CA Housing Market -Beneath the Headlines / REO Surge to Hit

Posted on January 27th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Beneath the Headlines — the Housing Market is Languishing

The chart below shows a CA housing market languishing with ‘organic’ sales (pink) at an all-time low. This, while loan defaults (yellow) – a leading indicator of foreclosures, REO and home price depreciation – are at an all-time high. Note that organic sales in a part of total sales and not to be added together.

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Existing Home Sales rose month-over-month in Dec. Everyone is giddy over the possible implications –signs of a robust reversal in the housing market leading the consumer and banks out of the devastating asset valuation nose dive. Of course, this will lead to asset price mark-ups and a ‘v’-shaped, full-blown economic recovery. That would be nice.

But it can’t happen this way and accepting the existing home sales data without looking inside the numbers will lead to incorrect assumptions about the housing market and subsequent losses if you make bets according to the faulty data.

Yes, on a national basis existing home sales were up 6.5 over November but also down 3.5% from Dec of last year. This is just one blip up like four or five others we have seen in the past year – they are always greeted the same way. A large percentage of this came from CA so let’s focus there because other bubble states are very similar. The overall month-over-month rise was a function of crashing prices, lower rates and the CA law SB1137 keeping a flood of REO inventory off of the market. This is all good stuff…or is it.

It’s All About Organic Sales

Organic sales – me selling a home to you – gauges to true health of the housing and mortgage markets and are at record lows. Two years ago organic sales were 95% of all sales and in Dec they made up 42.5% of all sales in CA. Foreclosure-related sales make up the rest. Nationally in December, only 55% of all sales were organic. The foreclosure market is now the housing market crowding out Ma and Pa Homeowner who can’t compete against banks and servicers ‘dumping’ properties.

Organic sales plummeting means that home owners are not freely able to transact. This tells me a few things a) that home owners are stuck upside down in their home and can’t sell b) the all-important move up buyer is non-existent and can’t even afford to buy the home they presently live in given present-day sensible lending guidelines c) home owners with equity can’t sell their home in order to get the down payment for the new home. Organic sales plummeting is a leading indicator to foreclosures that most have not put together yet.

Are Falling Values Good for Housing?

The pundits preach that falling values are great for housing because more people can buy. That is not the whole story. In this market after such a devastating past year and a half for home prices, lower prices are a leading indicator of two things – more loan defaults and more zombie home owners ‘stuck’ in their home unable to sell or refi.

Both of these are a leading indicator of future home price depreciation. Thus, the negative feedback loop in housing that has devastated the sector.

Show me a month where a) organic sales rise b) values stay flat or rise and c) new loan defaults and foreclosures stay flat or drop d) foreclosure related sales rise – that would be a positive. At present, ‘d)’ is the only factor in place.

Those citing a drop in inventories as the ‘mustard seed of hope’ forget that from Dec through Feb many that had no luck selling the prior year keep their homes from the MLS awaiting the Spring selling season. Inventory always surged from Mar to May.  Additionally, they also forget about ‘shadow inventory’ in the form of REO that is not listed.  Realty Trac said in a recent story that they show that only about a third of all REO is listed and trackable as inventory. The rest is sitting rotting at the banks/servicers. These numbers are very close to numbers I have quoted in the past through independent research.

A Flood of REO Properties About to Hit

Looking forward a few months, the REO inventory ‘wave’ that has built up in the past 12-months is about to hit hard. In CA, the SB1137 law exacted on Sept 5th forced a 60-day moratorium on Notice-of-Defaults and Notice-of-Trustee Sales. A Notice-of-Trustee Sale is needed before an insti can take a home to foreclosure. The law essentially kicked the can down the road where all of the inventory will hit as the Spring/Summer selling season kick off. In this respect, the plan worked.

Below is a chart of monthly chart of monthly Notice-of-Defaults, the first stage of foreclosure. NOD’s are filed after three to four missed monthly payments. NOD’s are a very leading indicator to foreclosures by 4-6 months in addition to an indicator of future supply/price depreciation. The massive wave of NOD’s from Jan to Aug and then again in Dec (post-SB117) is still out there waiting to turn into REO beginning soon.

