosed homes, there are definitely some reservations about the process,” said Pete Flint, co-founder and chief executive officer of Trulia.

A couple of months of housing inventories falling do not make a trend. It is amazing to me how much press and speculation this has received. One can argue much of the recent two months stock market rally was due to the belief that the housing market has bottom based upon flawed fundamentals. As a matter of fact, just yesterday came a story from CNN entitled Housing Inventories Rise Again in April – Doh!

In closing, perhaps this just goes to show you can’t talk a market into healing and the consumer into buying, like they try to do on bubblevision day in and day out. The data are the data and the data do not lie.

I will put out more on this in topic the next few days along with affordability factors, given we have lost most affordable financing relied upon so heavily in the bubble years. One report said ‘fixed rates would have to be at 1.4% to regain the affordability lost when the exotic programs went away’. -Best Mr Mortgage


Is Now The Right Time to Buy a Home? Are You Sure?!?

4/22 – March Existing Home Sales – The Story Within the Report

March CA Foreclosure Disaster

28 Responses to “The End Of The Housing Crisis? Huh?”

  1. […] Read the rest of this great post here […]

  2. A while back I saw Bill Gross on TV basically saying unless the gov’t can get the 30 yr. fixed to 4.5% there will be no fix. ? What are your thoughts? I do know that basically, unless you have at least 20% down, 800ish credit score, work history etc. don’t even bother, so where do these people get off? Credit is dry, no one in any real way can buy up this inventory….but, they have to play to the evening news and paint a rosey picture, I think the powers that be are afraid, very afraid. Hey, I am a bit worried too, because I don’t buy their b.s. but at least I can prepare a bit, by trying to stay informed.

    Oh yeah, and this is my favorite in “bubblevision” “if we talk too much about a recession, we will be talking ourselves into it, a self fullfilling proficy”…huh? yup, like I got that much power….talk to me the next time I pay the oil guy, I know why I am not going to the mall and it is not because I heard it on tv.

  3. Yes George W. Bush is a lot like Adolf Hitler with his propaganda nazi public relations minister Goebbels. You know what Goebbels used to say ? “If you repeat a lie long enough, it becomes the truth.” Everything related to the real estate makes me think of Nazi Germany. It was really funny yesterday hearing that bastard Paulson saying that the crisis was finished. The same day AIG announces a 9 billion loss and a 12,5 billion financing and warns of further losses. Today Citigroup, that freakin piece of junk, announces that they will be selling 400 billion of assets. No thanks. I would pay 20 cent on the dollar for the shit that Citigroup will be trying to unload.

  4. […] TechNewsWorld: All Tech, All the Time wrote an interesting post today on The End Of The Housing Crisis? Huh?Here’s a quick excerpt…reported that in CA in March 24,565 new and existing homes sold of which 38.4% had foreclosure activitywithin the past year, meaning much… […]

  5. I think your numbers are a little off – although they might be under-estimating, rather than over-estimating the problem. You’re using the wrong month’s numbers for your calculations.

    Here’s what you said: “NOD’s turn into Trustee Sales in about 75% of cases and in Trustee Sales turn into bank REO in 97.7% of the cases according to the data above.”

    To calculate the percentage of NOD that turn into REO, we cannot use March NOD and March REO and do simple division. We have to go back in time to December 2007 and see what the NOD count was back then.

    So to see the “conversion rate” from NOD to REO, take March REO divided by Dec 2007 NOD and that’s your percentage, because it’s the NODs planted in Dec 2007 that are just now sprouting into March 2008 REO (and presumably shortly thereafter being dropped onto the market as a bushel full of new inventory).

    It might be that far more than 75% of NOD are converting eventually into REO – I’m guessing that there were fewer NODs in Dec 2007 than in March 2008.

    It might be interesting to see a chart looking at the implied “cure rate” for the NOD -> REO cycle starting from (say) April 2007 through the present. Also, a chart of the month’s NOD values over time would be awesome as well. I’d do one, but I don’t have the data.


  6. The bottom line here is that the Federal Reserve is a criminal syndicate and the shareholders care nothing about the American people or thier economy. Abolish it and return to a consitutional currency.


    New estimate of the losses, that is to say the global losses in all real estate markets, not only the USA ?

    10,000 billion

  8. solid info mr. mortgage!

    i’ve been telling my clients for a year that the unreported story is the coming Alt-A walk-away. and down here in san diego county the average loan balance is far larger than $400k you mention.

    while many sub prime borrowers are unsophisticated wage earner types that will try like hell to hang on even after the reality of the crummy loan is clear to them, the typical Alt-A borrower is more willing to do a spread sheet analysis and decide in two minutes that they are upside down. they will have taken their cash out as a business plan and will sleep fine after they determine that they have no equity, no upside, can stay for 4-8 months cost free as the foreclosure occurs and then work a short sale for a few more months. they will game the system.

    this is a huge iceberg we are about to hit.

  9. English is not my native language, but even I know it’s “Wrecking havoc”, not ‘reeking’.
    See for example.
    Anyway, top site. Thanks for your efforts keeping us all informed.

