Today, the daytime financial market variety shows are simply giddy over the DataQuick report saying ‘SOUTHERN CA HOME SALES ARE UP 65% OVER LAST YEAR’.
Sorry to rain on the pom-pom parade, but how I see it home sales worsened yet again last month. Let me explain.
First off you can’t compare last year with this year. It would be like comparing loan originations. It is a meaningless analysis. However, you can compare the past three months, which were essentialy flat from near 40k statewide in July, to 37k in Aug and back to 40k in July. So, let’s start here.
Now, let’s talk about real ‘organic’ sales and not foreclosure-related sales, as organic sales are at all-time multi-decade lows.
In Sept 2007, there were 12,455 sales of which 12.6% (1570) were foreclosure related. This means last Sept there were 10,885 ‘organic’ sales, which is ‘me selling a home to you’.
In Sept 2008, total sales were in fact up 65% in SoCal over last year at 20,497. But, 50% were foreclosure related meaning only 10,249 organic sales went off. This is significant and worse than a year ago. Also, remember that last Sept sales plunged by 35% from August due to lenders pulling out of the jumbo market all at the same time so it was not a tough month to beat.
As a point of reference, in Sept 2006 22,654 homes sold in SoCal of which about 4% were foreclosure related leaving approximately 21,500 organic sales. In Sept 2005, 31,740 sold with 30,500 being organic. Now those are robust September sales figures. Ex-foreclosure related sales, Sept 2008 SoCal organic sales are down 66% from three years ago. This goes to show in living color how bad off the housing market actually is.
Organic sales have plummeted as prices have fallen because with values down 40%-70% across the state, so many are underwater. When you owe more than your home is worth you can’t sell or refinance. You are stuck.
With so many underwater and unable to move, who are the buyers? They are investors, first-time buyers and renters, which have historically been the weakest segments which is evident by the weak numbers. The all-important move-up buyer is nowhere to be found because with all of the exotic loan programs gone, they can’t even afford to re-buy the home they live in now.
Additionally, more than 10k homes in SoCal entered the foreclosure process or were actually foreclosed upon during the month of Sept meaning the problem is getting worse because more inventory is coming in than going out. As a matter of fact over the past six months, over 40k borrowers received a Notice-of-Default each month and 80% of those will end up losing their home to foreclosure.
Lastly, prices fell a sharp 7.6% in a single month, which puts even more people underwater in their homes and exponentially increases the chance of loan default across all paper types.
Please show me a month where organic sales rise, prices stay steady or rise and foreclosures stay steady or fall and I will call that a ‘better’ report. This surely is not it.
Even the CEO of Dataquick in the story below cautions, “You have to view last month’s sales in the proper context.”
Don’t get me wrong, I am glad to see foreclosures selling the way they are but I would be much happier to see sales flat and foreclosures slowing significantly. But, as prices fall mortgage defaults and foreclosures will stay with us.
I also am very concerned about the majority of those who purchased, refinanced or added a second mortgage between 2003 and 2007 who now find themselves underwater, unable to make a move while values crash around them. I am talking about ‘Prime’ borrowers here, as negative equity being a leading contributor to loan default is not Subprime, Alt-A, Pay Option, Jumbo Prime or Prime specific.
Never underestimate the effect that plunging values has on ALL home owners. While 10k buyers in SoCal got a ‘great deal’ by buying a foreclosure last month, millions lost significant value in their property and were pushed into a negative equity or deeper negative equity position and hundreds of thousands will ultimately default from such a violent, long lasting move downward in prices. -Best Mr Mortgage
Southland home sales up, prices down; foreclosures now half the market – October 20, 2008
La Jolla, CA—Southern California home sales shot up by an unprecedented 65 percent last month from the dismal, record lows of a year ago, when a credit crunch slammed the brakes on home financing. September sales also posted a rare gain over August as price cuts lured more buyers. Foreclosure resales rose to half of all transactions.
A total of 20,497 new and resale houses and condos closed escrow in the six-county Southland in September, up 5.8 percent from 19,366 in August (2008) and up 64.6 percent from 12,455 in September 2007, according to San Diego-based MDA DataQuick, a real estate information service.
Last month’s sales were the highest for any month since December 2006 and the year-over-year gain was the highest for any month in DataQuick’s statistics, which go back to 1988. However, last month’s sales were still the second-lowest for any September since 1996 and were 17 percent below the 20-year sales average for that month.
This September’s huge annual sales increase stems from the extraordinarily weak activity in September 2007, when sales were at a record low for that month. The year-ago sales plunged after the credit crunch that struck in August 2007 made “jumbo” mortgages for higher-end homes more expensive and harder to obtain. Sales were already hurting from the subprime mortgage industry meltdown earlier in 2007, which undermined demand for entry-level homes.
“The pitifully low September 2007 sales numbers weren’t tough to beat. More impressive was that this September’s sales volume bucked the seasonal norm and rose above August. Steep price declines, especially inland, have improved housing affordability quite a bit and may keep sales levels well above the record lows we saw late last year and early this year. It will depend on the severity of this economic downturn,” said John Walsh, MDA DataQuick president.
“You have to view last month’s sales in the proper context,” he cautioned. “They represent escrow closings, which reflect purchase decisions made in mid-to-late summer. That was before the dramatic worsening of the nation’s economic crisis in recent weeks. Over the next few weeks our sales data will begin to show how the meltdown in financial markets this fall has impacted housing demand.”
Bargain shopping continued to fuel the Southland market last month, with sales typically rising the most in areas where prices have dived and foreclosures have soared.
Fifty percent of all existing homes that closed escrow in September had been foreclosed on at some point in the prior year. That’s up from 45.5 percent in August and 12.6 percent in September last year.
At the county level, such foreclosure resales ranged from 36.8 percent of September resales in Orange County to 68.9 percent in Riverside County. In Los Angeles County foreclosure resales were 39.1 percent of all resales; in San Diego 47.3 percent; San Bernardino 63.1 percent and in Ventura County 44.0 percent.
The high level of foreclosure resales helped push the Southland’s median sale price down to $308,500 in September, the lowest since it was $305,000 in May 2003. Last month’s median was 6.5 percent lower than $330,000 in August and 33.2 percent lower than $462,000 in September 2007. The September median stood 38.9 percent below the peak $505,000 median reached in spring and summer of last year.
Several factors explain the sharp drop in the median price: Regionwide home price depreciation, relatively slow high-end sales, and the rising market share of foreclosure resales, which tend to sell at a discount.
Problems in the jumbo mortgage market continue to undermine high-end home sales. Before the credit crunch hit last August, 40 percent of sales were financed with jumbos, then defined as over $417,000. Last month just 13.2 percent of purchase loans were over $417,000.
MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
The typical monthly mortgage payment that Southern California buyers committed themselves to paying was $1,458 last month, down from $1,566 the previous month, and down from $2,198 a year ago. Adjusted for inflation, current payments are 31.9 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 44.4 percent below the current cycle’s peak in June 2006.
Indicators of market distress continue to move in different directions. Foreclosure activity is at or near record levels, financing with adjustable-rate mortgages is near the all-time low, as is financing with multiple mortgages. Down payment sizes and flipping rates are stable, non-owner occupied buying activity appears flat but might be emerging, MDA DataQuick reported.