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, Government, hedgefunds 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:
- 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.
- 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.
- 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 sold. That 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, Trulia.com 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
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