  10. your english is still off buddy it’s WREAKING. Thanks for the head-up. Because reeking is a word spellcheck didnt catch it. other than correcting my spelling errors, do you have anything to add to this thread of substance.

  11. I think reeking is exactly the right word to describe this situation. 🙂

  12. There is one Noah Rosenblatt who is either ignorant or a con man. He is hinting that housing will start to recover next year (referring to the end of subprime ARM resets). He complete ignores Option ARM’s.
    Noah’s Misleading Article

    Here is the big picture:
    Full Reset Schedule

  13. So what will Citigroup get for it’s 500 billion fire sale ? 500 billion. Wow! They must be in real deep sh-t ?

  14. Heh… I think ‘reeking’ havoc is better, because all of this will eventually give off a huge stench.

    As far as Citigroup, don’t mind the man behind the curtain.

    On a somewhat related note, commercial properties are starting to capsize. My neighbor works in the painting business. He has jobs lined up through the year (he normally gets projects lined up a year in advance because the developers want to make sure he and other finish-out folks are available when the building is done), but he said it ‘drops off the cliff’ for December on. Normally he should have a good amount of bookings started for Jan – April ’09. It isn’t there.

    And, I’m in the Austin, TX area, probably one of the few parts of the country that’s been fairly stable.

  15. Shannon, I’m a RES guy but pay attention to CRE. I think you’re right…CRE rolling over…read on Bloomberg CRE values down 7%-9% range as of 2007 year end for both US & UK. But no coverage from media/bubblevision! Fancy that! I’m in Pacific NW which has now, finally, begun to roll over in RRE. I told my co-workers at lender it was coming; refused to believe me. Anyway, I remember during last recession, CRE vacancy rate hit nearly 30% depending on building class for parts of Portland-Vancouver MSA. Vacancy = no income. Hmmm…how long befoe CRE defaults?

    Now to Mr. M’s statement – “REO is quickly becoming the market”. I concur. Any financing predicated upon the appraised collateral value is becoming increasingly more difficult, including purchase money not just refinance. So, deals will fall thru unless buyer has cash to bring to closing table to make up for short fall; or, buyer simply walks (loses earnest money deposit but why buy it if appraiser says value not there, right?). This is all going to get real ugly before it’s all over – will make S&L crisis look like dry run – this is not a “crisis” – this is a CATASTROPHE in the making!

    Next shoe to drop is CRE – as if the banks don’t have big problems already!

  16. Follow-up post to above:

    Congress needs to shelve the $300B bailout bill that’s now pending. Take that money, fund RTC & FDIC & NCUA.

  17. The bottom in the bubble states of California, Nevada and Florida will occur when the 70% of the sales prices of the existing inventory is below the national median. 95% of the sales prices in these states are still above the national median.

  18. Bah! They will borrowing another 300B from the stupid foreigners that will buy another 300B of treasury bonds at microscopic rates, no negative interest rates! This is a great system. A kind of NINJA system for Uncle Sam financed by Asia and Saudi Arabia.

  19. Here we go. I have been waiting to see if any of the FEDs actions would have an impact on Non-Borrowed Reserves of Depository Institutions. Guess what. it hasn’t slowed the drop.
    This is the scariest chart. I think it shows the cliff we have fallen off.

  20. omg, a realtor I know, just sent me the wall st. journal article declaring the houseing slump is over ?!?!

    Mr. M – more thoughts on that? I almost fell off my chair, but then again what is she going to say?

  21. Not even close…people all talk their position.

    No one wants to believe that things are that bad (like the lady I saw on TV spraying all the weeds in the abandoned houses due to Underwater escapitis

  22. Hank Jestor

    Interesting graph. What does it mean to the layman? Does it show that they are getting more and more leveraged?

  23. […] The End Of The Housing Crisis? Huh? […]

  24. Yes sir, that is what I am being told ;oD

  25. dont believe the hype. the time to buy is now!!!

  26. Best estimate for bottom will be, when Case-Shiller futures contract will be equal or higher than spot Case-Schiller index.

    If one beleives that bottom is right now, and future contract is bellow spot price, he can simply lock in additional discount.

    You may disagree that normal consumer is not capable of futures trade.

    If market would beleive that bottom is here, proffesional trades would immediatly spot arbitrage opportunity.

  27. Best time to buy ? After the presidential election when the shit will be really hitting the fan. The bottom is here because the banks want you to believe that the bottom is here.”Pump and dump”. They are trying to fix “Humpty Dumpty”. Save Lehman Brothers Movement in operation. It’s like the phony baloney CPI numbers yesterday. It allows them to have free money to pump the stuff.

  28. “Humpty Dumpty UBS” Union des Banques Suisses has done it again! They have another 45 billion of risky investments on their books. Love their financial leverage too. 53!

    Herr direktor Ospel (the swiss Ben Laden of banking) has done a great job at destroying the reputation of Switzerland. Funny farm UBS.

    It’s really frustrating for a short or a put buyer, to see the prices these pieces of junk are still fetching.
    When will they really crash ? I don’t get it.

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