August was not good for the CA real estate market. Just one month after pom-pom’s were flying over how well the market did in July and bottoms were again being called across the board yet again, August, a peak sales month, delivered another blow. Total sales were off, organic sales were off, foreclosure-related sales rose, defaults rose and prices tumbled.
This Wednesday’s ‘official’ existing home sales report from NAR will also likely show a fall unlike last month’s false-bottom surge that I warned you about in my July CA Home Sales Report. This post is meant to identify the micro aspects and many moving parts of the market and why beneath the headlines conditions continue to actually worsening each and every month.
When it comes to housing and finance, you can’t read headlines. Most are either outright lies or written by those who do not have a grasp of the topic. You have all learned this hard lesson over the past year and a half. This week’s national ‘existing’ and ‘new’ home sales reports will be no exception.
For the past many months, my monthly CA home sales reports have (on the surface) very closely mirrored the monthly ‘existing home sales’ report from NAR (due Wed the 24th). But the ‘official’ monthly reports do not analyze and break down the market in the manner needed 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 number is key. If you are a financial market participant, you know that the monthly existing and new home sales reports get the markets very hot and bothered. Perhaps this will give you a heads-up to this week’s respective reports.
‘Fewer Home Sold’ is back to being the headline after a surge in July. Even worse, foreclosures as a percentage of total sales jumped to 46.9% and prices tumbled on the median by 5.3%. Highlights include:
Inventory is not being absorbed due to foreclosures surging in Aug with only 12,679 homes leaving the inventory pool making for over 3-years supply.
Ma and Pa Homeowner (organic sale) are being squeezed out and can’t compete with bank REO sales or refinance accounting for only 20,172 total sales, or an all-time August low.
Banks took back 5,137 more homes than sold organically in August.
Values continue to tumble, down 5.3% in August alone, pushing all homeowner’s net-worth lower and many into an even deeper negative-equity position and an exponentially greater chance of loan default. Crashing prices pushes the mortgage implosion into higher-paper grades due to ‘the negative-equity effect’.
Foreclosure related sales reached a record 46.9% of total sales. In heavier subprime and/or foreclosure regions, foreclosure-related sales were over 80% of total sales. Short-sales are also counted as total sales and are typically ‘organic’, so the number of ‘distressed’ sales in the state in likely far greater than the 46.9% figure would suggest and true healthy ‘organic’ sales far less than 53.1%.
Despite what the major media headlines say, the housing market is worsening. The facts are right here. This report makes it more evident than ever that ‘the foreclosure market is now the Real Estate market and the banks are the market makers.’
Please show me a month where sales are up, foreclosures are flat or down and prices are flat or up. That would represent an improvement. Sales dropping while foreclosures surge and prices crash scream loudly about where we are headed.
In order to get a handle on the inventory, true burn-rate and the market in general, you have to track and separate every segment of the market, which I have done in my ‘CA Housing Market Nightmare Chart’ at bottom of this page.
For example, if you back out foreclosure-related sales, which were 46.9% of total sales, the picture is especially bleak due to banks taking back 5,137 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 because resales have always made up most of the market. New home sales and foreclosure resales have always placed a distant second and third.
In addition, organic sales languishing 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 or refinance and are stuck, perhaps with an exotic/unaffordable mortgage or a negative equity position, they are at an exponentially greater risk of loan default. This of course will add further pressure to the housing market.
Last September at the end of the summer selling season, CA values began their plummet. If sales do not surge this month through the Winter, which is historically a slow season, foreclosure starts already in the pipeline will overrun sales and inventories will continue to grow further depressing the market.
In August, only 12,679 homes were taken out of inventory. Year-to-date only 65,386, or 8,173 homes 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 withthe number of REO sales increasing, prices continuing to drop and being in a peak summer sales monththat sales would have been much stronger in August. Instead, total sales were down, the market worsened from last month and organic sales fell, which makes for the slowest August since DataQuick began tracking in 1988.
With bank foreclosure inventory hovering at record levels, sales need to double from here through the Winter 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 impossible. Remember, this is the first Spring/Summer selling season in five years without a full menu of “exotic/affordable” loan programs to drive affordability and interest only, Pay Option ARMs, stated income and 100% second mortgages are not coming back anytime soon.
