CA Housing Stats…The Real Story. 4.25 Years Supply?!?
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:
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Total Sales and Foreclosure Resale’s: include new homes, existing homes, SFR’s, condos and co-op’s.
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Median Sales Price: as reported monthly from DataQuick.
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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.
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Total Listed Inventory: 275,000 estimate by Movoto. This inventory does NOT include FSBO’s or most REO and Builder for sale inventory.
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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.
(CA Housing Crisis Chart – Large Version)
*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:
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a known Listed Inventory quantity of 275k units. This does not include most builder or REO inventory.
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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
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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:
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CA home Total Sales fell significantly from 2006 to 2008, down as much as 41.09% year-over-year.
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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.
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In 2007, most months’ Total Sales figures were the weakest for that particular month since DataQuick began tracking in 1988.
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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.
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In Sept, 2007 the Median Home Price fell sharply to $430k
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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.
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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.
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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.
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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.
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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%.
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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.
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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.
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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.
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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.
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New Bank REO as a percentage of Total Organic Sales was 115% in the month of April 2008 showing infinite inventory.
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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.
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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.
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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.
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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
April CA Home Sales Rise, But Not As Fast As Inventories
ALT-A Disaster Looming – Know the Facts!
ABOUT DATA SOURCES USED ABOVE
ABOUT MOVOTO
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.
ABOUT FORECLOSURERADAR
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.
ABOUT DATAQUICK
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.
May 30th, 2008 5:16 pm
Fantastic analysis!
As someone who just sold in the bay area, I wanted to add a few comments.
1. Easter was in March this year, so the spring selling season was pushed out a little bit. Our agent advised to wait until April to list.
2. I’m presuming the sales records are delayed – ie, contracts entered into in February with 30-day escrows are reported as sales in March? So your March/April data is actually Feb/March?
3. Many people waited on the sidelines early in the year until the new agency-jumbos where available, and then where disappointed. Rates on jumbos since have rarely been below 7%… and seem to be rising with inflation expectations.
4. My sense is that April is when the reality of the housing crisis really started getting publicized, and sales really started slowing down – at least in the bay area. I’m watching the market in the east bay area (LaMorinda, San Ramon, etc) and very little is moving in the 800k-1.5m range.
My point (prediction?) is that I think May/June sales numbers are going to be amazingly bad. I wouldn’t be surprised to see inventory burn go negative.
May 30th, 2008 5:30 pm
Great video and GRRRRR….have to say I am lovin’ the 2 day beard thang…makes me wanna’ lick it!
May 30th, 2008 5:44 pm
The news isn’t entirely bad for those with properties in that 800k-1.5m range. At least with no inventory moving, the comps and values are going straight down like those with homes in the 500k-800k range. Of course, the higher valued properties time will come, but probably won’t not as bad. I’m still a firm believer in MM’s opinion that the pending Alt-A/HELOC and Opt. Arm meltdown will make the subprime mess look miniscule by comparison if some type of programs aren’t created to keep the owner-occupied homes at least out of foreclosure. It’s amazing that the lenders aren’t doing more every day to attempt to offset this pending disaster.
May 30th, 2008 6:20 pm
You know why ? Because the lenders are morons. They believed in the Greenspan put. And now the jerks from Bloomberg, CNBC, MNBC still believe in the prevalent FED religion. You could this “From the Greenspan to Bernanké put.
In the FED we trust and the whole Mister God-FED bull.”
Complacency, imperial arrogance but mostly abyssmal asiatic stupidity. The should cut the oxygen to the US banks, FED included. But the chineese, japaneese and the stupid arabs are weak and dumb dumd dumd. They still don’t understand that nothing will be left of purchasing power of the dollar. These stupid morons from Ukraine, Russia or Vietnam don’t understand why they have 30% inflsyion. Real stupid foreign morons. They will be left holding the bag. All thes foreign morons also believe in the FED put too. USA is still the luckiest place in the world. You can thank the stupid foreigners.
May 30th, 2008 6:40 pm
good thoughts Kis…mortgage volume is way down in May too, purchases and refis. The new conf-jumbo is not selling even at 6.25-6.5% now.
