The Real Estate business is doomed for a very, very, very long time.
Banks lending today fully aware that tomorrow the loan is 5,10-50% underwater is a crime in itself.
Naked Capitalism-
“Shadow inventory,” the number of homes that are either in foreclosure or are likely to end up in foreclosure, creates substantial but hidden pressure on housing prices and potential losses to banks and investors. This is a critical figure for policymakers and financial services industry executives, since if the number is manageable, that means waiting for the market to digest the overhang might not be such a terrible option. But if shadow inventory is large, housing prices have a good bit further to go before they hit bottom, which has dire consequences for communities, homeowners, and the broader economy.
Yet estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely. For example, the Wall Street Journal published a Nov. 11, 2011 article, “How Many Homes Are In Trouble?” where values varied from 1.6 million (CoreLogic), to “about 3 million” (Barclays Capital), to 4 million (LPS Applied Analytic), to 4.3 million (Capital Economics), to LPS Applied Analytics, to between 8.2 million and 10.3 million (Laurie Goodman, Amherst Securities).
Why do these numbers vary so much? Even though CoreLogic is generally considered to have one of the best databases of loans, its estimates of loan performance and odds of default are based on credit scores, which is a badly lagging indicator. Laurie Goodman is seen by many as having the most carefully though out model, even though industry insiders are keen to attack her bearsish-looking forecast.
They saw this coming and they’ve been warned. If a foreclosure moratorium isn’t in the horizon, prepare to see home values sink to all time lows.
The TOO Big TOO Fail… will FAIL all on their own.
HW–
Roughly 10.4 million mortgages, or one in five outstanding home loans in the U.S., will likely default if Congress refuses to implement new policy changes to prevent and sell more foreclosures, according to analyst Laurie Goodman from Amherst Securities Group.
At the end of the second quarter, more than 2.7 million long-delinquent loans, others in foreclosure and REO properties sat in the shadow inventory, more than double what it was in the first quarter of 2010 (Click to expand the chart below). With the market averaging roughly 90,000 loan liquidations per month, it would take 32 months, nearly three years, to move through the overhang.
And that number is contingent on no other loans going into default.
The housing market’s woes continue forcing people into rentals, further depressing the home ownership rate in a nation that now has fewer homeowners than were created during the housing boom.
In the first quarter, 66.5% of Americans owned homes, down from 67.2% a year earlier, the Census Bureau reported. The rate last hit this level in 1998.
During the boom, when easy credit made mortgages available with less regard for income or ability to pay, the ownership rate surged to a record 69.2% in 2004?s second and fourth quarters and stayed near that level until the recession deepened.
Falling home prices should give aspiring homeowners the upper hand this spring, but in a growing number of locations, it doesn’t feel like a buyer’s market.
Blame the nearly five-year slide of home prices. Those declines, which accelerated over the past two quarters, have left many sellers unable or unwilling to lower their prices. Meanwhile, buyers remain gun shy about agreeing to any purchase without getting a deep discount.
I have the perfect solution…Why not give the current homeowner a “short sale” price modification and call it a happy ending to all? Buyers are too wise nowadays.
Besides most future homeowners will have a defective title or will have an F in the past!
Here’s an example why it makes sense to work with the current owner:
LPS using their MN address purchased my home at auction for 75% discount put it on the market for about 80% and made a few grand from the highest contract that was accepted. It benefited no one!
Now if they use my solution not only will the investors save on the fees they payout to the foreclosure mills but also on the late fees the homeowner accrues…see isn’t this economic sense for everyone?
By John Gittelsohn and Kathleen M. Howley – Sep 15, 2010 12:14 PM ET
The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.
Shadow inventory — the supply of homes in default or foreclosure that may be offered for sale — is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.
“Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand,” said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. “Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year.”
Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez Inc., a New York economic forecasting firm.
Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. unemployment remained near a 26-year high. The median price of a previously owned home in the month was $182,600, about the level it was in 2003, the National Association of Realtors said.
Fannie Mae Forecast
Fannie Mae, the largest U.S. mortgage finance company, today lowered its forecast for home sales this year, projecting a 7 percent decline from 2009. A drop in demand after the April 30 tax credit expiration “suggests weakening home prices” in the third quarter, according to the report.
