Since the housing bust began in 2007, housing analysts focused on lender activity as the best indicator of future housing supply and the direction of future housing prices. The reasoning for this is simple: lenders control the housing market. Prior to the housing bust, the housing market was a collection of individual homeowners unrestrained by their mortgage obligations. Once prices began to fall, many would-be sellers submerged beneath their debts and required lender approval for a sale. The short sale was born. Many others defaulted on their loans, and lenders foreclosed on the delinquent borrowers until lenders became overwhelmed with REO inventory. Between the REOs that the banks own and the short sales that they must approve, the market changed from a collection of millions of unencumbered individuals to a oligopoly of a small number of large banks and government sponsored entities. Once the lending cartel took over, the policies they enacted determined the fate of the housing market.
In early 2012, the lending cartel decided to stop listing homes for sale on the MLS. They correctly reasoned that if they withheld enough inventory, they could force prices higher even in the face of anemic owner-occupant demand. And since the lenders had to approve more short sales to comply with the terms of their settlement agreement, they began approving more short sales, and they abruptly stopped foreclosing and acquiring new REO. As a result, lenders have eliminated their excess inventory although they still maintain a large processing pipeline. The pipeline inventory is not enough to feed current demand, so MLS inventories sit at record lows, and prices are going up.
The fact that rising prices and the shortage of inventory is entirely an artificial condition raises valid concerns about future house prices. If lenders change their policies, they might increase MLS inventories and lower prices. If the federal reserve changes its interest rate policies, the cost of money could increase, buyer demand would plummet, and prices would follow. Both of these supports are entirely controlled by policymakers not the workings of a free market. However, I recently became convinced these very real threats to the housing market will not materialize.
First, lenders have no desire to recognize losses. They have been kicking the can for five years now, and they show no signs of changing their minds. In fact, since they can borrow money from the federal reserve or their depositors for next to nothing, they have no financial pressure to convert their non-performing loans back to investment capital. Without this cost push, lenders can wait as long as it takes for prices to come back before they foreclose on the long-term squatters. Also, regulators turned a blind eye to this nonsense back in early 2009 when they instituted mark-to-fantasy accounting. There is little or no chance of this policy changing as long as the banks are insolvent under the old accounting rules.
Second, I no longer fear rising interest rates will derail this market rally. The tax credit stimulus was easy to spot as a policy failure because it had a termination date. It merely pulled demand forward, and once the credit disappeared, so did the demand. Prices fell for 18 consecutive months after the credit was removed. I feared the interest rate stimulus would see the same end. However, when Ben Bernanke committed the federal reserve to an indefinite open-ended policy of buying mortgage-backed securities to drive down interest rates, I became convinced this stimulus will not be removed until owner-occupant demand returns to the market.
With the two biggest risks to the market contained, it certainly looks like prices will go up from here.
Last month, I reported that Banks increase foreclosures 30%, notices plummet, REO pipeline stabilizes. It looked that perhaps the banks were finally going to start processing shadow inventory and force out the most committed squatters. Unfortunately, that isn’t what happened. In a reversal of last month’s increase, lenders slowed their foreclosure filings once again.
Dramatic Declines in Foreclosure Activity
September 2012 California Notice of Defaults were down 20.7 percent from the prior month, and down 48.1 percent compared to last year. There has been speculation that the banks would rush to clear inventory before the CA Homeowner Bill of Rights takes affect in January 2013, causing an increase in the number of foreclosures. Clearly this is not the case as we continue to see the number of Foreclosure Starts decline. Notice of Trustee Sales remains basically flat, up 1.9 percent from the prior month.
Perhaps the bump last month was their final push. Any new filings from this point forward will not become foreclosures until after the January deadline.
September 2012 California Foreclosure Sales are down 17.9 percent from the prior month, and down 30.4 percent compared to last year. However, a larger portion of Trustee Sales, 39.2 percent, are being purchased by investors compared to 27.2 percent last year.
In the other states in our coverage area, Foreclosure Starts are down with Arizona down 37.1 percent, Nevada down 40.1 percent, Oregon down 40.0 percent, and Washington down 31.2 percent from the prior month. Sales are also down with Arizona down 24.3 percent, Nevada down 19.5 percent, Oregon down 0.3 percent, and Washington down 33.5 percent from the prior month.