The chart below shows monthly Notice-of-Trustee Sales, the second stage of foreclosure, which follow NOD’s by 4-6 months. At this stage the date and time of the actual foreclosure sale is given – foreclosure typically follows by 21 to 60-days. If you look at all of the NOD’s above from Jan to Aug in the chart above, where are all of the corresponding NTS? From Aug – Dec, NTS would have remained at that 37-40k level if not for SB1137 in addition to select full-moratoria by banks such as Countrywide. This just delays the inevitable. Despite that, NTS are growing and the chart below will look much like the chart above in the near-term – NTS will be back at all-time highs.

The chart below shows the monthly REO taken back by banks — 93-97% of all foreclosures go back to the bank as REO. Like the other two charts the numbers nose-dived as a result of SB1137. So where is all the REO??? The answer is it was delayed and coming quickly to the NTS phase. Additionally, Fannie and Freddie are on full foreclosure moratorium.

From the NTS phase properties are quickly taken back as REO. Supply coming out the other side is all dependent upon each institution, their capacity and willingness to take the associated hit. But as you can surmise from the charts above their dams are overflowing.

Note – at Field Check Group, my research firm, we track all of this by bank and servicer daily. Drilling down into each insti independently reveals that their actions are all over the map. Some do try hard to make this process smooth and transparent. Others are experts at playing ‘hide the REO’.

Who is Left to Buy?

Despite prices and rates coming down there are just not enough available buyers to sop up the entire present and future inventory. Remember, we went into this with about a 69% homeownership rate.

Move-up Buyer

Although purchases always accounted for a small portion of all mortgage loans and still do, move-up buyers were the largest segment of buyers during the bubble years. Easy lending made it a no-brainer for folks to always get something newer and bigger in a better location. Each quarter brought about new and innovative loan programs designed by the investment banks to bring payments and down-payments lower making homes more affordable.

With very little to no down payment required and housing rising double-digit percentages per year it was easy to sell, pocket the profit and buy the new home with little expense and even a lower payment if you chose a Pay Option ARM!. The new home was furnished on easy credit terms from their favorite furniture chain.

EVERYONE qualified due to stated income, no ratio and no doc loans. Now, the move-up buyer is virtually non-existent because most can’t sell for what they owe; can’t sell for what is needed to extract the large down payment needed to buy the new home given today’s sensible financing; can’t get good financing above $417k; or can’t qualify for a mortgage without an exotic or liar loan. The move-up buyer segment is not a driving force.

First-Time Buyer

First time home buyers in their early to mid 20’s are a group that can benefit from lower rates and prices at the lower end of the price range. However, historically they were one of the smallest housing market segments. Now the question is, how many 20-something’s have a large enough down payment, 2-year job history, very little debt and good enough credit score to take advantage of the low base rates available?

This group as a whole will not be able to get the low base-rates being thrown around because they are not seasoned borrowers with large cash positions. An LTV and credit score that was considered ‘Super-Prime’ two years ago can result in a 1.5% hit to the rate bringing them from 5.5% to 7% very quickly.  While the 7% rate may fall further, I believe that this group is more price-sensitive and looking for a ‘great deal’ on a foreclosure-related property vs waiting for rates to drop to buy. This seems to be the case with most buyers given over half of all home sales in the bubble states come from the foreclosure stock. The first-time buyer segment is not a driving force.


Renters can also benefit from lower rates but the same rules apply as with First-Time Buyers. This segment also has historically been one of the weakest, as many are renters for a reason. In many cases those reasons prohibit them from buying. The renter segment is not a driving force.

Second Home/Investment Buyer

Once again, it is more about getting a ‘great deal’ on a foreclosure related sale vs hitting an interest rate level that prompts a purchase for this group. For those not paying cash, most investors have significant interest rate adjustments on their loan taking the rate up substantially over 5.5%. For investment properties, the 3-point hit for LTV’s above 75% alone takes the 5.5% to 6.75% – most will have multiple hits.

The second/vacation home buyer can get more aggressive rates than investment buyers, but I sure hope that economists are not staking their reputation on vacation home buyers saving the housing market. The investment buyer is one of the driving forces in the purchase market today but that cannot be sustained over time.