There were 4 million homes listed with brokers for sale as of July. It would take a record 12.5 months for those properties to be sold at that month’s sales pace, according to the Chicago- based Realtors group.
“The best thing that could happen is for prices to get to a level that clears the market,” said Shapiro, who predicts prices may fall another 10 percent to 15 percent. “Right now, buyers know it hasn’t hit bottom, so they’re sitting on the sidelines.”
About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody’s Analytics in West Chester, Pennsylvania. He estimates prices will drop 5 percent by 2013.
‘Lost Decade’
After reaching bottom, prices will gain at the historic annual pace of 3 percent, requiring more than 10 years to return to their peak, he said.
Default notices, auction sale notices, and actual bank repossessions were received on a total of 1,961,894 homes, or one in every 78 households, during the most recent six month period according to the Mid-Year 2010 U.S Foreclosure Market Report issued by RealtyTrac.
These findings represent a 5 percent decline in filings from the last half of 2009, but an increase of 8 percent from the first half of last year. Perhaps the good news is that the year-over-year change was almost totally due to a jump in bank repossessions, which were up five percent while default and auction notices were down 10.4 percent since the first half of last year.
In June there were a total of 313,841 filings, a decrease of nearly 3 percent from May and down nearly 7 percent from the previous June. It was the sixteenth straight month where the total number of properties with foreclosure filings exceeded 300,000.
RealtyTrac’s report incorporates documents filed in all three phases of foreclosure, unfortunately the mid-year review did not break down the data into individual categories (but we’re building our own spreadsheet).
Notice of Default (NOD) and Lis Pendens (LIS). This is the first legal notification from a lender that the borrower on a mortgage loan has defaulted under the terms of their mortgage and the lender intends to foreclose unless the loan is brought current.
Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); If the borrower does not catch up on their payments the lender will file a notice of sale (the lender intends to sell the property). This notice is published in local paper and contains information pertaining to the date, time and subject property address.
Real Estate Owned or REO properties : “REO” stands for “real estate owned” and typically refers to the inventory of real estate that banks and mortgage companies have foreclosed on and subsequently purchased through the foreclosure auction if there was no offer higher than the minimum bid.
During the second quarter of 2010 there were foreclosure filings on 895,521 properties, down from 932,234 in the first quarter, a decrease of 4 percent. This is 1 percent more filings than in the second quarter one year earlier.
“The second quarter was a tale of two trends,” said James J. Saccacio, chief executive officer of RealtyTrac. “The pace of properties entering foreclosure slowed as lenders pre-empted or delayed foreclosure proceedings on delinquent properties with more aggressive short sale and loan modification initiatives. Meanwhile the pace of properties completing the foreclosure process through bank repossession quickened as lenders cleared out a backlog of distressed inventory delayed by foreclosure prevention efforts in 2009.
“The midyear numbers put us on pace to exceed 3 million properties with foreclosure filings by the end of the year, and more than 1 million bank repossessions,” Saccacio continued. “The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continue to sit just below the surface, threatening the fragile stability of the housing market.”
As usual, Nevada, Arizona, Florida, California, and Utah topped the list of states in foreclosure activity. In Nevada, one in 17 housing units (6 percent) received at least one foreclosure filing in the first six months of the year, down 6.2 percent from a year earlier and 13 percent from the last half of 2009. In Arizona there were filings posted against one in 30 housing units, down 1.6 percent from the second half of 2009 and 1.88 year over year. Florida follows with one in 32 homes in some stage of foreclosure, a decrease of 8.61 from the most recent half year and an increase of 3.4 percent from one year ago.
Other states with foreclosure rates ranking among the nation’s 10 highest were California (1 in 39 units), Utah (1 in 52), Georgia (1 in 56), Michigan (1 in 58), Idaho (1 in 59), Illinois (1 in 62), and Colorado (1 in 72.)
