Since the housing bust began, the banks have largely controlled the inventory of homes on the MLS. At first, they flooded the MLS with subprime foreclosures, but with mark-to-fantasy accounting, they were able to slow their foreclosure rates and store delinquent borrowers in shadow inventory. Since early 2009, the number of properties available for sales has been completely controlled by the banks. They determine when to list their standing inventory of REO, and they control the approval on every short sale. Between those two sources, the banks control the market.
Banks decided early this year to slow the rate they took back properties at foreclose auctions thus reducing MLS inventory of REO significantly. More recently banks increased foreclosures 30% as their REO pipeline stabilizes, but this supply is still several months away. Plus, they also slowed their rate of new filings which suggests they don’t plan to increase inventory significantly. Hopefully, the upsurge in banks taking on REO will translate into more available MLS inventory soon. It’s too early to tell if this is a new trend signalling a change in policy.
The banks benefit from the lack of inventory. Buyers bid up the prices on what’s available, and the banks recover more capital from their bad loans. The only caveat is that banks aren’t able to sell that many or prices would crumble again, so by restricting supply and raising prices, they slow the rate of their liquidations. It’s their hope that rising prices will trigger a self-fueling price rally as sidelined buyers enter the market for fear of being priced out. It likely won’t work out that way.
Many sidelined buyers are smart. They are waiting because they know lenders have an enormous shadow inventory they must liquidate, and in many markets, lenders have lost control of their liquidations and drove prices much lower. When buyers know the product is there, they also know they have the upper hand. If they wait, they can generally get a better deal. Most sidelined buyers today are frustrated by the lack of currently available inventory, but they are also being patient and waiting for lenders to pick up the pace of their liquidations. In the meantime, inventory levels are dropping to very low levels, particularly in the western US.
For-Sale Listings Drop Again, Led by California Cities
By Nick Timiraos — September 18, 2012, 6:00 AM
The number of homes listed for sale fell in August, led by a clutch of California cities that posted outsized declines.
Active Inventory in Irvine hit the lowest level of at least the last six years. (chart courtesy of Irvine Housing Blog)
Inventories fell in August by 1.2% from July, bucking a seasonal pattern of a slight uptick before the summer season ends. Listings were down by 18.7% from one year ago and 34.1% from two years ago, according to a report from Realtor.com.
Falling inventories are a leading driver behind the recent rally in home prices, and the declines point to continued price-strength in many parts of the Western U.S., which are also benefiting from strong investor demand.
Investor demand is confined to only a small subset of the property market. The real story behind the rising prices is the lack of supply.
Among the 15 cities with the largest year-over-year declines, some 13 were in California, led by Oakland, which posted a 58.4% decline. Other big declines came in Stockton (down 45%), Fresno (down 43.1%), Sacramento (down 42.4%), Riverside-San Bernardino (down 41.8%), Bakersfield (down 41.4%), and San Jose (down 41.1%).
The decline in active listings across Orange County is remarkable.
Inventory declines have typically preceded stronger prices if demand stays the same, because more buyers are chasing fewer homes. But low inventory could also curb transaction volumes if buyers, frustrated by the lack of choice, sit on the sidelines. …
Many frustrated buyers are sitting on the sidelines. As a result, we may not see a decline in price this winter, and if inventory returns, sales volumes may remain relatively high as unsatisfied buyers from the prime selling season remain active this fall and winter.
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Proprietary Irvine Housing News home purchase analysis
$699,900 …….. Asking Price
$736,000 ………. Purchase Price
5/24/2005 ………. Purchase Date
($36,100) ………. Gross Gain (Loss)
($58,880) ………… Commissions and Costs at 8%
============================================
($94,980) ………. Net Gain (Loss)
============================================
-4.9% ………. Gross Percent Change
-12.9% ………. Net Percent Change
-0.7% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$699,900 …….. Asking Price
$139,980 ………… 20% Down Conventional
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$559,920 …….. Mortgage
$149,109 ………. Income Requirement
$2,517 ………… Monthly Mortgage Payment
$607 ………… Property Tax at 1.04%
$350 ………… Mello Roos & Special Taxes
$175 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$203 ………… Homeowners Association Fees
============================================
$3,852 ………. Monthly Cash Outlays
($561) ………. Tax Savings
($880) ………. Equity Hidden in Payment
$156 ………….. Lost Income to Down Payment
$107 ………….. Maintenance and Replacement Reserves
============================================
$2,675 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$8,499 ………… Furnishing and Move In at 1% + $1,500
$8,499 ………… Closing Costs at 1% + $1,500
$5,599 ………… Interest Points
$139,980 ………… Down Payment
============================================
$162,577 ………. Total Cash Costs
$41,000 ………. Emergency Cash Reserves
============================================
$203,577 ………. 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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Fed Cannot Ignore Harm Caused by Housing Bust: Bullard
The U.S. central bank would be courting disaster if it pursued a so-called nominal growth target that did not take into account the economic damage done by the housing crisis, a senior Federal Reserve official warned on Thursday.
James Bullard, president of the St. Louis Federal Reserve Bank, also argued that the only variable in the economy the Fed could control over the longer term was inflation, saying it did best when focusing solely on that goal.
Bullard, in a lecture at the University of Notre Dame in Indiana, said the pre-crisis housing bubble had driven U.S. growth to levels that were not realistic to try to recapture. He cited work by economists Carmen Reinhart and Kenneth Rogoff that argue recoveries after a severe financial crisis are much slower.
“Attempting to target nominal (gross domestic product) without adjustment for the Reinhart-Rogoff effect could be an unmitigated disaster,” Bullard said during his presentation.
Frustration with a slow decline in high U.S. unemployment has sparked calls by some economists for the Fed to target nominal GDP, which measures growth in output before adjustments for inflation. They argue this would help communicate a powerful commitment to do whatever it takes to restore growth to its pre-crisis levels.
The Fed last week announced an aggressive plan to buy $40 billion of mortgage-backed securities every month until it saw a substantial improvement in the outlook for the labor market.
Bullard, who is not a voting member of the Fed’s policy-setting committee, told Reuters in an interview on Tuesday that he did not agree with the action. He said he would have dissented had he had a vote, because he would have favored seeing clear evidence the economy was slipping and risked another recession before launching the plan.
U.S. unemployment was 8.1 percent last month and economic growth remains stuck around 2 percent, despite cuts in the Fed’s target overnight interest rate to near zero and massive bond purchases. The bond purchase caused the Fed’s balance sheet to balloon to $2.3 trillion, even before last week’s news.