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165 Responses to “CA Housing Market -Beneath the Headlines / REO Surge to Hit”

  1. Kevin I think you’ve taken the responsibility thing as far as you can. Family needs to be the first responsibility and if the decision to walk from a contract is best for the family then that’s where it is.

  2. Kevin. Kevin. Kevin. Everyone who ones a home is hurt by the foreclosure crisis due to lost equity.

  3. Benzy: “Responsible to who?”

    Anybody that has a lien on your house. You are being childishly annoying with your games.

    Dee: “Kevin I think you’ve taken the responsibility thing as far as you can.”

    Because you Marxists are diminishing the meaning of it. That’s intellectually dishonest. I never said it was one’s highest responsibility, or their most important purpose. Of course family is. READ MY COMMENTs — I SAID IT WAS FINANCIALLY SMART. But don’t call it being responsible. My god you people are so full of shit that you unnecessarily try to mangle the most simply understood “positive” adjectives there are.

  4. The problem with bailouts and the reason they do not work is because they are just rearranging the deck chairs. Nothing is changing so there is no benefit, so it is as if you simply did nothing in the end. So it stands to reason that the same affect of doing nothing is eventually felt, but at a much larger cost due to the extra funds wasted in the process. You have kicked the can down the road only to pick it back up later. The cost has risen for the clean up is all. Let’s just look at a real quick and easy example.


    Private company “A” wants to build solar panels and then sell them for profit. They will need investment money and people to do so. The Government comes up with an idea to create jobs to stimulate the economy. They choose some green jobs and solar panel’s is one of them. They borrow future uncollected tax dollars as the investment money. They higher company “A” to do the job.

    What is wrong with this?

    No jobs were created because company “A” was going to hire these people anyway to build the panels.

    Instead of a company borrowing the money and paying for it the tax payers are now paying for it.


    Union company “A” needs work for their union members. They are all trained in doing large infrastructure jobs. They get paid well above the private sector and have twice the benefits. They are hoping that they get hired by private companies to do work or maybe some state or Federal jobs pan out. They are in trouble, but not unlike the rest of the country. The Government comes up with an idea of creating large amounts of infrastructure jobs. These jobs are all jobs that the unions are qualified to do. They borrow future uncollected tax dollars as the investment money. They hire the unions to do the work.

    What is wrong with this?

    No jobs were actually created, but more like they were saved due to the lack of work. No different as to what is happening in the private sector where those folks simply get let go.

    A chance for the unions to be downsized in membership and to change the contracts to lower cost by doing away with pensions and adding 401K’s and having the workers pay for some of their medical cost.

    If no companies are hiring the unions then that means the work doesn’t exist. Why should tax payers foot the bill for these unions to stay falsely working? No private jobs are created and very few are removed from the ranks of the unemployed. Yet somehow expecting these same people out of work collecting to cover the cost of these higher priced union jobs makes sense. I don’t think so.

    Much of these jobs are temporary in nature and once done the job is gone. We need sustainable jobs created that will be around in 5 or 10 years if the company and its business model deserve to still be around.

    With these two examples (I know simple in nature) we see a pattern exist already.

    The Government is borrowing money off of the backs of an already tapped out tax payer. In fact as a result of this, the bill will have to be paid over decades, which means they also borrowed the money off of the backs of our children and probably their children’s back to do this. Is that really a smart thing to be doing?

    No jobs were actually created by this. We added some temporary jobs that will disappear in short order and we added public jobs that the private sector would have added on its own and at their expense and not the tax payers.

    We lose a lot of export business due to the cost of the goods that we do manufacture in this country. A huge reason for this is union contracts. The unions have large salaries and bloated benefits packages that the rest of this country does not receive nor does most of the rest of the world for that matter.

    Due to these high cost we cannot compete with most of the world and therefore we are losing manufacturing jobs and our trade deficit continues to grow. This was a chance to address that but we failed and just gave them more of what they want at our countries over all expense.

    We borrow this money so we actually have to pay more back than what we borrow. The cost is always higher than what is reported.
    A year or so has passed and guess what? We still need jobs again in this country!!!

    What should have happened?

    We should be cutting payroll taxes to put money in the pockets of hard working Americans. Let them decide where and on what to spend it.

