Posted on May 30th, 2008 in Mr Mortgage's Personal Opinions/Research
I have spoken loudly for well over a year that the housing crisis, especially in bubble states such as California, will be much worse than most can imagine and at present is much worse than most think. (also see my Youtube version of this report) My top reasons are:
- The total loss, over the past 9-months, of most ‘affordable/exotic’ loan programs relied upon so heavily over the past five-years.
- Out-of-control supply with Foreclosure and Bank REO inventory surging to levels that now make the foreclosure market, ‘the real estate market’. In CA in April, 2008 Total Sales equaled 31,250, banks took back 22,328 homes from foreclosure auctions, and Foreclosure Resale’s were 38% of Total Sales. In April 2007, they were 5% of Total Sales.
- The ‘mortgage crisis’ moving up the credit spectrum from subprime to alt-a, and finally to a much larger percentage of the prime market than ever before thought…the latter primarly being due to the ‘negative equity effect’ and what was considered ‘Prime’ over the past five years, being far from it.
- A catastrophic 27% fall in CA median housing prices in the past 11-months, pushing a massive amount of home owners into a negative-equity position and increasing their likelihood of loan default across all borrower types.
- New home buyers not having a large enough down payment or income/credit level to be able to qualify for new-vintage fixed-rate, fully documented mortgages.
- Potential, qualified buyers not being able to sell their present home to raise the down payment; not wanting to rent or yielding enough from renting their present home to buy a new home; or just not wanting to enter the market due to depressed confidence levels. Remember, most home buyers are existing home owners and not first-time home buyers or renters.
- A large percentage of home owner who used second mortgages or high-LTV single-lien financing to avoid a down payment and existing home owners who leveraged-up their homes by pulling cash-out to maximum LTV/CLTV levels having no ‘skin in the game’, defaulting and moving to the rental pool.
- Homes are still too expensive and it is still cheaper to rent in most cases. Buy vs rent ratios are still closer to peak levels than historic norms in many major metropolitan areas around the nation, especially in the bubble states. CONTINUED…
I have also said for a long time that ‘unless people plan to pay cash, with all of the exotic loan programs suddenly gone, home prices will gravitate to the most readily available financing, which is still Fannie/Freddie <=$417k conforming’. The new Fannie/Freddie ‘Jumbo’ loans remain far too restrictive to serve as a replacement for what was lost. They are not even close. It just so happens that exotic loans were so pervasive in CA that our home prices are ‘gravitating’ lower from much loftier levels than anywhere else in the nation.
The fact is home prices are collapsing and there is not even a hint at that stopping. As a matter of fact, DataQuick reports that CA home prices reached a record median level of $484k in Mar 2007 and remained there through the summer. Then suddenly in Sept 2007, the median price fell sharply to $430k, as the Spring/Summer sales season ended at about the same time most lenders pared back what was left of their ‘exotic/affordable’ mortgage offerings.
Prices continued to fall each month since and are still falling. Last month, the median home price hit $354k, which is 26.86% off of the high in 11 short months or 23.9% from the end of the 2007 selling season. Before you jump all over me, I am a Case-Shiller fan but since I was using other data from DataQuick, I wanted to keep it consistent.
Most think the CA ‘housing crash’ has been ongoing for a couple of years. That is not the case. Total Sales have been steadily declining for a couple of years, but values kept increasing through summer 2007 despite that.
Most frightening is that CA has not seen a Spring/Summer selling season without ‘exotic/affordable’ loan programs in years. 2008 is the first. We are in uncharted territory.
What I have known in my head, blogged about and scribbled on the back of napkins for months, I actually found the time to chart (Please see spreadsheet below and attached). I used sales data from DataQuick, foreclosure data from ForeclosureRadar and listing data from Movoto.
I began tracking from 1/1/2007 through the most recent data available, which is April 2008. However, columns D & E on the accompanying spreadsheet do capture sales from 1-yr prior or 1/1/2006. The spreadsheet also captures:
Total Sales and Foreclosure Resale’s: include new homes, existing homes, SFR’s, condos and co-op’s.
Median Sales Price: as reported monthly from DataQuick.
New Bank REO: total monthly foreclosures sales that went back to the bank from the foreclosure auctions, which is running at the 98% level lately according to ForeclosureRadar.
Total Listed Inventory: 275,000 estimate by Movoto. This inventory does NOT include FSBO’s or most REO and Builder for sale inventory.
Inventory Burn: Total Sales less New Bank REO
Column ‘O’, Inventory Burn, is where things get a little tricky and some may not agree with my math. I am open to debate this, as I consider this piece ‘a work in progress’ and this subject the largest threat to real estate in most bubble states.
For Inventory Burn, I backed out New Bank REO from Total Sales to come up with an Inventory Burn divisor for which to calculate Total Months Inventory by factoring it into the Total Listed Inventory figures. I averaged the past four months Inventory Burn of 21,566 to come up with a monthly divisor of 5,392 units per month leaving the CA inventory pool. This maybe an overly simplistic way at which to look at this, but given all of the wildcards, these are the data we have here and now.
