- Mid-to-Upper end Housing Market Default/Foreclosure Update p.1 – 2…going into the all-important summer selling season, mid-to-upper end housing supply coming from the foreclosure pipeline alone is greater than present sales demand. But foreclosure-related supply only accounts for 33% of for-sale listings. Ma and Pa Organic — that make up the lion’s share of for-sale listings — do not stand a chance. Across the higher end, this will lead to major house price depreciation and soaring negative-equity which then leads to more loan defaults, increased foreclosure-related supply, further house price depreciation and so on and so on…
- Mark-to-market / Geithner Plan Sidebar p. 3…the distressed whole loan market is booming just not at the price the sellers are willing to take. This proves that just because the prices are depressed does not mean the market is distressed.
There are four primary forms of housing supply – they are:
- Ma and Pa Organic (includes short sales)
- Foreclosure-related (REO),
- Foreclosure pipeline (Notice-of-Defaults and Notice-of-Trustee Sales that will become supply in one to nine months)
- Pent-up (those that want to sell but values fell too quickly through their strike price taking them out of the market)
- New homes are not a meaningful form of supply and mean little to the market – they are more of a nuisance than anything else. New home supply causes the most trouble for builders — in many areas of the bubble states you can find near-new properties already in foreclosure across a freeway from new supply both from the same builder.
Although REO sales make up 60% of total sales in most bubble states, REO listings make up only 33% of total listings and Ma and Pa Organic make up the rest. Of the Ma and Pay Organic listings, 50% are advertised as short sales.
I would argue that pent-up supply makes up the greatest amount but that is impossible to quantify as it is a percentage of the total listings pulled from the market over the past two years as house prices declined. If house prices were to really climb in earnest, homeowners that tried but were unable to sell in the past due to suddenly finding themselves in a neg-equity position will come out of the woodwork feeling lucky they can finally get out. This inventory that very few ever talk about should keep a cap on prices indefinitely.
With respect to Ma and Pa Organic and REO listings, I will leave the inventory and months supply reporting to the real estate associations because most — with the exception of bank shadow inventory — can be found on the MLS. With respect to supply barreling down the foreclosure pipeline or hitting daily through the process of foreclosure, that’s my domain. Accurately measuring supply – when it will hit, from what source and how much — is paramount when accessing future housing market performance. And from what I can physically see in the mid-to-upper end housing space, a repeat of the process that took down lower priced homes is playing out right now.
2009 will be the very tough year for mid-to-high end house prices and related mortgage instruments. There is no way around it. It is already in process and very measurable. When loans over the GSE conforming limit of $417k are required to purchase a home, the housing and mortgage market become very volatile. This is despite GSE Jumbo loans to $729.5k becoming quite attractive lately relative to where they came from a year ago. Still, how many really earn the fully documented $180k per year and have the $270k down needed to buy a $1 million home using a GSE Jumbo loan? Note – the income above is only enough if the borrower has ZERO other debt. Each $1000 on other monthly payments (car, boat, credit cards etc) reduces the amount able to be borrowed by about $125k.
The Hard (to handle) Numbers
In CA in last year, there were approx 24k sales of homes valued at more than $1 million. During the same year only about 4500 high-end homes made it all the way through the foreclosure cycle and ended up as REO keeping this form of supply at manageable minimums.
But now, Jumbo loans and the homes attached to them are screaming through the foreclosure process. Total sales of mid-to-upper end homes have fallen off sharply from the 24k pace to closer to 12k in 2009. A foreclosure wave is about to hit that looks very similar to the beginnings of the Subprime crisis in 2007. If 80% of all Notice-of-Defaults end up as foreclosure-related REO listed for-sale supply (based upon the last month’s NOD counts) the supply from this source alone will equal total sales making for infinite inventory. Add in Ma and Pa Organic that make up 66% of all listings and supply in this sector will also dwarf demand resulting in a house price free fall this summer.
The chart below shows the relentless flow of monthly Notice-of-Defaults for properties with values over $1 million. NOD’s are a leading indicator of everything bad for housing. Judging by the pace of new defaults post-SB1137 (December through February), the mid-to-upper end housing market will remain depressed all year, as 80% of these defaults will turn into housing supply 5-8 months from the NOD month. Note – the Feb monthly pace of new loan defaults is greater than the monthly sales pace by 35%. When you add in Ma and Pa Organic supply that make up 66% of for-sale listings, demand is dwarfed.
Data in partnership with ForeclosureRadar.com
The chart below shows actual high-end foreclosures that have made it back to banks as REO over the past two years. Most of this REO makes it back out the other side as listed for-sale supply through the Realtor network. However, as the chart highlights very few higher end properties have made it all the way through the foreclosure process and out the other side as supply in the past.
During the 2008 period that this chart covers, total demand of nearly 2k sales per month was much greater than foreclosure-related supply of approx 4500 properties providing support for this class. As the wave of NOD’s highlighted in the previous chart roll through the system at the same time that demand wanes, supply will far outpace demand and it all begins.
data in partnership with ForeclosureRadar.com
Mark-to-market / Geithner Plan Sidebar. Foreclosure-related REO sales — that make up 60% of total sales — count as comparable sales for the purpose of property appraisals and are responsible for the rapid decline in values across the nation. Real estate sales comparables are the perfect example of real-time mark-to-market valuations. These homes are worth what someone is willing to pay and the REO resale market is booming relative to organic sales — you hear about it every day in the press.