“It was recently reported that the nation’s five largest mortgage servicers have implemented all of the 320 servicing standards required under the national mortgage settlement,” stated Sean O’Toole, Founder & CEO of ForeclosureRadar. “The continued decline in Foreclosure Starts clearly shows that even though servicers are now apparently in compliance and clear to move forward with foreclosures, they are still in no rush to foreclose on the majority of delinquent borrowers.””
And for the reasons I outlined above, they likely won’t be in any hurry until there is collateral value backing their loans. Ultimately, lenders will either force the squatters to pay or to get out, but with prices down, lender losses would be large, so they are taking their time hoping prices will come back and make them whole again.
California REO acquisitions down 19%
REO inventories stabilize
The real goal of lender REO policy this year was to reduce their standing inventories. Lenders were holding tens of thousands of homes waiting for better days. Those homes have been cleared out, and the remaining inventory is in their (very slow) processing pipeline.
Pipeline processing taking even longer
Banks are certainly not worried about making their foreclosure processing any more efficient. Since it now takes them nine and a half months to process a foreclosure, the 65,000 they currently own are all in process. It represents the total acquisitions over the last 9 months. I don’t expect to see REO inventory levels drop much from here unless they decrease their processing times.
Why the fall in notices?
This one defies explanation. Lenders have greatly reduced their foreclosure filings over the last year despite the fact they have no shortage of delinquent squatters to foreclose on. It is a sign that banks are in no hurry to process California foreclosures despite the upcoming law changes on January 1.
Orange County
The story in Orange County is similar to the rest of California. REO processing is back to levels of April through July. Overall, REO processing is down more than 50% from last year’s levels.
Notices of default in Orange County also took a dive for the second straight month. Squatters in Orange County can breathe a little easier.
The inventory saw a similar leveling off.
Amend-extend-pretend continues. Lenders are in no hurry to process more foreclosures, and their liquidations still hang over the market. Over the last six months, their snail’s pace of liquidations has created a dramatic and completely artificial shortage of supply which has caused prices to shoot upward.
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
We're sorry, but it seems that we're having some problems loading MLS # U12003991 from our database. Please check back soon.
Proprietary Irvine Housing News home purchase analysis
30 HONEY LOCUST Irvine, CA 92606
$899,000 …….. Asking Price
$1,000,000 ………. Purchase Price
8/31/2006 ………. Purchase Date
($101,000) ………. Gross Gain (Loss)
($80,000) ………… Commissions and Costs at 8%
============================================
($181,000) ………. Net Gain (Loss)
============================================
-10.1% ………. Gross Percent Change
-18.1% ………. Net Percent Change
-1.7% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$899,000 …….. Asking Price
$179,800 ………… 20% Down Conventional
3.46% …………. Mortgage Interest Rate
30 ……………… Number of Years
$719,200 …….. Mortgage
$190,337 ………. Income Requirement
$3,213 ………… Monthly Mortgage Payment
$779 ………… Property Tax at 1.04%
$517 ………… Mello Roos & Special Taxes
$225 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$183 ………… Homeowners Association Fees
============================================
$4,917 ………. Monthly Cash Outlays
($713) ………. Tax Savings
($1,140) ………. Equity Hidden in Payment
$196 ………….. Lost Income to Down Payment
$132 ………….. Maintenance and Replacement Reserves
============================================
$3,392 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,490 ………… Furnishing and Move In at 1% + $1,500
$10,490 ………… Closing Costs at 1% + $1,500
$7,192 ………… Interest Points
$179,800 ………… Down Payment
============================================
$207,972 ………. Total Cash Costs
$51,900 ………. Emergency Cash Reserves
============================================
$259,872 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
Cost of Ownership Analysis
Are you ready to make an offer, but you are worried the cost of ownership is really more than you can afford? Don't make a mistake that might cost you the family home, your life savings, and your good credit! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today!
We produce detailed reports showing the cost of ownership based on the most likely transaction price and current financing terms. You will know how much you will spend each month in out-of-pocket expenditures and the true monthly cost of ownership factoring in tax deductions, loan amortization, and opportunity costs on your down payment. In addition, we show you how this cost compares to a rental of equal quality to make sure buying is the right decision for your situation.
An OC Housing News Cost of Ownership Analysis will calm your worries and give you peace-of-mind.
Let us show you the way!