May 30th, 2008 6:42 pm
Dave, you are right about the super jumbo props, but not for long. You better have fresh comps every 6 months or the lenders will freak. The problem with super jumbo props is when they lose value they do it fast. 1.5 mil becomes 1.1 mil overnight.
May 30th, 2008 7:12 pm
You said it. My brother just bid on a pending foreclosure / short sale property in Danville. Was listed at $1.1m in January, and he is now the high bidder at $800k. Going to drop comps from $550/sqft to $400/sqft overnight, as there are very few other properties sold lately in the area. There are active, 3-6 month old listings within 1 mile at over $600/sqft. Something tells me they are getting a wake up call soon.
If I was a lender, a 20% down payment wouldn’t be enough to protect against that type of overnight drop.
May 30th, 2008 8:22 pm
I agree with Kis, great work Mr. M – I realize you focus on the CA market, I live in New Hampshire, south, though, only about 30 miles from Boston – what I have noticed here in the past few weeks are houses being listed by an agent (who I think likes to buy her listings) popping up in a very tight 1 mile radius – all have been listed at 06′ prices in my opinion – 800 to 900k plus – for this area it is close to the top range. My husband and I have a hard time believing there are many buyers for these properties, but my bigger question is, do these people think they are getting out at the top? (are you kdding me), or they are so leveraged they have no choice but to hope they can sell?, (I’m thinking the latter) – none of this seems very pretty to me….I would love any thoughts you all have. thanks
May 30th, 2008 8:24 pm
Since negative equity is the leading cause of foreclosures wouldn’t that make everyone who has bought a house within the last 4 years in the bubble states more likely to foreclose? Especially the people who bought houses at the peak of the bubble. This appears to me like it would be the worst part of the housing crisis. Why would anyone stay in their home if it loses more than half of it’s value?
May 30th, 2008 8:31 pm
Ben – that is exactly why this crisis is so much worse than anyone can imagine.
May 30th, 2008 8:33 pm
Thats intersting evil…it could be a number of people and realtos getting together to try and effect prices by painting the MLS tape.
May 30th, 2008 8:46 pm
As American as apple pie…
http://hsgac.senate.gov/public/_files/052008Masters.pdf
Mr. Mortgage, you thought you had the turpitude figured out…
May 30th, 2008 8:50 pm
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. Again, no inventory has moved.
great analysis
I share your sense of urgency. The American people have a choice: they can suck it up, that is endure humiliation, loss of status, move in with the in-laws or lose their country. How is that going to happen you ask? Continued government spending, government borrowing, devalued dollar. Talking about burn rate. The Fed has got $800 billion to prop up the banks – what happens when that’s gone?
God bless America
May 30th, 2008 9:41 pm
45 North – the only way out of this is to throw more money at the banks for a national mortgage principal balance relief across the board. National debt foregiveness. These fuching banks, primarily the wall st bank, get a free money hall pass when they were the ones who engineered all the these ‘creative’ inventment vehicles that are now blowing up. Lehman is the one who really gets my panties in a bunch.
May 30th, 2008 9:54 pm
admin: the only way out of this is to throw more money at the banks
admin, I’m a Canadian. Canada is in this with the US like it or not. Promises for a quick exit are a trap. Endure as best you can.
May 30th, 2008 11:03 pm
From the numbers I have seen, it seems the Alt-A defaults should be peaking in a year or so. Add 9 months for the foreclosures to get to REO and we could be getting out of this.
Once the REO supply decreases the burn rate will increase.
Although the next 18 months will likely see a large drop in value, it does not mean the loans in negative equity will become REO. A large part of the negative equity will be held by equity loans that will not foreclose. And people with fixed rate loans will just keep making payments.
Also consider that multifamily is considered to be the strongest commercial investment right now as there is a likelyhood of rents rising. There will be a pschological tipping point as rents rise and prices fall which will cause people to buy again. As renters start to buy, we will hit a bottom and investors and families moving up to larger houses will return. The question is how long this will take.
One final note: Some of the excess inventory will eventually become abondoned at not part of the market. There has been building on the outskirts of towns all across the state that has no jobs nearby or retail to support it. Some of these will just become empty.
