Field Check Group: Real Estate & Finance

Below is an MSA level look at the default, foreclosure and housing market in San Diego from a recent report of all CA MSA’s.  All CA MSA’s look the same.  Even down to the street and city level, foreclosure pipeline supply is greater than present demand and pipeline supply is only one form.  In the mid-to-upper end, the numbers look just like the lower end did back in 2007 when the Subprime universe was buckling in earnest — right before median house prices began their catastrophic slide. Mark

−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

- San Diego – Looking Ahead of the Housing Market
- San Diego Sales – Stabilizing at Low Levels
- Foreclosure Supply About to Overwhelm Market
- Prices May Stabilize — even increase — as Market Worsens

−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

With proprietary default and foreclosure data only available to a select number of firms in the nation and decades of mortgage and real estate experience, we are able to provide high-level and granular broad-market and company-specific insights never before available – sometimes months ahead of public news and events. Looking ahead of the mortgage and housing market and into bank’s residential mortgage portfolio and balance sheet is now much easier. Best, Mark Hanson

−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

San Diego – Looking Ahead of the Housing Market

Be careful believing that the housing market is ‘improving’. While the price depreciation has gotten ‘less worse’ at very low price range, the CA housing market is by no means ’strong’ with total sales far below levels seen from 2003-2006.

All-important move-up buyers are non-existent and the market is being carried by it’s historically weakest participants — the investor and first time home buyer. At present sales levels, the market may have reached a point of maximum demand from these two segments.

There are four primary forms of housing supply – they are:

• Ma and Pa Organic (includes short sales) — 65% of supply / 40% of sales
• Foreclosure (REO) — 35% of supply / 60% of sales

Harder to measure but equally as important to the supply/demand balance is:

• Foreclosure pipeline supply (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 Home supply, permits etc are virtually meaningless in this market environment.

Although REO sales make up 60% of total sales in most bubble states, REO listings make up only 35% of total listings and Ma and Pa Organic make up the rest. Of the Ma and Pay Organic listings, roughly 50% are advertised as short sales.  Due to epidemic negative-equity and tough financing — especially in the mid-to-high end — Ma and Pa Organic don’t stand a chance against the REO.

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 climb even ever so slightly 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 that they can finally get out. This inventory, which very few even think about, could keep a cap on the market indefinitely by itself.

When you add in Ma and Pa Organic, foreclosures and foreclosure pipeline supply it is obvious that the housing market — particularly in the mid-to-high — is highly unbalanced with supply outpacing demand at levels never seen before.

San Diego Sales – Stabilizing at Low Levels

Year-ago comparable sales have been very easy to beat because at the end of 07 through Q1 08 house sales plunged as loan programs rapidly vanished while house prices were still near all-time highs.

But unless sales pick up sharply by April/May the year-ago comps will start coming in negative. In the chart below, the blue line tracks total sales for the past few years. In the last month reported to date — Feb 2009 — total sales at 2473 were below April 2008 of 2809.

This means sales have to increase by over 15% by April or year-over-year comparable sales will go negative for the first time in nearly a year. Negative sales comps being reported in the media could add a layer of negative sentiment to the market while foreclosure supply is about to flood in — further suppressing prices.

Foreclosure Pipeline Supply About to Overwhelm Market

New Notice-of-Default (NOD) filings in San Diego County are surging.  Nearly 4000 new defaults hit in March alone while total sales were roughly 3000. NOD is Stage 1 of the foreclosure process that happens after a borrower misses 3-4 payments. From here the banks/servicers will try to modify the mortgages and those that are not modified will go to stage 2 — Notice-of-Trustee Sale (NTS) within 4-5 months. Due to epidemic negative equity, weak sales and few financing options for many, the amount of NOD’s that will make it all the way to foreclosure is very high.

In the past 6-months, on average San Diego County sold 3000 properties per month therefore supply from the new default supply spigot alone is greater than present total sales.  Add in REO, Ma & Pa, and pent-up and supply dwarfs demand.

