Posted on June 19th, 2008 in Mr Mortgage's Personal Opinions/Research
DataQuick just released its May CA Home Sales report…“more homes sold,” which on the surface looks great! But the true numbers were far from it. Although more homes sold, inventory is rising and conditions are worsening. Also, please see the YouTube version of this post if you’d rather listen than read. Just make sure you rate it high, I work for stars!
If you back out REO-related sales, the picture is especially bleak with banks taking back 4500 more homes than sold “organically” (an organic sale is a transaction between two private parties and not a home that came from the foreclosure stock). In order to get a handle on the inventory, true burn-rate and market in general, you have to track and separate every piece of the market, which I have done in the CA Housing Market Chart at bottom of the page.
When you look at all of the “parts” of the market, you discover that the CA housing market is at a stand-still and has been all year. In June, only 8,193 homes were taken out of inventory. Year-to-date only 29,759, or 5,352 per month, have been taken out. The numbers are not good. Similar stats can be found in other foreclosure-heavy states nationally.
One would hope that with the number of REO sales increasing and prices continuing to drop, sales would have been up much stronger in the month of May, a peak month for CA housing sales. They were essentially flat.
With the rate of acceleration of shadow inventory, sales need to double from here in order to chew through the inventory already in the “listed” channel and bring the “month’s supply” figures down to the 10-11 months that is thought to be accurate for CA.
In the month of May, the key stats are:
- 33,024 total sales; up 5.7% over April’s 31,150 but the slowest May since 1995
- 12,648 foreclosure resales; up 7.15% from last month and 700% from one-year ago.
- 38.4% of total sales were foreclosure resales; up about 1% from last month.
- 20,376 “organic” sales (total sales less foreclosure resales)
- $339k median price; down 4.3% in a single month and a whopping 29.96% in one year. Prices are gravitating towards the most readily avail financing, Agency <=$417 conforming.
- 43,301 new Notice-of-Defaults, which will result in 34,650 new foreclosures months 4-5 from now.
- 24,831 homes went back to the bank as REO (shadow inventory)
- 5,352 units left inventory (total sales less new bank REO)
In addition, in the past 4-months, 167k new notices-of-default were filed. If 80% turn into REO, an average of 33,500 homes per month will be taken back by the banks in the next four months, which is more than sales have been since August of last year.
Next Thursday, we get the NAR Existing Home Sales Report, which may show a similar headline…”Existing Home Sales Rise.” The stock market likes to get all hot and bothered over this number. But, unless you look at all the data and take it into context, the number is deceiving. With all of the data in hand, it is obvious the market is worsening.
Of the total sales, 38.4% (12,648) were foreclosure resales. Most of this is bank shadow inventory. These homes are typically not listed so they do not show up in the inventory estimates. They are typically sold through real estate agents or large auction aggregators such as the Real Estate Disposition Corp (REDC). Bank REO sales are counted in the monthly Existing Home Sales, which is deceiving. When you compare year-over-year sales, last year foreclosure resales were only about 5% of total sales. It is an apples-to-oranges comparison.
This continues to verify what I have been saying for months, that “the foreclosure market is the real estate market and the banks are the market makers.”
This shadow inventory is being sold at massive discounts to the note amount and recent comparable sales in any given neighborhood and pose the real threat to home prices across the nation. All over the country, neighborhoods are being marked-to-market overnight due to shadow inventory being dumped that was never shown as part of the listed housing stock in the first place.
It is a real problem when the headline sales number is growing and according to the MLS the supply is shrinking, but in reality the true inventory is not falling due to the bank REO growing faster.
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 homes sell but more homeowners are thrown into a negative equity position. This leads to more defaults and even more Bank REO. It is a vicious cycle. Negative-equity is now known to be the leading cause of loan default.
In summary, in May there were 33,024 total sales of which 12,648 were foreclosure resale’s leaving only 20,376 organic sales. This is a multi-decade low for May. There were 24,831 homes for $10.4 billion that went back to banks and 43,301 new notices-of-default. The new NOD’s will bring about 34,650 new homes that go back to the bank as shadow inventory 4-5 months from now. In the past 4-months, 167k notices-of-default were filed, meaning 133,500 homes will go back to the bank as shadow inventory in the next 5-months, which is more per month than monthly sales have been in the past year. The median price dropped once again to $339k and stands 29.96% below its 2007 all-time price peak. Finally, only 5,532 total homes left the inventory pool given how many homes came back to banks vs. total sales. To cap it off, none of these figures include most FSBO or home builder inventory.
If sales do grow and the number of foreclosure sales continues to grow as a percentage of total sales, where does this leave Joe and Jane Homeowner and the Builders?
If sales do not grow and foreclosure sales continue to grow as a percentage of total sales like we are seeing right now, we have the makings of an absolute meltdown on our hands. -Best Mr Mortgage
CALIFORNIA HOUSING MARKET CHART – THE WHOLE STORY
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