Mortgage Insurance Update – Speculators May Now Control Purchase Market

Posted on August 31st, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

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

Source: Mortgage Daily August 29, 2008

Other Mr Mortgage Related Stories

Record Foreclosures Sweep CA in July – Breaking News

Pending Home Sales Number NOT Positive – Explained

Pay Option ARMs – Up to 48% Default Rate! First Federal Featu

Mr Mortgage on Fannie/Freddie Massively Underestimated Risks

Mr Mortgage: May CA Home Sales Report – Conditions Worsening

Look OUt! Here Comes the Alt-A Implosion

Mr Mortgage on Mortgage Modifications – You May Qualify!

Mr Mortgage onMortgage Modifications Part 2 – BEING FORWARD THINKING


18 Responses to “Mortgage Insurance Update – Speculators May Now Control Purchase Market”

  1. I’ve read very recently that most lenders will not lend to someone with two or more outstanding mortgages already in existance. So, if this is speculators jumping in, and I think I agree, then they may well be using all cash and then resellng quickly. Not needing Mortgage insurance and basically Flipping by buying with cash at 30% to 40% of the existing first mortgage. Bruce Norris is doing this at a furious pace in Riverside County.(See his radio broadcast on his website where he says this.)

  2. My own read of the situation based on anecdotal observations is that speculators are indeed in the market. I live in Little Italy section of downtown SD, and I saw a constant stream of buyers in July coming in and out of my large condo building, and other buildings in the neighborhood. When a some of these closed, they ended up a few days later on Craigslist for rent. One unit I actually wanted to buy to live in, sold quickly before I even knew it was on the market (a foreclosure). Sure enough, it was on Craigslist a few days after closing for rent.

    I also have friends from the Bay Area who came down and took a foreclosure tour. . .the real estate investment mindset is NOT dead! Most of the people I talk with think that the market may go down a bit more, but they are willing to stick it out. . .most are not going to be in cash flow positive, so we will see how long they want to subsidize renters!

  3. peterb – interesting theory, but in the end, who would these speculators be selling to? Wouldn’t they need a “real” buyer, and wouldn’t that show up in the MI numbers?

    I agree with Mark in SD, people are buying to get rental income. I work with people who fully believe that it’s a great time to buy investment property. They scoff when I talk about rents falling – even though it’s such an obvious outcome.

  4. There goes another wave new bagholders catching the falling the knives.

    “There’s a sucker born every minute.” P.T. Barnum

  5. Mudkip, I follow some blogs on this subject and I think you’re right. I read a lot postings where individuals are eye-balling the market for rental properties.(Poorly calculating the costs,IMO) So, I think this is nothing more than a bear rally that should be exhausted fairly easily. IMO.

  6. As we have left the prime transaction seasons in real estate, the speculators et al are going to get really nasty surprises next Spring faced with frozen up markets and unable to sell to each other any longer. Professionals in the business expect seasonal slowing down in the Fall and Winter. Homes will be listed early next year as usual–then nothing. April and May should see full blown panic and not only in re. Then watch the Feds really pile on.

  7. The Kool-Aid is still in full force in the Bay Area. My mother in law subsidized my sister in law’s home purchase at nearly the exact peak of the bubble (10 year Interest Only loan! at 6 times income) and when I asked her if she understood the type of loan she got her response was, “She can write off the interest.” Yes, I know that, but how is she going to afford a substantially higher payment when the loan recasts? Do you know she accepted massive interest rate risk? At a time of historically low interest rates? And she’s banking on appreciation, but two neighbors’ homes are now for sale for $100 less per square foot?? Can you say D-O-O-M-E-D?? But she apparently had no concern when I mentioned these facts. I have to figure there are many more like that besides my mother and sister in law. The Bay Area, yes, the Real Bay Area, will see declines of 50% when this all plays out. Watch and see.

  8. Mr Mortgage, are you familiar with the high-end residential RE in Cali? I’m thinking about places like Atherton and Los Altos Hills. So far, home prices in those places have continued to climb ( Is it a good idea to put money there now?

  9. Hey Tom,

    Are you talking about my loan?? I am north bay. I am down 250k and out of money and work. D_O_O_M_E_D is me. I agree 50% is right on the money.

  10. It was interesting to read the Boston Fed report on negative equity as the biggest factor in loan defaults. Makes the whole system seem just that much more unstable since you could still be fully employed and making money and still default as a financial decision! And this may involve almost all buyers from 2005 onward.

  11. I myself am considering buying 3 to 5 houses for all cash to provide a retirement income stream.

    However, I need these to be at levels that yield 8% after ALL COSTS assuming a 10% vacancy factor. I think that in some markets these conditions exist, but my guess is that some people are jumping in early.

    Expected rental income is the key, however some ‘flippers’ are there believing that the bottom will be in Q3 2009 as per Jim ‘there is always a bull market somewhere’ Cramer..

    Demographics (the aging boomer population, new households with debt but no savings, overbuilding in long commute areas, people doubling up, etc., etc.) suggest that ‘The Bottom’ may well not arrive until 2012 or even latter.

