When it comes to housing and finance, you can’t read headlines. You have all learned this hard lesson in the past year and a half.
For the past many months, my monthly ‘CA Home Sales Report’ has, on the surface, very closely mirrored the monthly existing home sales report from NAR (due Thurs 24th). But the ‘official’ monthly reports do not analyze and break down the market in order for you to get the real story. That’s what I am here for.
If you are a home owner or potential buyer, knowing what lies beneath the headline numbers is key. If you are a financial market participant, you know the monthly existing and new home sales reports get the markets very hot and bothered. Perhaps this will give you a heads-up on this Thursday’s and Friday’s reports released by NAR and the Census Bureau respectively.
Below are some sample headlines I tossed around for this story, all of which are true, believe it or not.
- Slowest June Sales in Decades
- Home Sales up for a Second Straight Month in June
- House Values Continue to Drop Sharply
- Foreclosure Sales Carry the CA Real Estate Market
Despite what the headlines say, the housing market is worsening. The facts are right here. <>
DataQuick just released its June CA Home Sales report saying that “more homes sold,” which on the surface looks great! But the underlying numbers were far from jovial. Although more homes sold, values are falling, inventory is not being absorbed, overall conditions are worsening and June overall and organic sales were at the slowest pace since DataQuick began reporting in 1988.
The report makes it more evident than ever that ‘the foreclosure market is now the Real Estate market.’
In order to get a handle on the inventory, true burn-rate and the 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.
For example, if you back out foreclosure-related sales, which were 41.9% of total sales, the picture is especially bleak due to banks taking back 3100 more homes than sold “organically”. An organic sale is a transaction between two private parties and not from the foreclosure stock.
I think ’organic sales’ are especially significant becuase they (resales) have always made up most of the market. New home sales and foreclosure resales used to place a distant second and third.
Seeing organic sales languish is a leading indicator of mortgage loan defaults across all paper types continuing to increase in the future far in advance of actual events or published data. If individuals can’t sell their homes and are stuck, perhaps with an exotic/unaffordable mortgage or a negative equity position, they are at a much greater risk of default. This of course will add further pressure to the housing market. Last Sept at the end of the summer selling season, CA values began their plummet. If sales do not surge right now, we could be looking at a repeat event in a couple of months.
When you look at all of the ‘parts’ of the market, you will discover that the overall CA housing market is at a stand-still and has been all year. Despite sales increasing slightly over the past couple of months, inventory of ‘MLS Listed’ homes and bank REO continue to grow. In June, only 11,676 homes were taken out of inventory. Year-to-date only 41,435, or 6,906 per month, have been taken out. The numbers are not good. Similar stats can be found in other foreclosure-heavy states.
One would hope that with the number of REO sales increasing, prices continuing to drop and being in a peak sales month, sales would have been much stronger in June. They were essentially flat and represent the slowest June since DataQuick began tracking in 1988.
With shadow inventory hovering at record levels, sales need to double from here in order to chew through the inventory already in the ‘MLS Listed’ channel and bring the “month’s supply” figures down to the 10-11 months that is thought to be accurate for CA.
This will be difficult. This is the first Spring/Summer selling season in five years without a full menu of “exotic/affordable” loan programs to drive affordability.
In the month of June, the key stats are:
- 35,202 Total Sales; up 6.2% over May’s 33,024, but still the slowest June since 1988
- 41.9% of Total Sales (14,750) were Foreclosure Resales; up 8.6% from last month and 1000% from one year ago.
- 20,452 ‘Organic Sales’ (Total Sales less Foreclosure Resales). This is up 76 homes from May.
- $328k median price; down 3.25% in a single month and a whopping 32.25% from last summer. As expected long ago, prices are gravitating towards the most readily available financing: Agency <=$417 conforming.
- 42,151 new Notice-of-Defaults, which will result in 33,500 new foreclosures 4-5 months from now.
- 171k new Notice-of-Defaults in past 4-months = 136k new REO from 2-6 months out
- 23,526 homes went back to the bank as REO (shadow inventory)
- Only 11,676 units left inventory (Total Sales less New Bank REO)
- Total MLS-Listed Inventory grew to 310-325K going into summer selling season from approximately 275k a few months back.
On Thursday, we get the NAR Existing Home Sales Report, which may show a similar headline…”Existing Home Sales Rise.” The markets like to get all hot and bothered over this number. But, unless you look at all the data and take it in context, the number is deceiving. With all of the data in hand, it is obvious the market is worsening.
Of the total sales, 41.9% (14,750) 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 mostly 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 official report, which is deceiving. When you compare year-over-year sales, last year’s foreclosure resales were only about 5% of total. It is an apples-to-oranges comparison.
This shadow inventory is being sold at massive discounts to the note amount and recent comparable sales in any given neighborhood. Foreclosure resales pose the primary threat to home prices across the nation, followed closely by the lack of affordable loan programs. 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, values are falling and supply is shrinking according to the MLS. In reality, the true inventory is not falling due to the bank REO inventory surging and sales stagnating.
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 the leading cause of loan default.
In June there were 35,202 total sales, 14,750 (41.9%) of which were foreclosure resales, leaving only 20,452 organic sales. This is a multi-decade low for June. There were 23,526 homes totaling $10.2B that went back to banks and 42,151 new Notices-Of-Default. June NOD’s will bring about 33,500 additional homes that will go back to the banks as shadow inventory 4-5 months from now.
In the past 4 months, 171k Notices-Of-Default were filed, meaning 136k homes will go back to the bank as shadow inventory in the next 6 months. The median price dropped once again to $328k and stands 32.25% below its 2007 all-time price peak. Finally, only 11,676 homes left the inventory pool based on 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, we remain on track for an absolute housing downside overshoot and subsequent total meltdown. -Best, Mr Mortgage <>
CALIFORNIA HOUSING MARKET CHART – THE WHOLE STORY
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ABOUT DATA SOURCES USED ABOVE
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