*Also see Breaking CA April Foreclosure Stats – Very revealing
One can argue that I should have added the New Bank REO inventory, or ‘Shadow Inventory’, into the Total Listed Inventory figure and divided by the true number of Total Sales, but I didn’t think that was appropriate. This is because New Bank REO counts are absolutely surging as of late (up 100% in 6-months) and will continue to surge according to data provided by ForeclosureRadar in their past four Monthly CA Foreclosure Reports. If it were stable, or within the reasonable thresholds, for the past year and I was able to estimate a total past ‘Shadow Inventory’ count, then this method could have been used as well.
What I show is seven month’s consecutive reports showing significantly increased Notice-of-Default and New Bank REO counts, which constitute a trend and do predict the future. These reports show that in the next four months, there will be 30,500 homes per month on average turn into New Bank REO. This is at a pace twice that of the beginning of 2008 and several times greater than 2007. Therefore, factoring in historical New Bank REO counts, which were much smaller, and adding them to the Total Listed Inventory was not appropriate.
I needed a starting point, so I decided to start right here with:
a known Listed Inventory quantity of 275k units. This does not include most builder or REO inventory.
a known monthly New Bank REO inventory count in the present and looking forward four months into the future as predicted by the past four month’s Notice-of-Defaults
and a present Total Sales count
With this I can determine what the Total Sales count must be in order to achieve an Inventory Burn rate great enough to absorb the existing 275k Listed Inventory and the monthly New Bank REO. Even at the present Total Sales count for April of 31,250, which was much higher than at any other time in 2008, the numbers show very little Inventory Burn.
I considered utilizing ‘annualized’ data but if I annualized sales, then I would have to annualize the New Bank REO and given the upward curve in REO, that measure would have been even worse. This is because home sales will decline, as they always have after the Spring/Summer selling season, and New Bank REO may very well continue to accelerate due to Alt-A loans defaulting at a greater rate and the negative-equity effect forcing more borrowers of all types into default.
Last year, there were 383k homes sold in CA and this year the pace is about 20% lower. However, the foreclosure rate is surging and the New Bank REO annualized pace is at 360k. ‘Annualizing’ would make for ‘infinite inventory’. Again, reducing the Total Sales count by the New Bank REO to get an Inventory Burn seemed like the only logical measure.
The final results are about what I expected. California has YEARS OF INVENTORY to burn through. The numbers show 4.25 years of listed and ‘Shadow’ inventory is out there and that is using the most liberal April Total Sales figure of 31,500 units, which was large in comparison to past months but appropriate, as we are in the Spring/Summer home selling season. I was also conservative by using the April New Bank REO figure, which we already know will increase over the next several months.
If New Bank REO counts hover around the 30k mark where they should be for the next four months at least, in order to burn through the current 275k CA Listed Inventory at a rate consistent with the national Month’s Supply levels of 11.4 months and/or the perceived CA Month’s Supply levels of approx 10 months, Total Sales will have to double from the current two month average pace of 27,500 per month. This will be tall order, however, as the biggest purchase month in years was March of 2006 when 57,635 homes changed hands. At that time, we had a full menu of exotic loan programs to choose from.
This is the first Spring/Summer selling season in five years without a full menu of ‘exotic/affordable’ loan programs to drive affordability.
You may think that as prices fall, more homes will sell and that will solve the inventory problem. That is not totally correct. As prices fall, more homeowners are thrown into a negative equity position, which leads to more defaults and even more Bank REO, as explained in further detail in the following paragraphs.
New Bank REO, or ‘Shadow Inventory’, is a real problem and a real threat to values across the nation. On average, banks are discounting this inventory by 25% of the original note value with nearly half experiencing discounts of 30% or more. Remember, most first mortgage note values were originally at 80% loan-to-value, meaning many homes are being discounted nearly 50% from the original appraised value at the time the loan was done. What about all the comparable property owners who bought at the same time and are now 50% upside down in their home, and not in default? Yet.
Bank REO inventory is now ‘the market’. Banks are the market maker. According to DataQuick, in March and April 2008 Foreclosure Resale’s were responsible for 38.4% and 37.7% of Total Sales respectively. Last April, Foreclosure Resale’s were 5% of Total Sales.
With discounts as large as banks are offering, entire neighborhoods and regions are being marked-to-market overnight. This is pulling thousands of other home owner’s values down sharply forcing them into a negative equity position, heightening their chances of loan default.
In a nutshell and simplistically speaking if 10k people get a ‘great buy’ on REO, 100k home owners could have the value of their homes fall by 30-50% overnight. Of those 100k, 35% get thrown into a negative equity position, 35% of those experience loan default and 75% of those (9,200) go back the bank as REO. The banks sell at a 30-50% discount and the process repeats. Again, no inventory has moved. Values just continue to fall. It is a vicious cycle.
Please take a look at the accompanying spreadsheet above and YouTube version of this report reviewing the spreadsheet. My itemized findings are as follows:
CA home Total Sales fell significantly from 2006 to 2008, down as much as 41.09% year-over-year.