Reports are available for properties in the Southern California MLS coverage area, and are generally delivered within 24-72 hours. If you wish to receive multiple properties, please contact us at info@ochousingnews.com, and we will prepare the reports for you.
OC Housing News FREE Guides!
Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."Comparative Market Analysis
Are you ready to make an offer, but you are worried you will either (1) underbid and miss the property or (2) overbid and pay too much? Don't make a mistake and miss your dream home, or worse yet, overpay for it! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today!
Are you thinking about selling, but you are worried you will either (1) overprice and fail to sell or (2) underprice and leave money at the negotiating table? We are the experts in real estate valuation. Work with us to set the right prices to sell your property quickly for the largest amount possible. Let us show you what your property is worth today!
An OC Housing News Comparative Market Analysis will calm your worries and give you peace-of-mind.
See for yourself right now!
Reports are available for properties in the Southern California MLS coverage area, and are generally delivered within 24-72 hours. If you wish to receive multiple properties, please contact us at info@ochousingnews.com, and we will prepare the reports for you.
Home Prices Forecast to Make Slow Progress from Floor Reached in Q1
Home prices reached a sustainable bottom during the first quarter of this year, according to Barclays’ U.S. residential credit strategy team. In many markets, longer-term affordability measures point to equilibrium, the firm’s analysts contend.
While the floor appears to have materialized, they stress that home prices are likely to recover slowly over the next 4 to 5 years.
“We expect on average a 3-4 percent annual increase in home prices [nationally] in coming years,” they said in an updated market outlook.
At that rate, Barclays’ analysts explained, home prices will be slightly below their 2006 peaks even in 2020, finally returning to pre-crisis peak levels in June 2021.
Barclays credits government and private modification programs with delaying foreclosures and preventing an overcorrection, allowing the home price floor to form earlier this year by keeping a glut of distressed homes from hitting the market.
The research firm noted that it is seeing significant variation by state in terms of home price appreciation, tied directly to foreclosure processing timelines.
States with the fastest timelines—California (7.0 months), Colorado (7.3 months), Arizona (7.7 months)—are also home to the biggest annual increases in home prices. Data provided in Barclays report illustrates that foreclosure timelines in these states are on average at least 12 months shorter than in states with the slowest procedures—New Jersey (21.3 months), New York (21.0 months), Florida (20.7 months)—where price gains are smaller.
Delayed foreclosures mean distressed inventory will remain elevated, according to Barclays. The firm’s analysts estimate there are currently close to 3.3 million homes seriously delinquent or in foreclosure which will eventually need to be sold as REOs or short sales. Over the next three years, they expect to see around 4 million liquidations.
“We expect 110,000 distressed sales per month for several years, which should keep [the] distressed share [of homes sales] elevated,” the analysts wrote. For each 1 percent lower distressed share, home prices improve 1.1 percent, according to Barclays.
The firm’s analysts noted in their report, however, that shadow inventory is not the same thing as excess supply, and stressed, “[W]e believe that in the longer term, housing is driven by excess supply.” In fact, Barclays’ data show that the industry’s shadow inventory has been declining steadily for more than a year, and the excess supply is manageable over a two- to three-year period.
“What matters is total excess supply, including owner and rental units,” the analysts wrote, adding that foreclosed borrowers still need a housing unit; they’re simply transitioning from owner to rental units. By Barclays’ assessment, excess supply stood at about 2.6 million housing units in June 2012.
“Our estimate for clearing excess supply is 2-3 years; but recent household formation has outpaced completions substantially, which could point to faster absorption of the excess supply,” Barclays’ analysts stated in their report.
With supply and demand aligning more closely, Barclays says long-run measures suggest home prices are close to equilibrium, and that means the risk that home prices landed on a false bottom earlier this year and will fall dramatically from their current levels remains low. “The government will intervene if prices fall further, [and] other factors will keep timelines long,” the research firm noted in its analysis.
Risks that could upset Barclays’ updated outlook for the housing and residential credit markets stem mostly from extra-market shocks, the company’s analysts explained. Such shocks could take the form of the fiscal cliff awaiting U.S. lawmakers at year-end, the reverberating effects of ongoing sovereign debt crises in Europe, and the fate of the mortgage interest deduction, though Barclays notes the risk that comes with capping the deduction is associated primarily with higher-priced homes.