    In such a market, if you can get the right rent, and do not need to sell, purchasing can make sense. But if you need a rising sales price or ‘equity’, forget it.

  12. PeterB, that negative equity is the driver should be taken as read and was apparent a year ago where there had been a boom and where the loans are non-recourse.
    The key question is whether the landlord demand as described above can absorb the flood of foreclosures and whether the prices at which foreclosures are selling at now in the worst areas as REOs is approaching the affordability level for all those renters who have been waiting for years .

    One thing is certain. There is no national real estate market and analysis should build up from regional market forecasts. For example Texas is on another planet from Calfornia/Arizona.

  13. fedwatcher, be patient. The numbers may look good today and horrible a year from now. All cash? You are giving up interest tax deductions, no? You can finance and backstop that by putting the left over cash in T-bills. Also, be sure to incorporate.

  14. Yes, I was thinking CA when I said systemic instability, not USA. Bad habit. Big state. I would echo Brant’s advice about waiting this one out. There seems to be all kinds of pain headed for this market. I cant see any encouraging news on the horizon for CA real estate. Unemployment increasing, credit constricting, defaults rising. Defaults in San Diego county are starting to average 1900/month. Astounding figure! Old record was 1996 at 600/month.

  15. An *all cash* guy bought a beachfront house near me in Boston just last month . He did *work* as fast as he could and is already down to near breakeven on his offering price. He risked 750k for what would be, at best, a 29k profit – today anyway. Rental value of house is probably less than 2/3 of the carrying cost (and of course that is assuming today’s *low i-rates*).

    As I put it, the FIRST falling knife is the most dangerous one to try and catch.

  16. I agree with those who say it is too early to buy.

    I may buy in the spring of 2009, if I find a place meeting my strict criteria.
    – less than $100.00 per square foot
    – 8% return on net purchase price via rent, allowing a 10% vacancy
    – less than 5 miles from major employers
    – a walk ability score greater than 50%
    – etc., etc., etc.

    However, new data can alter my plan. The main reason for my looking at real estate as an investment to generate cash income and not as a speculation to flip, is that it can function as an inflation hedge as well. In a long term deflationary environment, I would lower rents but maintain purchasing power. In a long term inflationary environment, I would raise rents to maintain purchasing power. In all cases ‘affordability’ is key. That is affordable house prices and rents. I want mortgage underwriting rules to be like they were in 1976, not like they were in 2006. Gold does not pay interest, T-bills do and rental properties also. I see inflation followed by deflation followed by inflation. We are at the cusp of the shift from inflation to deflation. But for Real Estate, it is deflation in all classes except for agriculture where prices are continuing to rise.

    Why don’t you look at apartment buildings?

    The problem with apartment buildings is that the current holders expect to continue to raise rents and thus expect a price for their property than is unrealistic. In the future, things will get a lot worse for landlords in general as more communities enact rent-control, it becomes harder to evict, and as the financial condition of ones tenants deteriorates.

    I do not and will not become a slumlord. I want to be able to look my renter in the eye knowing that I am charging an affordable fair rent and that my renter gains economic advantage by renting from me as to location, price, and amenities.

    The ‘greed is good’ message of Wall Street has put us at risk of a major class war. We have allowed Wall Street to sell their BS to the world.

    DEBT is the main problem. Financial engineering, Easy Al, Hank, Ben, and a long string of U.S. Presidents both Democrat and Republican have led us here (the ordering of Democrat before Republican is both alphabetic and that the fudging of our economic numbers started with JFK and continued through each succeeding administration). Thus we now have two ‘Change’ candidates for the title of POTUS.

  17. Don’t forgot the FHA. In July, there were 7,719 mortgage purchase loans endorsed by FHA. In July of last year, there were only 354 mortgage purchase loans endorsed by FHA. Endorsements lag closings by an average of about 5 weeks, so for the most part July’s endorsements reflect June’s purchase activity.

    Needless to say, the increase in FHA purchase loan activity this year is startling, and at least in part reflects an increase in first-time home buyer activity fueled by the plunge in home prices.

  18. Call me what you want but I’m buying 3/2 1000-1500 sq. foot homes right smack dab in So Cal for well under 100k. These homes currently rent for 1300-1400. Currently my average purchase price is 92k which is well below what the people paid when there were new in the 80’s.

    Houses will never be free, the rents are well in line with incomes, and these cash flow like stuck pigs. Speculators, knife catchers whatever, all you “smart” guys said the same stuff during the 90’s. Meanwhile, those with the balls to take action made millions and we are going to do it again.

    It is easy to throw a once size fits all blanket over the entire market but when you (to use your words) really look at the micro aspect of the markets you find pockets of gold. Pockets where the buying activity by owner users is very robust, where there is ample employment and solid rental demand. Pockets where a well priced home receive multiple offers and sell for over asking. Pockets where the bulk of sales are to owner users. But then again, you have your own blog so that means you know much more then us ole knife catchin speculators.

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