    We should be giving tax incentives for companies to ramp up R&D in their industries. How are we going to offer affordable goods down the line if we are not investing in new technologies that will cut cost, and allow us to build things smarter and faster?

    We should be providing cash incentives to companies that create jobs and a bonus over time if the numbers stay elevated (hire 100 / company now has 300 / one year later they have 300 still = bonus! 2 years later another bonus and then the full amount is reached.

    We should Increase unemployment to assist those currently out of work. This is not their or their families fault.

    We should be cutting hoards of programs that are just bleeding our system dry. Welfare should be replaced with a paying retraining and work program that trains people in current fields where jobs are needed (nursing for example), and see them through the resume and interview process until hired. They
    get paid but must come to work (so to speak) 8-5 every M-F until they get hired somewhere at which time the benefits stop.

    They need to stop the food stamp give away and open centers that give food away. This will create jobs as well as feeding the hungry. This group will work closely with local restaurants for example. You need to work at the center X amount of time to continue to qualify for the food stamps for example. Food will be standardized and healthy. A huge undertaking, but it will eat up some vacant office space, create jobs and still feed the hungry. It will allow us to cut down on fraud and waste. It will ensure the money goes where it is supposed to go. It will get these folks out working in the real world and helping to cut cost at the centers because we are already paying them through food.

    Any line item that does not create an immediate job should be eliminated from the bill. Down the road we can re-address things if needed, but we just need help right now.

    Any job that is created needs to be a job that will exist for a minimum of 1 year. No 3 month jobs as they can be done in other ways and not be a part of this bill.

    Much more can and should be done, but only with the horizon in view, immediate needs at hand and a plan to pay for it in place up front. No more pay now and worry about it later actions. A comprehensive plan including the phasing out of Government jobs while increasing taxes over time. You can’t say well if we end the war we can use that money so t is no additional cost. That doesn’t fly any longer. We can’t afford the war and need to reduce that cost out of our budget and not move it over to somewhere else. Every single dollar spent must be paid back so we need to know how before we spend it.

  5. Take the middle man out (the banks)!

    Borrow directly to businesses and people from the FED.. at .25% to 1%.
    Problem solved!

  6. Benzy: “Responsible to who?”

    Kevin: Anybody that has a lien on your house.

    This actually is a concept I have been trying to elucidate with respect to Japan’s housing fallout. I’d like to know how the Japanese reconciled all of those multi-generational loans.

    So, it’s not so much a case of one of your usual asinine obfuscations from the sidelines. But ridiculous to say the least, Kevin, considering the well chronicled fraud perpetrated by my humble lender, WaMu, that I should feel like I have some responsibility to them.

    Oh, there I go again being childish.

  7. “Because you Marxists are diminishing the meaning of it.”
    diminishing it for who? In keeping with intellectual integrity, I’ll just use one of Bert’s responses to this kind argument “ad hominem”

  8. Mr. Mortgage, thanks for the great analysis and the great website–I just discovered it today.

    I appreciate the point you and others make here about how the CA market is in the doldrums with much more pain to come. I live in the Bay Area, and it’s been fascinating to watch the transition from boom to bust.

    Now there’s one point that some make about the Bay Area: the broad aggregated statistics like the ones you use here do not reflect the significantly different conditions in different segments of the market. Although the subprime mortgage problems and foreclosures are indeed a huge problem in lower-end markets, they may be much less severe in the higher-end ones. For example, there may be tons of foreclosures in East Palo Alto but very few in neighboring Palo Alto. Hunter’s Point in San Francisco might be a disaster, but Pacific Heights in the same city is a different matter.

    To what extent do you think that the bleak prognosis you have for the CA market is true for the higher-end real estate markets (in the Bay Area, for example, that would be San Francisco, Marin, the higher-end towns on the Peninsula, etc.)?

    The residential market for >$2 million houses does seem to be dead these days. Houses are staying on the market for months and price reductions have been rampant. Do you think that the wave of foreclosures and the tidal wave of inventory in the spring will occur in this segment of the market as well? Or is this more of a low-end phenomenon?

    Thanks again for the great work!

  9. MM, I too apreciate your service..thought I say it again before you move.. and thought I ask if you know now your new website name? or will it be the same one?