These were the thoughts MND shared regarding the May data. They are still very relevant…
Plain and Simple: The good news is it seems like the worst is behind us in terms of new defaults. Plus the modest decline in newly scheduled auctions helps out housing on the excess supply front as banks are choosing to hold onto their inventory instead of flood the market with distressed supply (which would drive prices even lower). Perhaps this is a factor of the expiration of the homebuyer tax credit? Now for the bad news. Over the past year, to give HAMP a chance to “work its magic” (which servicers have little incentive to do ) and to reduce the cost of maintaining the condition of foreclosed properties, banks were delaying the foreclosed home liquidation process. This allowed delinquent borrowers to stay in their houses and also allowed banks to avoid asset value write-downs. Unfortunately, with HAMP running out of qualified borrowers, that trend is starting to reverse course. Bank balance sheets are beginning to balloon with REO, shadow inventory is being converted to actual inventory!
This is a negative for two reasons. First it implies more people are being put out of their home and onto the street and second, at some point, the distressed homes banks are adding to their balance sheets will need to be put back up for sale. Once the housing market starts to pick up recovery momentum, banks will begin to slowly liquidate their inventory of foreclosed properties. Hopefully they will do so in a manner that does not greatly disrupt local supply/demand and push prices even lower (which would hurt their own cause). Growing “shadow inventory” is one of two reasons why the housing recovery will likely be a very long process (the other being long term unemployment).
Another day, another report on the state of our nation’s housing market. Today it’s the monthly foreclosure report from RealtyTrac, saying that while total foreclosure activity is decreasing, the number of homes being repossessed by the banks hit a new record high.
“Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed,” writes the company’sCEO James J. Saccacio.
This report comes on the heels of a Bank of America executive yesterday saying that the company, which took over the slings and arrows of Countrywide Financial a few moons ago, would start to push short sales and other foreclosure alternatives over taking the homes back onto its books. But will it matter?
“Although the ramping up of short sales is occurring, it won’t be enough to offset all the loans coming through foreclosure,” Bob Caruso of Lender Processing Services tells me. “It’s great that everybody’s ramping up, but the volume is still coming through so heavily that the short sales will only be a fraction of the loans coming through.”
Caruso cites the government’s Home Affordable Modification Program as a continuing driver of more foreclosures, because it’s just putting off the inevitable.
“The HAMP program has already piqued and is coming down. Less and less loans are eligible for HAMP because the government made the criteria really tight. They made it almost like threading a needle,” adds Caruso.
That, he says, is because while the program gets borrowers down to a 31 percent debt to income ratio for the mortgage, it doesn’t factor in all the other debt that borrowers are carrying (see blog May 17). He says too many Americans have “debt management issues,” to put it nicely.
Now while I was mulling that, I saw a report from my colleagueSteve Liesman on new Federal Reserve data showing “Americans extinguished their mortgage debt in the first quarter at the fastest pace in nearly 40 years, either by paying it off or defaulting.” He goes on to say, “As a result, the report showed that household net worth climbed by more than a trillion dollars to $54.5 trillion, the highest level since the fourth quarter of 2008.”
Well now you know what I started to think then … is that more evidence that defaulting borrowers are juicing consumer spending with their excess cash??(see blog April 12) Steve tried to do a lot of very confusing math on it, but then he looped in Mark Zandi, of Moody’s Economy.com, who had the following reaction:
“I don’t think the fed’s mortgage debt data sheds much light on the issue. What matters for consumer spending growth is the cash being freed up by so many households not making a mortgage or rental payment. That mortgage debt is declining is suggestive that there are lots of these households, but it doesn’t suggest much more than that.”
Okay, so here’s what I learned today: Despite a slight drop, really a flattening, in new foreclosures, the pipeline is still so full that bank repossessions and freeloading borrowers are going to mess with the fundamentals of our economy for a good long time to come.
How many real estate agents and brokers does it take to sell a California home? 2 ¼ if we look at current inventory levels and the amount of Californians with a real estate or broker’s license. One of the early observations of the housing bubble was how much money was being spent in the economy because of high wage California housing bubble jobs. Toxic loan after toxic loan provided wonderful commission checks but also provided the state with a nice chunk of tax revenue. Year after year this went on. Our fate has been intertwined with real estate and since real estate has busted so has ourstate economy. I remember a few colleagues that were pulling in high six-figure incomes as mortgage brokers and real estate agents and were spending every dime as quickly as it came in. Many have downsized drastically and don’t have a penny to their name. Ironically many of these people drank their own Kool-Aid and bought million dollar homes with the same mortgage sewage they were passing onto their clients. A few are now in bankruptcy and many have lost or will lose their homes.