This proves that just because the prices are depressed does not mean the market is distressed. This boom in REO property demand carries over to the distressed whole loan space. Because most distressed loans eventually turn into REO, the only way to accurately value these assets are at a discount to the present value of the underlying property adjusted for time to foreclose, rehab and resale time and expense.
This is why it is confusing to me how the whole loan part of Geithner’s plan will help boost prices for whole loans. The market for these assets is booming just not at the price points that sellers are willing to take. The only way Geithner’s whole loan plan will boost distressed whole loans prices is if it boosts housing prices. In the whole loan class, I just do not see sellers meeting buyers especially considering how far present values have fallen and the epidemic amount of negative-equity. In fact, in CA last month the average negative equity was over $200k across all foreclosures.
**For more information in our default/foreclosure related research including real-time mortgage default, foreclosure and loss tracking across large-named publicly traded companies please email me at the address below. Looking ahead of the housing and mortgage market and into bank’s residential mortgage portfolios and balance sheets is now much clearer.
Best Regards,
Mark Hanson
Mark@TheFieldCheckGroup.com
Analysis by Mark Hanson, Field Check Group Real Estate & Finance
Data in partnership with Foreclosure Radar
March 31st, 2009 at 2:41 pm
First comment!
April 2nd, 2009 at 7:57 pm
Second comment!
Whoo Hoo! Glad your back mr mortage!
I was looking all over for your new site and I’m the first to find it!
April 3rd, 2009 at 1:47 pm
Good job – I have not made the site public yet.
April 7th, 2009 at 6:28 am
Mark,
what makes you think the high-end foreclosure supply will hit the market this summer, as opposed to e.g., 2010, 2011, etc.?
April 7th, 2009 at 11:42 am
Hi Evo – I can see realtime each one coming through.
April 8th, 2009 at 8:43 am
Boy am I glad to see you back in the saddle Mark. We’ve missed you!
Thanx!
April 8th, 2009 at 2:18 pm
Great to see you have your own space now, Hedgie.
Don’t forget to post on Tickerforum.
April 9th, 2009 at 8:34 am
Great analysis.
Is the data for CA or for the whole US? Would it be possible to make a similar analysis for the major metropolitan areas?
April 9th, 2009 at 9:25 am
Hi Mr Mortgage!
I just discovered your site via Redfin. I’m currently in the market for a single family residence in the San Fernando valley in CA (around Lake Balboa area) and I wondered what you think the outlook there is as far as likely foreclosures in the 300-400k price bracket of homes and if what’s out there now is likely to be joined by many more foreclosed homes. Will there be a trickle down effect of the higher end foreclosures impacting the more mid range properties? I don’t know whether to wait or to buy now. There are apparently plenty of cash buyers out there flipping properties which is beyond irritating to those of us who want to buy a HOME!
April 9th, 2009 at 11:54 am
Glad to see you’re back. I’m been going through Mr Mortgage withdrawals.
April 9th, 2009 at 11:59 am
What is the likelihood that a good portion of the NODs in the pipeline get reworked? Now that the banks have government assistance thanks to the taxpayers, they can reduce rates and principle. Maybe a high percentage of those w/NODs will do loan mods and poof! No more NODs. Then the banks can start lending to those w/lemonade stands and all will be good w/the universe
April 9th, 2009 at 12:33 pm
I’m also very glad you’re posting again. Nobody filters through the BS as well as you do.
April 9th, 2009 at 1:57 pm
Glad I found this site.
Pam, I’m in the same boat, looking for 300-400,000 homes in Orange County. Lots of cash buyers out there (so I’m told) and it is beyond irritating. People are bidding up 20-30 thousand dollars.
April 9th, 2009 at 5:52 pm
In response to Josephine’s question, I simply cannot see these NODs getting reworked, because so many of these outstanding loan amounts will be beyond a reasonable % over the actual value of the property. As Mark stated, the average REO/foreclosure in Cali is 200K under the outstanding principal.
Obama and Geithner’s plan/assistance for homeowners, as it currently stands, will simply not help Cali homeowners in the least, because it requires what, a max of 110% LTV ratio to get assistance and the loan reworked?
Not only that, but when you take into account the HUGE margin the banks are playing in their favor for anything that isn’t a conforming loan (under 400 some odd thousand), including the so called “jumbo conforming” loans between 400 some odd thousand and 729.5K, prices are going to tank, no question about it.
I wouldn’t even start to look until later this year, and as Mark indicated, with enormous supply building and coming out of the woodwork at any significant uptick, I think buyers have all the time in the world. Don’t settle, don’t rush, and by all means, lowball the hell out of anything and everything!
April 9th, 2009 at 6:00 pm
Hey DanVanh, sure there are cash buyers out there, and plenty of overbidders, but it makes no difference. They are catching a falling knife no question about it. I’ve been told that numerous scummy realtors have been advising people to “overbid” and “bid over the asking price”…anyone that listens to these people is a complete and utter fool, and those realtors should be…well I don’t want to say anything nasty but they should be soundly punished in a variety of ways.