May 30th, 2008 11:35 pm
Hi Dom,
Take another look at alt-a and pay option arms in particular. Pay Options will be a total wipe out. We have alt-a pain coming for three years at least. It will require a massive bailout.
Negative equity has become the leading cause of loan default. Granted, not all will default but I bet as prices tumble defaults increase across all paper grades.
Multi-family and all invetor 1-4’s are strong right now but I think due to massive rental supply coming on, renst will weaken significantly. With mortgage lending gone, you would think that the opposite will occur.
I urge you to read these re: alt-a, pay options and foreclosures. These are all from the past month or so. They tell the whole story.
http://mrmortgage.ml-implode.com/2008/05/13/84/
http://mrmortgage.ml-implode.com/2008/04/17/alt-a-disaster-looming-know-the-facts/
http://mrmortgage.ml-implode.com/2008/04/06/arm-resets-just-beginning-a-closer-look-at-the-arms-reset-problem/
May 31st, 2008 3:31 am
Mr Mortgage -
While I agree with the numbers you put in, and I agree with your premise, that we are in deep doo doo, I would like to propose a different model.
The goal for the model is to answer this question: how long until we can return to BAU (business as usual)?
I’m going to simplify. Pretend organic supply remains the same, and that REOs are simply added to total supply. (In truth, I would guess that REOs get sold while organic supply gets suppressed, but the numbers come out the same).
foreclosure period = “foreclosure supply” / 30k units per month
burnoff period = foreclosure period
Time until BAU = 2 x foreclosure period
So the key value is, what’s foreclosure supply? Here’s my analysis.
Foreclosures happen because people cannot afford the homes they have. Simplistically, we can determine these people by the mortgages they selected. If 75% of the people that bought during the bubble got an exotic mortgage, we assume for this discussion they are “foreclosure supply.” (I don’t know the real number – I’m pulling this one out of thin air)
foreclosure supply 1M = 40k/month x 36 months x 0.75
That’s a 33 month “foreclosure” period, at 30k/month. Based on that analysis, I think California has 3 years of foreclosure period, and another 3 years of burnoff period. Things will be more or less back to normal by the end of 2013.
What do you think? Simplistically put, it will take two times the length of the bubble to recover from it. I mean, that kinda feels right to me. The hangover is twice the length of the party.
May 31st, 2008 8:45 am
REO’s are becomming a larger and larger % of sales each month due to the fact banks are discounting so heavily and home oeners cant. Of course, this drives values down and more into foreclosure.
I like you line of thought but I dont understand a few things.
First of all, nobody knows what the foreclosure supply is because of course, it has ramped up so hard in the past year. 16 monts ago 3300 units per month were going back to teh bank. In April, 22300. We know already that 163k Notices of default were issued in Jan – Apr meaning 122k homes will go back to bank from May – Aug.
So, we stand at a 360k per year run rate of REO. That may increase. Also, the sales may very well decrease as they typically do according to seasons. Right now we are at a 250k run rate for 2008.
But you are right about one thing, foreclosure supply is not infinite therefore counting a months supply as I have done of 4.25 years is likely incorrect. It could be longer, it could be shorter. But it is a good example of the problem.
A ‘retun to normal’ will only happen when home values drop enough where the median income can buy the median home in a specific region and/or it is more advantagous to buy vs rent. What happens in 2013 when rates are 22% due to hyperinflation caused by the mess we have today?
There are so many wildcards looking into the future that is is impossible to predict anything that is why I kept coming back to the here and now with my analysis.
I do like your line of thinking though and have to think more about it. It does make sense but there has to be a way to factor in all the variables.
May 31st, 2008 10:32 am
Desperate builders are making it harder for the bankers here in Port St. Lucie, Fl. In the last few days I have seen new homes being offered for 99-109,000 dollars. Slightly larger ones are going for 149-189,000.
Two years ago the cheapest house we were working on was selling for $220,000 and that did not include the lot which added another 80-120,000 dollars.
To compete dollar wise would mean an incredible loss per house for the banks. This mess is mind bogling.