California is likely to face a lost decade in housing. Do I mean from 2000 to 2010? In some areas we have already reached a lost decade. Yet many areas will face their lost decade from 2010 to 2020. Here are 5 reasons why California real estate will have a decade of slow or no growth ahead:
Reason #1 – High paying finance and real estate jobs are gone
I went ahead and compiled 14 years of license and broker data for California above. From 1996 to 2002 we averaged approximately 300,000 active licensees in the state. This was before the bubble ramped up. We reached a peak in 2008 of 549,000 active licensees. Today that number is down to 493,000 and is continuing to fall as many simply let their license expire. Even with recent sales increases we are still close to half the volume of the bubble years. Plus, home prices are half of what their peak values were. So even basic math will tell you that at the very least, half of income in this industry is gone (for example the 5 to 6 percent agent cut is based on the sale price). Then on the lending side you have 96.5% of loans being government backed and these don’t provide the nice kickbacks that the option ARMs did for example. In other words, high income no GED required jobs are now gone. Even those with industry specific degrees and training are finding it hard to get good jobs in today’s economy.
And many other jobs tied to the FIRE side of California employment and construction took big hits:
These were good paying jobs that are now gone. Many of these jobs depended on the perpetual growth of the housing bubble. But even as we will see with inventory levels, do we still have a bubble in this industry?
Reason #2 – Too little inventory and sales for the amount of workers
I went ahead and took a major snapshot of how much MLS inventory is currently listed for public view in California. Although inventory is spiking, you start seeing issues that are plaguing the industry:
Since February of this year California has added 64,500 homes to the MLS, an increase of 41 percent. This is a massive jump. Part of this jump aligns perfectly with the failure of HAMP and more banks pushing inventory onto the market.
But let us use that current inventory number and run a quick analysis:
493,576 real estate agents and brokers / 219,217 homes on the CA MLS = 2 ¼ agents and brokers for each home
I find the above fascinating. We have close to 500,000 licensed agents and brokers for 219,000 homes on the market. And you wonder why we have a problem? This is like going to a used car lot with 20 cars and finding 50 sales representatives. However like many things in life, I believe that the Pareto principle applies here as well. That is, 80 percent of sales is likely to come from 20 percent of those with active licenses.
Although the shadow inventory is much larger than the 219,000 homes on the MLS, agents and brokers only make money when they sell. And banks don’t seem in a big hurry to move the entire inventory out at once. In other words, we have years of junk built up in the pipeline with wages slashed.
Reason #3 – California budget and revenues shattered
If you want to see a problem in the making look at this:
The state for the fiscal year of 2007-08 collected over $101 billion. How do things look today?
For the fiscal year that is coming to an end, we are projected to bring in $81 billion. We are short by $20 billion and this includes every kind of tax increase you can imagine. This does little considering half of the state revenues come from personal income taxes and many of those high paying bubble jobs (see above) are now gone. Yet the state kept spending more and more assuming that a Ponzi like income stream was going to come in forever. That is not the case as we are now painfully finding out so we must adjust.
The Legislative Analyst Office (LAO) is projecting problems well into 2015. Another issue that the state will have to contend with is high pension costs of soon to retire baby boomers. Recently CalPERs announced that the state will need to pitch in $700 million to cover its poor bets. They are pulling back for the moment:
“(LA Times) Facing political fire, the state’s largest public pension fund Wednesday retreated for a month from a plan to approve a $700-million increase in taxpayer contributions it gets from the state and about 1,000 school districts.
State Treasurer Bill Lockyer, a member of the California Public Employees’ Retirement System board, said the fund needs to assess the consequences of the huge hike on California at a time when the state faces an estimated $19-billion budget deficit.”
You can rest assured that there will be some serious battles on this front for years to come.
