With the serious problems facing the housing market including high delinquency rates creating a massive shadow inventory, a weak economy, tepid demand from owner-occupants, excessive consumer debt, a depleted buyer pool due to credit impairment, and artificially low interest rates, it’s a wonder housing prices aren’t still heading straight down. The recent uptick in prices is largely due to a successful attempt by the lending cartel to restrict for-sale inventory on the MLS. Without this inventory restriction, prices would almost certainly be headed lower.
At some point, the shadow inventory of delinquent mortgage squatters will be cleared out. The liquidation will either lower prices or limit appreciation for a long time while these properties are processed. The big question is, when will this liquidation happen? Right now, the banks are in no hurry.
For lenders to be motivated to process their backlog of foreclosures, they need some reason to act. Ordinarily, the cost push of paying for capital would force them liquidate non-performing loans and put that money to productive uses. However, with the federal reserves zero interest rate program to steal from savers and the elderly, banks have no cost of capital. Banks can borrow all they want from depositors or the federal reserve for nothing.
Since the banks have little or no cost of capital, they can sit on their bad loans indefinitely — and they are. Right now, it’s in the best interest of the lending cartel to sit on their bad loans. The lack of inventory on the MLS is causing prices to go up — although it is simultaneously causing sales rates to plummet. Higher resale prices make for better capital recovery on the loans the banks do process. As long as they all agree to continue delaying their foreclosure processing, they all benefit from higher prices. Of course, this is still a cartel arrangement, and as prices rise, each member has a strong incentive to cheat, particularly the weakest members, but right now, the cartel is enjoying great success driving prices higher.
Until the federal reserve raises interest rates, lenders face no cost pressure to liquidate their bad loans. With no pressure to liquidate, lenders will continue to allow squatters free housing in hopes resale prices will continue to rise. So when will the federal reserve finally start to raise interest rates? Well, they said they will leave them at zero through the end of 2014, but it may leave rates along much longer. In fact, it is likely the federal reserve will leave interest rates near zero until house prices regain their peak, and with 3.5% interest rates, that will be much sooner than most think.
The federal reserve cannot raise interest rates as long as so many loanowners are so far underwater. The member banks of the federal reserve hold hundreds of billions of dollars in second mortgages and HELOCs on their books. If house prices don’t rise enough to put collateral value behind these mortgages, the resulting losses upon liquidation will bankrupt our banking system. This really leaves the federal reserve no choice but to push resale prices back up to peak levels as soon as possible by any means necessary.
As rising home values bring properties above water, lenders will liquidate, but not before. With no cost push, they can afford to wait. And with the threat of bankruptcy looming if they liquidate too early, they must wait. Based on those circumstances, inventory will likely remain in the shadows for quite some time. Prices will go up, transaction volumes will be way down, and prices will not flatten out until they approach the peak where lenders will finally begin their liquidations.
I guess that makes me bullish. I now believe that perhaps the bottom callers were right. I wish one of them would have identified the reasons I gave above. Perhaps I may have been convinced months ago, but now, based on what I believe the federal reserve and the member banks are going to do, and why they are going to do it, I think we may be at the bottom. So much for the capitulatory liquidation regulators would ordinarily require.