In the month of August, the key stats are:
37,988 Total Sales; down 3.9% from Julys June’s 39,507 and the slowest August for organic sales since DataQuick began reporting in 1988.
46.9% of Total Sales (17,816) were Foreclosure Resales; up 2.1% from last month and 1100% from two years ago.
21,172 ‘Organic Sales’ (Total Sales less Foreclosure Resales). This is down 1640 homes from July.
$301k median price; down 5.3% in a single month and a whopping 37.9% from last summer. As expected long ago, prices are gravitating towards the most readily available financing: Agency <=$417 conforming.
43,205 new Notice-of-Defaults, which will result in 34,500 new foreclosures 4-5 months from now.
213,500 new Notice-of-Defaults in past 5-months= 171,000 new REO from 4-6 months out as they move through the system.
25,309 homes went back to the bank as REO totaling $10.65 Billion…second highest of all time.
Only 12,679 units left inventory (Total Sales less New Bank REO)
Foreclosure-related & Bank REO Sales
Bank REO sales are counted in the ‘official’ monthly Existing Home Sales report making things appear better than they are. They are not ‘organic’ sales however. When you compare year-over-year sales, last year’s foreclosure resales were only about 7% of total and the year before that it was less than 5%. It is an apples-to-oranges comparison. Short-sales are also counted as total sales and are typically ‘organic’, so the number of ‘distressed’ sales in the state in likely far greater than the 46.9% figure would suggest and true healthy ‘organic’ sales far less than 53.1%.
This REO 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 REO inventory being dumped, much of it never shown as part of the listed housing stock in the first place.
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 exponentially increasing their chance of loan default. This leads to more defaults and even more Bank REO. It is a vicious cycle; a feedback loop from which there is no escape. Negative-equity is now one of the leading causes of loan default, especially in higher priced areas.
Total CA Home Sales and Foreclosure Market
I believe that a massive property dump is in process and it won’t be seen or felt for a few more months. I call it the ‘quickening’. I talked about it a month ago in my post and video called ‘The Real Estate Quickening is Upon Us’. This is a bi-product of the failing and/or deleveraging of all financial institutions. Some of the only assets left on their balance sheets that are easily liquidated are residential REO and non-performing notes. Demand is high for these asset classes.
I have noticed a flurry of activity in the bulk residential asset space starting a couple of months ago when the FDIC said it would be liquidating IndyMac’sREO and distressed mortgage portfolio. Then, Merrill dumps $30 billion in ‘assets’ on the market to Lone Star who is in turn piecing it out. In the past month, Fannie and Freddie threatened to dump and Lehman is being liquidated through bankruptcy. In the past week, other large firms have stated their intent to finally liquidate and this latest $700 bank bailout should result even more inventory.
If I were the CEO of a bank holding sizeable real estate assets, I would want to get ahead of these large players and dump at any cost right now. Look out because a massive amount of inventory may be headed for the pipe.
It is the liquidating of bank owned residential real estate, which now makes up nearly half of all home sales, that is responsible in part for such massive price drops around the nation, especially in the bubble states, over the past year. With foreclosures continuing to increase, the last thing this fragile market needs right now is more supply.
The real estate market needs more buyers…period. But where do they come from? Move up buyers have always been the dominant force in the market. However, most homeowners who purchased between 2003-2007 can’t afford to re-buy the home they currently live in let alone thinking about moving up. Even if they could, so many are underwater that they can’t sell. That leaves first time home owners and renters to carry the real estate market going forward and they have always been the weakest market participants.
The negative equity time line keeps moving backward at an amazing pace folks. The further back in time it moves, the more become underwater and the higher up the paper-grade chain this crisis moves. If sales do grow and prices stabilize into the Winter, which would be an historic event, and the number of foreclosure sales continues to grow as a percentage of total sales, where does this leave Joe and Jane Homeowner who did everything right and the builders? How badly does this hurt borderline borrowers who are only hanging on due to the small slice of equity in their home? 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 overshoot and subsequent total meltdown. -Best, Mr Mortgage
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