Reason #4 – Shadow inventory
The Wall Street Journal put together data regarding shadow inventory that we already knew about. California ranks near the top of shady banks and home squatters that are simply staying put and not paying their mortgage:
This is just nuts. In California 7 percent of loans that are 90 days overdue are not in foreclosure! What is even more stunning is the nationwide amount of people living in homes with no payment and foreclosure for 2 years! This is a slap in the face of every prudent middle class American. And the idea of poor homeowners is nonsense here in California. You have folks living in prime locations not paying their mortgage who can easily afford a nice rental. But they’ll sit it out while banks sit back and suck on thetaxpayer gravy train. This data merely confirms what we already know. The state is plagued with delinquent loans. In fact, 15 percent of all California loans are 30+ days late or worse.
Reason #5 – Consumer psychology and jobs
The mantra that real estate prices never fall is completely shattered for an entire generation of Americans. Those who lived through the Great Depression are largely absent from our current economy and can’t share their wisdom. And given the preference of Americans to watch Dancing with the Stars instead of reading some history, many have forgotten that real estate can crash and crash hard. But if history is any guide, we will have a generation of Americans who are more cautious and thus will put a lid on any mega jumps in appreciation for the next decade.
On Friday the California unemployment rate came out and we are still at a record high of 12.6 percent. Adjusted for the underemployment rate we are closer to 23 percent. Even the running average at the BLS shows us over 21 percent:
Keep in mind this is a one year rolling average so this will only move higher as we have been at peak levels for many months. This also goes back to my earlier reasons for a lost decade in home prices. Those high paying jobs are gone. You can only purchase a home by what your income can support. A large number of those depended on toxic mortgagesthat were easy to churn on a short notice. After all, giving NINJA loans with no verification allowed seedy mortgage brokers to turn out loan after loan. Now even with lax lending inFHA insured loans, at least they have to verify income. As it turns out, there simply isn’t that many that can qualify in California.
I see a sideways moving decade for California real estate. And for the next one or two years prices will start trending lower again as the Alt-A and option ARM waves hit and the gimmick parade starts running out. You can only keep a lid on corruption for so long. The “once in a century” problems now seem to be hitting every month. A near 1,000 point drop in the Dow, the trillion dollar Euro bailout, and other mega events will come quicker as a reckoning day will hit. All it takes is a failed Treasury auction and you can kiss cheap mortgage rates goodbye.
Imagine what your value will be worth after all these “shadow inventory” is finally released. Again, I hold a real estate license and can tell you I have access to some of this shadow inventory and it is not pretty to look at. Barclays report below is only one source!
In Michigan they are demolishing homes like you cannot imagine…But I may know exactly why…”Greece” is a hint.
BY: CARRIE BAY DSNEWS.com
Analysts at Barclays Capital say the industry’s ominous shadow inventory is close to topping out.
New research published by the firm says the supply of homes nearing REO status, defined as 90 or more days delinquent or in the process of foreclosure, will peak this summer and then begin falling gradually as the market becomes stable enough to absorb 130,000 distressed properties a month.
“While we expect REO levels to remain elevated, the trickle of homes from foreclosure into REO implies moderate levels of inventory reaching market,” Barclays said in its report.
The company estimates the current REO supply to be 478,000 and expects it to rise to 536,000 by late 2011.
Barclays’ delinquency pipeline snapshot shows that as of February, there were 2.4 million mortgages at least 90 days past due and 2.1 million more already winding through the foreclosure process, which combined makes up a shadow inventory of 4.5 million.
It’s a daunting tally and could grow larger as foreclosure alternatives are exhausted, but Barclays’ model forecasts 4.7 million distressed sales over the next three years, with 1.6 million coming in 2010, 1.6 million in 2011, and 1.5 million in 2012.
The research firm notes, however, that an orderly liquidation of shadow inventory will require both “more robust household formation and job growth.”
Some market indicators, though, are looking favorable. This week, Fannie Mae reported only a minor increase in its March serious delinquency rate – 5.59 percent versus 5.51 percent in February. RealtyTrac also reported a 12 percent month-to-month decline in default notices for April.
Barclays says this data supports its forecast that the industry is only a few months away from reaching peak levels of shadow inventory.
I have the perfect solution…Why not give the current homeowner a “short sale” price modification and call it a happy ending to all? Buyers are too wise nowadays.
Recent Comments