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Proprietary Irvine Housing News home purchase analysis
$939,000 …….. Asking Price
$755,000 ………. Purchase Price
9/3/2004 ………. Purchase Date
$184,000 ………. Gross Gain (Loss)
($60,400) ………… Commissions and Costs at 8%
============================================
$123,600 ………. Net Gain (Loss)
============================================
24.4% ………. Gross Percent Change
16.4% ………. Net Percent Change
2.7% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$939,000 …….. Asking Price
$187,800 ………… 20% Down Conventional
3.64% …………. Mortgage Interest Rate
30 ……………… Number of Years
$751,200 …….. Mortgage
$173,448 ………. Income Requirement
$3,432 ………… Monthly Mortgage Payment
$814 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$235 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$4,481 ………. Monthly Cash Outlays
($773) ………. Tax Savings
($1,154) ………. Equity Hidden in Payment
$223 ………….. Lost Income to Down Payment
$255 ………….. Maintenance and Replacement Reserves
============================================
$3,032 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,890 ………… Furnishing and Move In at 1% + $1,500
$10,890 ………… Closing Costs at 1% + $1,500
$7,512 ………… Interest Points
$187,800 ………… Down Payment
============================================
$217,092 ………. Total Cash Costs
$46,400 ………. Emergency Cash Reserves
============================================
$263,492 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Cost of Ownership Analysis
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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
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$969,000 5 MACON |
0.09 miles 4 bd / 2.75 ba 2,921 Sq. Ft. |
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$798,000 51 Bluecoat |
0.16 miles 4 bd / 2 ba 2,721 Sq. Ft. |
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$988,000 1 TICONDEROGA |
0.25 miles 4 bd / 2.75 ba 3,112 Sq. Ft. |
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$736,990 13 SILVER SPRUCE Ct |
0.45 miles 3 bd / 2.5 ba 2,752 Sq. Ft. |
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$790,990 11 SILVER SPRUCE Ct |
0.45 miles 4 bd / 3.5 ba 3,261 Sq. Ft. |
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$895,967 66 NASSAU #108 |
0.51 miles 4 bd / 2.75 ba 2,577 Sq. Ft. |
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$749,900 77 GRANT |
0.55 miles 4 bd / 3.5 ba 2,536 Sq. Ft. |
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$799,000 73 GRANT |
0.56 miles 4 bd / 2.75 ba 2,652 Sq. Ft. |
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$1,050,000 44 HUNTER |
0.6 miles 4 bd / 3 ba 3,216 Sq. Ft. |
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$848,888 43 CHOATE |
0.62 miles 4 bd / 2.25 ba 2,870 Sq. Ft. |
Low inventories are going to cause home sales to continue to fall. We may see record low home sales soon if circumstances don’t change.
NAR: Home Price Increase Has Downsides as Inventory Dwindles
Limited inventory may be boosting home prices, but buyer choices are stifled in an increasing number of markets, the National Association of Realtors (NAR) reported Thursday.
The association’s latest quarterly report showed that the median existing single-family home price increased during Q2 in 110 out of 147 metropolitan statistical areas (MSAs) compared to the same period in 2011. Of the remaining 37 MSAs, 34 posted price declines, and three remained unchanged.
The national median existing single-family home price was $181,500 in Q2, up 7.3 percent from the same time in 2011. This is the strongest year-over-year increase since the first quarter of 2006.
The second quarter’s results illustrated a marked improvement over the first quarter, which showed year-over-year price gains in only 74 MSAs.
Lawrence Yun, chief economist for NAR, said the organization expects prices to continue to rise in the future.
“It’s most encouraging to see a growing number of metro areas with rising median prices, which is improving the equity position of existing homeowners,” Yun said. “Inventory has been trending down, and home builders are still under-producing in relation to growing demand.”
Yun pointed out that price increases can also be attributed partially to a decreasing share of sales in low price ranges, where inventory tightened.
Distressed homes accounted for 26 percent of Q2 sales, down from 33 percent in Q2 2011. Drastic discounts from distressed sales usually work to bring the median home price down.
Since the summer of 2007, inventories have been trending downward steadily. The end of the second quarter saw 2.39 existing homes available for sale, a 24.4 percent drop from the same time in 2011.
NAR president Moe Veissi said that mortgage rates and historically low prices have increased buying power dramatically. The inventory in the lower price ranges needs to keep up with demand, he said.
“What we need now is additional inventory in the lower price ranges, so we hope banks will be releasing more foreclosure inventory into the market. With gains apparent in all of the price measures, banks also should have more confidence in expanding mortgage credit to home buyers using safe but sensible standards,” Veissi said.
The national median family income in the second quarter was $61,000. To purchase a home at the national median price, a buyer making a 5 percent down payment would only need an income of $39,000.
“Because the income required to buy to a typical home is very manageable by historical standards, any further decline in mortgage interest rates will have little effect. Changes in underwriting guidelines would have a far greater impact,” Yun said.
Existing-home sales varied from region to region, rising 1.3 percent in the Midwest and South but slipping 0.6 percent in the Northeast. In the West, tight inventory brought existing-home sales down 5.3 percent as the median home price jumped up 13.4 percent.
“Inventory is pretty tight in all price ranges in most of the West except for the upper end, which accounts for the sharp price gain,” Yun said.