  10. Susan you said:

    “You are mistakenly taking me for “giveme, giveme” individual because the banks and realtors fooled the homeowner with:”

    Hmmmm, I have not now nor have I ever said or thought that your were a “giveme” person. I pegged you as a “fixer” that is going to open the med kit, rub some ointment on the wound and whip out the right bandage and patch it all up.

  11. BertDilbert:

    I have a nursing background and am a mother and grandmother, so I do have the tendency to “fix” things. For the past 30 years, I have worked in Real Estate or mortgages though. I am one of those “damn mortgage brokers” but I do understand the mentality of homeowners, past, present and future.

    My proposal of a government recall mandate is a valid one, one that can stop the flow of losses to the general public of homeowners and the banking industry. It puts a dollar number on the amount. The only parties involved are the homeowners and the banks. Not the “renters”.

    It does not turn around the industry to be a boom again, nothing will except for incomes in general to double or for the “special” programs to return qualifying more “potential homeowners”. Neither in my opinion will happen it the next decade or two, but it does stabilize the housing market and stops the losses to the banks/investors.

    I am not attacking the over inflated prices, which I agree were extremely over inflated. The prices were agreed to by both parties involved.

    I am not attacking the special programs nor the liberal underwriting, the programs and underwriting were agreed to by both parties involved.

    What I am attacking is the banks actions of releasing massive foreclosures sales into the market place with the knowledge that “these sales” would lower the values of the surrounding area affecting their existing customers financially.

    Where is the consumer protection needed for the mortgage product? The mortgage itself became defective based on the business actions of the banks.

    In the orginial proposal, I addressed and corrected the actual problems of our foreclosure epidemic from the homeowners point of view with the banks involved:

    homeowners who weren’t underwater had the option of refinancing at 4%. (increases the homeowners spending power)

    Homeowners who were underwater but current had the ability to refinace at the current appraised value at 5%. (increases the homeowners spending power and leaves them at 100% loan to value, the banks write down the dollar amount of reduction at 3x the loss)

    Homeowners who were underwater and DELINQUENT had the ability to refinance if qualified within 31/41% ratios at the reduced appraised value at 6%. ( should increase the homeowners spending power and leaves them at 100% loan to value and again the bank writes down the reduction at 3x the loss for qualified borrowers)

    Homes that were foreclosed on due to borrowers inability to qualify would be sold to the general public at the appraised value with a 4% interest rate. The banks would be able to write down the dollar loss at 2x the dollar amount.

    If found, that the qualified potential borrower pool was insufficent to purchase said foreclosures, a subsidized auction would be done. This would be the only governmental money used for the proposal, to subsidized the potential homeowner with purchasing a property at the current appraised value.

    What the proposal does not address is the credit default swaps that the government is trying to protect at taxpayers expense.

    Until our government actually changes its focus to protect the public and not the banks bets, there will only be band aids offered.

    No where in my proposal am I myself aided, nor is my daughter (for JoanJett sakes).

    A bandaid is the TARP program, the modifications or even the bad bank proposed, they all just cover the problems up. The cut has become infected, it needs to be cut off and replaced which my proposal does.

  12. Thank you all for posting, I have enjoyed the discussions.

    Till we meet again, I hope everyone stays healthly and happy. Enjoy your life.

  13. Jimbo, great post. I hope that MM responds. When I read that Phoenix home prices have gone down 35%, or so, over the last year, I too have questions like your’s about what areas contributed to this the most. In the Phoenix area, the price of a home is determined largely by the uniqueness of the area. The unique, hilly/mountain land went first. The “cotten land” developments (formerly agricultural) on the flat (Gilbert and southern suburbs) are hurting badly.

    I can remember looking at real estate ads in the LA basin a few years ago and seeing 20-25 year-old 2,400 feet, wood-framed houses going for $750,000. Unbelievable! Twenty years ago houses (Upland, etc.) going for $100/foot!

  14. Mr. M, I saw you on CNBS. It’s true what they say; the camrea add 10 lbs! LOL!

    Well done, sir.


  15. Hey gang — try this blog for information. It is just as good as the Mr Mortgage blog.

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