May 31st, 2008 11:16 am
An American Enterprise Institute economist has written, who is no Cassandra, has written the following regarding the macroeconomic outlook:
May 31st, 2008 11:47 am
Thanks for the update on inventory. I wish you would focus on cities. I’m in San Diego and would love a real analysis of what’s happening here.
I’ve had realtors quote me the WSJ. Luckily I already came across your counter to that story and once the realtor said WSJ, it became a teacher in Charlie Brown cartoon — wa-wa wa-wa-wa – I just ignored what he had to say in his sales pitch.
I’ve been tracking defaults and foreclosures the past few months in the area I’m interested in buy ing. I guess I should go further back in time.
I like the slight facial growth, too
May 31st, 2008 12:34 pm
Once again, thanks for all your excellent work. My area of expertise is the energy market, which has been my focus for 5-6 years now. The energy situation is going to be particularly cruel, to LA and Orange Counties, where earlier in my life I spent significant time.
I have spent alot of time driving both LA County, and Orange County. This was especially true when I worked in television, and was all over both counties on “Location”. These are huge land areas in distance and the settled, populated areas go on forever. I frankly don’t think most Americans understand how unique these two counties are in that they are both vast, settled, and of course leveraged to the automobile. While other “endless suburb” areas do exist in the US, many of them have public transport. The Chicago area and the Northeast corridor come to mind. LA and Orange counties are nakedly exposed to structurally higher petrol prices. I mean, this is serious. Historically, the growth in these two counties unfolded over just 50 years, and was almost wholly structured on the automobile, and cheap gasoline.
If the housing crash was the earthquake, then as we go to 8.00 dollar gasoline over the next 2-3 years, it will be like a dam-break and then a Flood on top of the earthquake (apologies to the Chinese were these two disasters may indeed unfold back to back). The bottom line is that there will be no reversion to any historical mean in oil prices, for Americans. It’s simply not coming. That this historic step-change is therefore coming on top of a housing bust makes for a real witches brew–especially California.
Yikes.
May 31st, 2008 12:44 pm
Start praying. Get rid of the FED. Tear up this horrible building in Washington and fire theses jokers and criminals. Jim Roger is right. Hope these clowns go bankrupt.
May 31st, 2008 5:10 pm
So after thinking more about it, I believe that the “around 1M” number is the minimum number of people – lets call them “baseline foreclosure supply” that will be driven by fundamentals to leave their homes. The problem COULD be worse – maybe some 30-year fixed people will walk away when they’re 300k underwater in their 700k house – but it will almost certainly not be any better than the baseline.
So if 1M is the right number, and monthly sales stay at around 30k, 2013 is the best case for when we get out of the mess. It could certainly be worse, especially if your hyperinflation scenario occurs.
Then comes the question, how much larger is the foreclosure supply?
That moves us from the realm of modeling economics of home affordability into the realm of modeling human behavior. What percentage of people will decide to bail because they see their home as a tradable object rather than a place they love to be?
I suspect people haven’t changed much since the S&L crisis of the late 80s. If we could see how people as a group behaved in Texas when they were seriously underwater, we might be able to model what is likely to happen here.
I hit this up from a supply perspective because I think trying to predict the bottom based on pricing will be difficult. My sense of markets is, they tend to overshoot fundamentals on the way down. So even if we do reach the “median salary can buy the median home” level, we will probably go lower than that if there is still too much inventory lying around.
May 31st, 2008 5:24 pm
thanks for the reply mr. m – I never thought of it that way, but it is a very interesting and plausable explanation. But, I don’t know what you all in this thread are talking about – bubblevision keeps telling us this is all over, even some saying dow 15k by december – LOLOLOLOLOL – I swear I don’t know how they get away with it. We are in major sh#% !!!
May 31st, 2008 5:25 pm
Right Dave…human behavior and ‘walking away’ becomming acceptable. I meant we will keep lurching lower until median hits median and then perhaps start to get some leveling out. But, yes ALL markets overshoot to both sides especially bubble markets.
May 31st, 2008 7:57 pm
I love to listening to bubblevision.
