Last month home sales surged in many states around the nation especially in CA where they jumped to 39,500, up 12.2% June. However, values also fell 3%, foreclosures ran over 30k units and foreclosure-related sales as a percentage of total sales surged to 45%. This means ‘organic’ sales were running in the 20k range, the slowest July in recent history.
To me, this means that the overall housing market continues to worsen. (Please see my July CA Home Sales Report). Show me a month where sales do well but prices are stable and foreclosures decline and that is a light at the end of a long tunnel. That has not happened yet.
But who is buying all of these homes? In CA, values are down 35% in the past 14-months! We know that a large percentage of home owners are literally ‘stuck’ in their home unable to sell or refinance so they are not buyers. The all-important ‘move-up’ buyers do not exist to any great degree any longer because affordable mortgages are gone and many can’t even afford to re-buy the home they live in today. ‘Move-down’ and ‘lateral’ buyers are not out in any great numbers also because of the two reasons above.
First time home buyers and current renters are about the only groups out there in a strong enough position to buy but historically they make up the smallest percenatge of total sales. How can sales be up so much then?
SPECULATORS! No way. After a 10-year bull run in housing and only 14-month fall speculators could not be in there buying up properties already. The specific purchase data don’t show this to any great degree. But other data may.
For some reason, as purchase volume is rising sharply Mortgage Insurance volume is plummet ting. This is a strange phenomenon. First time home buyers and current renters are not the 20% down crowd but investors/speculators are. For one reason, because most non-owner occupied loan programs require more down payment but many speculators also put more down to try to avoid detection if they are calling the purchase a ‘primary residence’ or ‘second/vaction’ home.
We know that 45% of all home purchases in the State of CA were from the foreclosure stock and similar numbers hold true in other bubble states around the nation. The largest sales increases are coming directly from the subprime epicenters such as the Central Valley, Sacramento and the Inland Empire. Could speculators be once again in control of the real estate market? For their sake and ours when these buyers find themselves deeply underwater and amidst plummet ting rents in the near future, I hope I am wrong. But the MI readings may show otherwise.
They think they are ‘investors’, but I call them ‘speculators’ because if they really looked at the micro aspects of the market like I try to do in my monthly CA Home Sales and Foreclosure Reports (links above), they would see they are trying to catch a falling knife. This first group of speculators are likely the old-school real estate folk who feel that if you buy at replacement cost plus land value you can’t go wrong. They can.
I personally know a few of these gamblers with offers out on a dozen homes at any time in the Central Valley. Funny, they have been doing this since last year year and every month prices still fall. They don’t seem to get angry but just keep putting in more offers thinking the values are getting even better. That’s subjective. If rents are falling, mortgage rates rising and underwriting guidelines tightening, then homes are becoming even more expensive even if it is not reflected in the price…yet.
Most are forgetting about the foreclosure hangover, negative-equity dragging even the best borrowers double-digit percentages underwater and exponentially increasing their risk of default, falling rents, tightening lending guidelines and the massive inventory of approved, empty lots.
When you do a one-mile radius search (appraisal zone) in Foreclosure Radar of any neighborhood in Tracy, CA for example, you will see between 100 and 300 homes in some stage of foreclosure. That is what I call ‘foreclosure hangover’. That is a lot of supply coming down the line that will result in lower prices. As prices fall, even better borrowers will begin to default meaning more foreclosures down the line. It could even hit some of the early speculators that jumped in at the beginning of summer for example. If the speculators performed even a basic rental survey in the same areas they would see that rents are steadily dropping as the foreclosure inventory is purchased. If they are following the mortgage disaster, they would learn that each and every month, lending gets tighter reducing affordability. Lastly, the improved lot overhand is massive. Some place the total at over 70k lots sitting, awaiting a build-job in the Central Valley alone. This means land is essentially free.
I am absolutely positive that some of this surge in sales and drop in Mortgage Insurance is also from the ‘Buy and Bail’ crowd as one of our knowledgeable readers, David S, points out in the following story from the Housing-Kaboom blog . This story also talks about phony short sales. It is a great read. – Best Mr Mortgage
M.I. Volume Sinking Fast – August 29, 2008 By Mortgage Daily staff
Mortgage insurance activity has fallen by half over the past year, is at its lowest level in nearly a decade and is headed lower. But as mortgage insurers tighten their guidelines, the quality of new business is likely improving.
Last month, 70,725 policies were written for $12.3 billion, the Mortgage Insurance Companies of America reported today. Activity dropped from 74,779 policies for $13.7 billion during June.
Volume was less than half the level in July 2007, when 171,585 policies were written for $26.6 billion. The latest month’s activity is the lowest since 2000.
$12.3 billion in MI in July is a familiar dollar amount. In July in the State of CA alone, $12.5 billion in foreclosures went back to the bank due to no buyers at the Trustee Sales (foreclosure auctions). Please see my July CA Forclosure Report.
July’s volume included 70,588 traditional policies written for $12.3 billion and 137 bulk policies for less than $0.1 billion.
Future business is likely to head even lower based on declining applications. During July, 86,734 mortgage insurance applications were received, falling from 90,896 the prior month to the lowest level since at least 1999 — the oldest data available to MortgageDaily.com
Source: Mortgage Daily August 29, 2008
Other Mr Mortgage Related Stories