Some people see 10%, 20%, 30% off the peak price and think it’s a great deal, well a fool and his money are soon parted. Note the sales trends, particularly inventory available on the market. Over 9 months inventory available and there is simply no way prices should be going up.
The second wave is about to hit, this time for the middle and upper level homes, 500K-750K and 750K and up…take a look at past recession studies and you will find that, while it may take longer and/or be delayed, the highest price zip codes’ median values fall by pretty much the same percentage as the lowest price zip codes. I will have to see if I can google the report based on the 90’s recession which outlined this…
It’s coming, people, no way around it. No way in hell is there going to be yet another bailout, this time for what, 2 or 3 trillion dollars, coming to help these property owners. What I’m wondering is what is going to happen to the banks when this one hits? So much for the “recession is over” and the false rally…
April 9th, 2009 at 6:09 pm
Thank goodness Mark is back! Wasn’t easy to find you this time. Need someone to hold my hand as we enter Summer 2009. I’m scared.
April 9th, 2009 at 6:31 pm
Mark,
Outstanding article.
Im a 25 year Certified Residential Real Estate Appraiser based in SF Bay area.
Found this information to be extremely helpful.
Keep up the great work!.
April 9th, 2009 at 9:12 pm
I broke out demand versus inventory by price levels on my blog:
http://effectivedemand.blogspot.com/2009/03/ventura-county-demand-versus-inventory.html
You basically have the high end sitting while the low end is selling very well. With the foreclosure moratoriums draining a lot of supply from the market you should get a sales slow down (and median price rise) by July or so unless the REO spigot opens up again.
April 10th, 2009 at 9:07 am
How to blow the BS whistle on real estate agents: tell them you will match every dollar they invest into any property. How to blow the BS whistle on a banker: ask them how much leverage they will give you on specie (pronounced speeshee) and watch their face carefully…
April 10th, 2009 at 12:31 pm
“How to blow the BS whistle on real estate agents: tell them you will match every dollar they invest into any property”
Aztc, if I do that, I would be broke. My agent is buying properties for himself.
April 15th, 2009 at 5:46 pm
oh joy Mr Moron is back
April 16th, 2009 at 10:49 am
JASTOON MUST BE A REAL ESTATE AGENT ! STILL SPINNING WITH DENIAL !
April 16th, 2009 at 8:53 pm
Whew!! Thank goodness you’re back, Mr. Mortgage! I’ve been dying to read your blogs since you went offline.
April 21st, 2009 at 10:31 am
Once the public and house owners, holding a mortgage, know that the
bankers and their government are nothing else but crooks and criminals,
its actually rather easy to deal with the foreclosure situation. Well
for Americans and their second amendment it surely is. One stays in
your house and You are going to BAIL yourself out, instead of the
“Bankers” and the “mortgage and loans” front operations.
You institute a BAIL-OUT commission. TARP funds for this BAIL-OUT
commission are constituted by donating FULL METAL JACKET ammonition
into the Commissioners kitty. Then when all have contributed, a
representative delegation makes its way to washington D.C. and
requests a hearing with all the USUAL SUSPECTS .. You know : Neel
(Kashmir flying Carpet begger) Kashkari, Henry (Eagle Boyscout)
Paulson, Alan (Tamudic Fiat Currency) Greenspan (as the honory
nestor), Bernard ‘Baruch Helicopter’ Ben Bernanke, Timothy Franz’l
(The Frankfurt breed, ECB Henchman) Geitner, and all who want to
sit in. The BAIL-OUT Commissioner then poses the question :
OK, I’M GONNA BAIL YOU GUYS OUT. HOW MUCH DO YOU NEED?
ONE?
TWO?
THREE?
The honorable Treasury and ex Treasury specialists and Federal
Reserve members will most probable claim that only THREE will do.
You then state that its the wrong answer, as they haven’t asked yet
in which currency they are going to be BAILED-OUT. The Commisioner
then reads the BAIL-OUT commisions founding documents and ends with
:
“SINCE YOU DIPSHITS EVEN FORGOT TO ASK IN WHICH CURRENCY YOUR ASS
IS TO BE BAILED-OUT, I WILL DISCLOSE THAT ITS FULL METAL JACKET
AMMONITION.”
THEN YOU BAIL THESE TRAITORS OUT WITH THREE FLYING EAGLE edtions of
that FULL METAL JACKET AMMO, and forget about the whole disaster.
All of Bushes Executive paperwork is burned, and one creates and
funds the building of factories and production units on American
soil.
April 21st, 2009 at 12:59 pm
i think i agree with Robert Stockmann……my guess is eventually a couple of these thiefs and traitors are going to be picked off on the streets in broad daylight and most Americans will cheer
September 8th, 2009 at 1:55 pm
I would like to get back on your email list.
Thank YOu
December 13th, 2009 at 7:22 pm
Generally I do not post on blogs, but I would like to say that this post really forced me to do so! really nice post,and very informative.