It’s a global phenomena. Always smile and if sh^t hits the fan ? Say it will be over in a jiffy. Friday it was so funny on Bloomberg TV. All the Merrill Lynch and all the banking cheerleaders were saying now was the time to buy the banking because it was over. Time to back the truck and acccumulate some banking manure. Time to buy AIG. So funny.
I open my newspapers today. (La Presse). Two pages of complete bullshit. “Les investisseurs reprennent goût aux banques.” (Investors finding banks now interesting and tasty.) I use bubblevision as a contrary indicator. When they say buy, I sell, and when these morons say sell I buy. It works most of the time.
May 31st, 2008 10:11 pm
marc,
I use financial t.v. the same way, I don’t buy a bit of their hype, just to get the release of data, and then form my own opinion to prepare myself / family….So you read the french papers eh? lol.
May 31st, 2008 11:37 pm
Thanks very much for your videos and blog. I agree there is still a lot of pain for the housing market. And talk of bailouts gets my blood boiling. The lenders would love for the government to take the loans/inventory off their hands and sit on it for 10 years if they had to.
Just a quick comment on your analysis. The median price dropping you pointed out has way more to do with the type of homes being sold than their price. As you know, prices could even rise (although that’s not what happened here) while the median goes down. That’s at least one reason why the Case-Shiller index is around. The average person may not get this concept so I think you would be doing them a big favor by explaining it, especially in the context of your other data.
Thanks,
Phil
June 1st, 2008 4:04 am
Si signor. Kaniechna. And a little bit of russian. But the bull is the same in any language and the message conveyed is strangely similar. Usually what is pumped or dumped in the US media, arrives 24 to 48 hours after in Canada. The bubble is global. I read recently a story about the prices of real estate in Kiev. Crazy and scary place for real estate, even more crazier than California ! Some properties are valued at 1,000,000$. Little problem however. A real good salary there, is about 15,000$. So you it’s scary all over. And it’s starting to implode real fast in Eastern Europe too, nor just Spain and England.
June 1st, 2008 11:51 am
[...] Mr Mortgage Quotes: [...]
June 1st, 2008 12:00 pm
The 64 trillion dollar questions are “how long?” and “how far?” will real estate prices in California drop before we see the blood in the streets bottom and the next buying op.
My wild a$$ guess is that we will see prices drop to around the 1996 lows and we could see some sort of buyable bottom in around 2012.
The 1996 lows would point to a further 50% or more drop from where we are now.
June 1st, 2008 2:42 pm
How to solve the problem. Lend even more and permanently to the same people that created the mess ! Crazy !
This is incredible news. Permanent credit from the FED to the same people responsable for the mess in the first place. Disgusting.
“Sugar daddy” indeed. The sugar daddy will the taxpayer but also the other countries financing your deficit and supporting USA greatest export, monetary and credit inflation. Pure moral risk. That way I presume, they will be able to paper over all these problems in California and ship it to Burkina Faso. This cannot be good for anyone, except the crooks on Wall Street.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7EKKQuCqhUA&refer=home
June 2nd, 2008 12:07 am
Thanks for this post!
June 2nd, 2008 9:13 pm
@Dave Fairtex:
IIRC around 2 million foreclosures are expected, conservatively, before we’re through with all of this. The number could go as high as 3 million if we end up in a prolonged and severe recession.
Also bear in mind how long it took for the previous housing boom to unfold. I seem to remember it peaking around 1990 or so, bottoming out in 1995, and returning to its previous peak in about 1999 depending on where you lived. That bust doesn’t seem to me to be anywhere near as severe as the one we’re currently going through, but conservatively I’d expect things to take at least as long to get back to normal, so 2017 would be about right to me…
June 3rd, 2008 6:08 pm
First off I want to thank “Mr. Mortgage” for all the hard work he done and freely shared with those willing to read/listen to it. (Hats off to you.)
Regarding Inventory…I’m guessing your whole point of the topic is to try and uncover the truth about current housing supply numbers that are being published, and the likely misconception that because inventory levels appear to be “dropping” that the market is set to rebound soon. (We might be near a price bottom…within 10%, but no where near the end of this cyclical real estate downturn).