Notice-of-Trustee Sales (NTS) are also surging at nearly 2500 in March — the highest on record in 8 months. This comes just in time for the Spring/Summer selling season – what a coincidence. From here the property is taken to the courthouse and sold within 21-45 days so the majority of these should make it to the MLS within 60-days.

Actual foreclosure supply that went back to the bank as REO has remained very low relative to total supply and sales. In March only 573 homes in San Diego County were foreclosed upon. In July 2008 when the nation panicked and bank/servicer/GSE specific moratoria kicked in across the country, 2110 properties were taken back as REO.  This low pace of REO has kept the market from outright implosion but really only served to kicked the can down the road.

Despite this interference, prices still tumbled. Supply is about to hit again and in a very hard way. Unless sales demand more than doubles from here, this market will remain under significant pressure. But the doubling of demand would take total sales back to peak levels seen in 2005 and is unrealistic.

Jumbo Notices-of-Default hit 1438 in March – far greater than mid-to-high end sales. Jumbo defaults and the properties attached to them are surging in absolute and relative terms during the latest 4-month surge. While the low end of the market maybe stabilizing the mid-to-upper end has no price support. The surge in Jumbo foreclosure supply in addition to tough financing and epidemic negative equity, which has taken away most move-up buyers, will cause significant house price compression. Mid-to-upper end housing markets will lead the downside in 2009.

Jumbo Notice-of-Trustee Sales surged in March to 970 — the highest on record in 8-months…again, just in time for the Spring/Summer selling season. From here the properties are taken to the courthouse and sold within 21-45 days.

Actual Jumbo foreclosure supply that went back to the bank as REO has remained very low relative to total supply and sales. In March only 195 homes in San Diego County were foreclosed upon. In July 2008 when the nation panicked and bank/servicer/GSE specific moratoria kicked in across the country, 714 properties were taken back as REO. This low pace of REO has kept the market from outright implosion but really only served to kicked the can down the road.

Despite this interference, prices still tumbled but supply is about to hit again and in a very hard way led by a surge in the mid-to-high end. Unless sales demand more than doubles from here, this market will remain under significant pressure. But the doubling of demand would take total sales back to peak levels seen in 2005 and is unrealistic.

Present Value of properties at the time of foreclosure

Average present values of properties at the actual time of foreclosure have stabilized at approx $240k. As a headline this sounds great. But in reality the reason for this is because more mid-to-higher end properties are being foreclosed upon which pushes up the median and average prices. The damage that losing the mid-to-upper end earners does to the broader economy –as they go through the same de-leveraging as the Subprime borrowers did — is unknowable.

Present Value of properties at the time of default have also stabilized but at $265k. This is a prime example of how higher priced properties that enter the mix will push house prices up giving a false read on the market. As a headline this sounds great. But in reality the reason for this is because more mid-to-higher end properties are being foreclosed upon which pushes up the median and average prices.

Present-Value Mix-Shift at time of foreclosure - The chart below shows average house prices at the time of foreclosure broken down into present-value tranches. This chart gives a clear view of the total percentages of each tranche that is being foreclosure upon. At the top of the chart, the lowest price (blue) tranche has stopped increasing while the other others have started to increase. This points to a stabilization of house prices caused by the mix and not necessarily an improvement in the market itself.

Present-Value Mix-Shift at time of Notice-of-Default – The chart below shows average house prices at the time of default (5-7 months prior to foreclosure) broken down into present-value tranches. This chart gives a clear view of the total percentages of each tranche that is being foreclosure upon. Like the chart before, the lowest price (blue) tranche has started to shrink while the others are expanding. This also points to a stabilization of house prices further out the foreclosure process caused by the mix and not necessarily an improvement in the market itself.

**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

Analytics by Mark Hanson, Field Check Group Real Estate & Finance

Data provided by ForeclosureRadar.com

You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.