The CA Median Home Price kept rising through May 2007 to a record $484k and stayed relatively flat until Aug 2007, despite Total Home Sales volume declining sharply.
In 2007, most months’ Total Sales figures were the weakest for that particular month since DataQuick began tracking in 1988.
Only recently have sales picked up with 31,150 Total Sales in April 2008, however, this number is still 10.87% lower than 1-year ago and last year’s number was 28.52% lower than 2006.
In Sept, 2007 the Median Home Price fell sharply to $430k
In the subsequent 7-months until present, the Median Home Price continued to plummet. It stands at $354k today as measured by DataQuick, which is a whopping 26.86% decline in 11 months. This is unprecedented.
The massive fall in housing prices coincides with not only the end of the Spring/Summer selling season, but the elimination of most lenders ‘exotic’ and Jumbo loan programs and/or loan types, which include but are not limited to: subprime, Alt-A, interest only, pay option arms, stated income, no ratio, no doc, home equity loans/lines, no money down etc.
CA has NOT gone through a Spring/Summer selling season without the above mentioned ‘exotic’ and jumbo loan programs and/or loan types in 6-years.
As Total Sales and the Median Price fell, foreclosure and New Bank REO activity increased sharply and continues to do so with 22,324 homes add to REO inventory in April, 2008. This is up 100% in 6-months. Most of this ‘Shadow Inventory’ is not part of the estimated 275k MLS listed homes, traditionally used to calculate Month’s Supply.
In the past several months Foreclosure Resale’s have also increased to 38% of Total Sales in the state of CA in April. In April 2007, they were 5%.
New Bank REO is now the market and the banks the market-maker. On average, banks are discounting inventory by 25% of the original NOTE value with nearly half experiencing discounts of 30% or more. Most first mortgage note values were originally at 80% loan-to-value, meaning these homes are being discounted nearly 50% from the original appraised value at the time the loan was done.
Entire neighborhoods and regions are being marked to market overnight due to Bank REO sales. This is pulling thousands of other’s home values down sharply forcing them into a negative equity position, heightening their chances of loan default.
New Bank REO as a percentage of Total Sales has been steadily climbing since 2006 and even reached 101.45% in Jan 2008 before backing off to 71.67% in April 2008.
Backing out Foreclosure Resale’s from Total Sales in April 2008, leaves you with 19,406 Organic Sales, which is the below the lowest number since DataQuick began keeping records in 1988.
New Bank REO as a percentage of Total Organic Sales was 115% in the month of April 2008 showing infinite inventory.
True Inventory Burn, which is Total Sales less monthly New Bank REO inventory, has been steadily decreasing and in Jan 2008 was a negative number. The past four months true Inventory Burn totaled 21,566 units or 5,392 units per month.
If the rate of New Bank REO remains steady, (however we already know it will increase to 30,500 units for at least four months out due to the past four months Notice of Default data), and the rate of Total Sales stays at the elevated April levels, given the true Inventory Burn, it will take 51 months or 4.25 year to sell all existing MLS Listed Inventory. This does NOT include FSBO or unlisted Builder or past bank owned REO inventory.
If the rate of New Bank REO steadily increases as it has for 16 consecutive months and Total Sales do not increase due to rising mortgages rates, tougher lending guidelines, the absence of loan programs, and historical seasonal patterns, then CA has infinite inventory, as the rate of New Bank REO will continually exceed Total Sales as it did Jan 2008.
If the home prices are not only based upon affordability but supply and demand fundamentals, then CA real estate prices could stay depressed far longer than anyone has predicted to date.
OTHER MR MORTGAGE RELATED STORIES
Breaking CA April Foreclosure Stats – Very revealing
ABOUT DATA SOURCES USED ABOVE
Movoto provides comprehensive home listings for 26 counties in Northern California, the greater Los Angeles area and San Diego as well as for Massachusetts, Maryland, Washington, DC and Northern Virginia via our website http://www.movoto.com. Our site is different from others in that it’s blazingly fast, easy to use and has an intuitive “mash-up” of home listings and other critical home-buying information like schools. Movoto carefully hand-picks top local agents as partners and offers homebuyers the opportunity to meet these top-rated agents. Users of the Movoto site have access to the best home-buying information on the web as well as the cream of the crop of local agents from name-brand brokerages.
ForeclosureRadar.com is the only place where you’ll find complete up-to-date information on every foreclosure opportunity available in California, including exclusive daily updates on every auction. And we’re the only foreclosure service that provides a comprehensive set of professional tools for Realtors® and Investors to find, evaluate, and track the best foreclosure opportunities.
Since 1978, DataQuick has built a solid reputation as a premier provider of real estate information solutions. From the early days of microfiche to today’s high-speed Internet solutions, we’ve helped thousands of customers realize their goals by offering the most current and advanced data products on the market. But aside from offering quality products and services, there’s one thing we take pride in the most—the committed, caring relationship we build with our customers.At DataQuick, it’s the people who make all the difference. While we’re trained to be experts on virtually every aspect of real estate information, we also like to have fun too. From monthly team interactive events to giving back to the community, we all contribute to the DataQuick story in our own unique way.