Your efforts show that we are likely to have elevated inventory levels for an extended period of time (4.25 years). However, it is my strong opinion that “affordability” is the underlying base of support for the housing market, and tracking inventory is more or less useless until we get back to a sustained 5 months inventory level or less (at which point a rebound in prices will occur). You bring up a good point about counting the “shadow inventory” though and this is certainly something to monitor over the next few years.
With that said, let’s take a look at affordability. If we have a median price of $354K (as of April 2008) and a median household income of $66,810 (per the Franchise Tax Board for 2006) and a market interest rate of ~6%. We are getting really close to affordable, which might suggest a stabilization in the Sales Volume (or maybe even a sustained up-tick as seen in April).
Now, back to the affordability equation…Let’s qualify the median income buyer with $66,810. We’ll allocate 34% of gross income to cover the Mortgage Payment (P+I)…($66,810 * 0.34 = $22,715…divide by 12 to get the monthly amount $1,892.95 the “Median Buyer” can afford).
Take the Median Home Price of $354,000, assume a 10% down payment of $35,400, and a blended market interest rate of 6.12%. (6% 1st & 8% 2nd) and you get a (P+I) payment of $1,934.82. That’s pretty close to affordable for our “Median Buyer”.
I’m not a mortgage broker, so I’m only guestimating on the market interest rate, but I think my point is clear. We have quickly reached an “affordable” median home price here in California and I think this will START to serve as a floor of support for home values moving forward.
Sales will SLOWLY start to increase from here because “median buyers” can afford to buy (and more importantly afford to stay in their home), which will help to prevent future REO inventory & more downward pricing pressure. We will GRADUALLY work through existing inventory & “Shadow Inventory” over the next few years.
How long will this take? That’s anyone’s guess, as it’s a moving target with lots of variables. If home prices drop much further and we “overshoot” true market value on the way down (which I suspect we will) than the rate of inventory absorption will increase. Or if incomes increase and/or interest rates decline we will also see a faster rate of absorption…(the opposite is obviouly true if incomes fall and/or interest rates increase.) Market rents are also a factor and have been rising steadily, however, the increases could slow or reverse if REO inventory starts coming back as rental inventory in mass, which happened in the 1990’s downturn.
Bottom line, I think we are within 10% of a price bottom (or a median price of about $320,000) which we will see in early 2009. Median Home values will stagnate between $320-$330K for the remainder of 2009 & 2010 before we start to see price increases above inflation again in 2011.
At which time (in 2011) we will have a Median Household Income of approx. $72,095, a median home value of say $330,000 and a market that will be able to support an interest rate of about 7.5%….
…only time will tell.
June 3rd, 2008 9:22 pm
[...] CA Housing Crisis, The Real Story…4.25 Years Supply??? [...]
June 4th, 2008 1:49 am
Good thinking KO but I still think supply outweighs affordibilty.
June 4th, 2008 12:46 pm
I understand your point regarding the “weight” of supply, but at some price you, me & almost everyone would raise there hand and say “I’ll buy it!” For the end user (i.e. the home owner) that price is higher than what I am willing to pay as an investor because I need a return on my investment. The end users “return on investment” is pride of ownership and control of his/her domain. This “market value” is sustainable at the point where it becomes affordable.
There is a buyer for every property at the right price, and that price is market value.
Thanks again for all your great work!
June 4th, 2008 1:15 pm
Existing owners cannot unload their houses until 1) they find a qualified buyer, and 2) they qualify for a mortgage on another house. The chain starts with a new buyer. How many new buyers are there with an adequate DP and the qualifying income to buy a home at current (declining) house prices? How many will there be in 6 months or so as layoffs increase? The number of qualified buyers will steadily shrink. The rush-for-the exits is already in progress for non-owner-occupied houses (’investments’) and will continue to accelerate. The inventory of houses-for-sale will continue to increase and reach unheard-of levels. Prices will continue to drop precipitously until they reach ‘bargain’ levels and you can pick up a house for a ’song’. What will all of this lead to?
‘For Sale’ inventory levels which EXCEED the 50% level of the Great Depression!
We have crossed the Event Horizon of America’s Black Hole – and the Grand Depression is just the beginning of The End!
Now how’s that for Mortal Optimism?!
Of course, Eternal Optimism is my beat!
June 4th, 2008 1:28 pm
I have issues….with your inventory burn calculation.
From a mathematical standpoint, taking the last 4 months of average sales information and extrapolating it to the population of remaining homes will yield the worst possible result since during that 4 month period we were knee deep in the housing crises.
The alternative would be to look at housing depressions in the past and adjust your average inventory denominator to reflect some sort of recovery factor that will occur in the future. But again, we are in uncharted territory with demand being driven not only by supply but by factors such as available financing. Anyhow, I would bet that if you did this the actual burn rate, optimistically, would not drop below 3 years (inclusive of shadow REO inventory). But 4.25 years vs 3 years (tomatoe vs tomaatoe) might not be much of a difference but yields a more realistic burn rate.
Also, I would recommend that numbers have a (-) negative symbol to drive home the point in the column labelled “1 year price decline”. As it stands, it make it seem like a increase in units sold….
June 5th, 2008 1:50 pm
[...] those of you so inclined, I released a lengthy report entitled “CA Housing Crisis, The Real Numbers…4.25 Years Supply!” a week ago and the report dovetails nicely with this local story from the Contra Costa Times of [...]
June 8th, 2008 1:48 pm
Great work Mr Mortgage. With regard to California versus many other states, the law on deficiency judgements is critical. For example, in Colorado and Louisiana, one cannot simply walk away from his mortgage as in California, unless he has no other assets. A friend of mine in Louisiana had to give his bank 20K in 1998 to let him walk, otherwise they could have tapped his retirement fund.
June 11th, 2008 12:00 pm
[...] But, how can you truly judge sales and inventory numbers when the banks are taking back as many homes at auction as sell each month? Remember, the ‘months supply’ number is calculated using ‘listed’ inventory and a very small percentage of bank REO inventory is listed. The amount of ‘non-listed’ bank REO, shadow inventory, is staggering. I recently did a research report on this that showed over 4.25-years supply in CA. [...]
June 11th, 2008 5:29 pm
[...] about Las Vegas, what about Southern California, how about Florida? In a separate post he gives 8 reasons why the housing crisis in our fair state is probably worse than we think, which includes the high inventory, the “catastrophic” fall in median home price, and [...]
June 13th, 2008 11:42 pm
[...] CA Housing Stats, The Real Story…4.25-years Supply?!? [...]
June 18th, 2008 2:14 pm
[...] Home Prices Are in Your Interest Villains in the Mortgage Mess? Start at Wall Street. Keep Going. CA Housing Stats…The Real Story. 4.25 Years Supply?!? House flipping now can draw hefty fines June 4, 2008 | Filed Under Housing Crunch [...]
June 19th, 2008 1:54 pm
[...] CA Housing Stats, The Real Story…4.25-years Supply?!? [...]
June 23rd, 2008 12:56 am
[...] CA Housing Stats, the Real Story – 4.25-years Supply?!? [...]
June 25th, 2008 10:59 am
[...] CA Housing Stats, The Real Story…4.25-years Supply?!? [...]
June 30th, 2008 12:45 pm
[...] CA Housing Stats, The Real Story…4.25-years Supply?!? [...]
January 13th, 2009 3:19 pm
I understand I’m a little late to the conversation here, but here’s an update on housing inventory from the Los Altos Reasearch:
Across the 10-City Composite Index markets, inventory declined by 5.1% in November and 7.5% over the past three months. Inventory fell by the largest amounts in Boston, San Francisco and Seattle. “Inventory levels have continued to decline for many months and November was no exception,” said Stephen Bedikian, partner and research director for Real IQ. “The real estate industry continues to work through the large inventory overhang but only very slowly.”
I don’t know if you built these decreases into your analysis, but there seems to be slow soft occurring We’ve ( RealEstateSpace.com) also seen the decrease in listings on our site as well. Its been slow and steady across the sunbelt, with December marking the 3rd straight month of inventory declines.