- Gridlock: CA Organic House Sales — No Increase in 18-months
In order to chew through supply and balance the market, homeowners must be able to sell and re-buy. Move-up/across/down homeowners have always carried the market in the past. Now the market is dominated by its weakest participants — the first timer and investor — who are at a point of maximum demand, as supply is about to hit hard once again.
- Examing the Foreclosure-Related Resale Market — At the Point of Maximum Demand
Despite consensus that house sales are surging, they remain very weak as highlighted in this segment and chart.
- Total Sales vs Foreclosure Supply – Heavily Imbalanced with Infinite Supply
It is the tale of two markets with one at a point of maximum demand and one languishing. This, while massive supply is about to come online.
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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.
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The CA housing purchase market is at a point of critical gridlock. And it’s not from too many buyers. It’s just the opposite — there are not enough of the right type of sellers that after sale, become the right type of buyers.
The organic move-up/across/down buyer is not an active participant in the market and has not been for 18-months. Coincidentally, 18-months ago marks the exact point at which lenders pulled the plug on all of the exotic first and second mortgage loan programs.
This is the tale of two housing markets; each vastly different with respect to its different players and fundamentals with one at a point of maximum demand and one languishing.
CA Organic House Sales Near All-Time Low — No Increase in 18-months
CA organic home sales are near all-time lows. They have not increases at all in the past 18-months and are down from peak levels between 60% and 75% in 2009.
The chart below depicts the total sales broken into ‘organic’ and ‘foreclosure-related’ sales. The blue portion represents Ma and Pa Organic selling a property either to re-buy a new property or to rent. The red portion are first-timers and investors slugging it out for a $200k foreclosure-related property.
Unless the organic group can sell and re-buy, the housing market will continue to be controlled by its historically weakest participants — the first timer and investor group. With financing tight, economic conditions questionable, and rents tumbling these groups can’t carry the market especially at the mid-to-upper end which will feel the most pain in 2009-2011.
Epidemic Negative-Equity – Average $201k on Each Foreclosure in April
Remember, the US was near a 70% homeownership rate entering this mess. It has fallen a few percent since, but by and large the homeownership rate left over from the bubble years is massive. As values plummeted equity was evaporated and negative-equity has become epidemic. Negative equity is so problematic in CA that the average negative equity for all foreclosures last month was $201k.
With respect to house sales, negative equity takes away the largest segment of the market…the organic move-up/across/down buyers.
Unless more homeowners are able to sell and take away a large enough down payment for the new vintage loan; rent their present residence for enough to cover the debt-service; and/or come up with a large enough down payment out of savings in addition to having the income to qualify for a new loan, the housing market will continue to be dominated by a bunch of speculators slugging it out for a $200k foreclosed property. Therefore, further price depreciation, interest rate decreases or the re-introduction of exotic financing will be needed to boost sales from here.
Examing the Foreclosure-Related Resale Market – The Supporting Factor but at a Point of Maximum Demand
Below shows where the action is — the foreclosure-related resale market. The green line represents total monthly foreclosure-related resales relative to actual foreclosures (blue) and Notices-of-Defaults (red), which are essentially foreclosures in the pipeline waiting to happen.
Over the past 8-months — due to govt and bank-specific foreclosure moratoria — demand for foreclosures was higher than supply supporting prices. But as foreclosures come through from the recent surge in NODs (red), the same supply imbalance seen from Jan 2007 through Oct 2008 will occur. That is of course unless first timers and investors step it up a notch, which is highly unlikely if they were unable to do so over the past year as prices and rates plummeted.
It is also important to note that the supply shown here is only foreclosure related supply, which accounts for only 35-40% of total supply. This underscores how lopsided the supply/demand fundamentals really are.
Total Sales – Weaker Than Most Think
When adding foreclosure-related and organic sales together, total sales are very weak at approx 38k in April (green line below). Together, there were a total of 55k new Notice-of-Defaults and foreclosures in April. When backing out foreclosure-related resales, organic sales are down an average of 70% in 2009 from the robust markets of the bubble years.
When including all of the organic MLS listed supply (60% to 65% of total supply), with the foreclosure-related supply (60% to 65% of total sales demand), CA has an infinite amount of supply.
Ultimately, this will not only continue to put pressure on the low end that recently has shown signs of stabilization, but also decimate the mid-to-upper end, which not shown any signs of coming back to life with respect to sales over the past two years.
Bottom Line
There are not enough buyers.
**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 provided by ForeclosureRadar.com
May 26th, 2009 at 6:46 am
CONSTIPATION !
May 26th, 2009 at 7:29 am
Mark,
I am an investor in the IE with a group that has bought nearly 60 homes in the past year. What I see in the marketplace are more and more ‘investors’ buying homes than at any time in the past year. Regular buyers simply can’t compete because the best deals are bought and bid up by private investors who make cash offers. However, every agent I talk to has a huge supply of FHA buyers who are making offers on clean houses but can’t get anything. As you know, over 50% of first time buyers are using FHA’s 3% down program. Essentially, prices are a lot lower than $200k – they are below $100k in a lot of IE cities.
Prices and rates are so low that a two-income family on minimum wage can afford a home if they can find a family friend for the down, if they don’t have it themselves. There is nothing abnormal about the mid to high end still coming down – that is all part of the cycle. The seeds are being planted now for the next recovery that is years and years away. All the buyers now will have equity in 3-5 years and THEN the move-up market will come back to life. Its still in reverse now. Its the same cycle that is repeated over and over every 10-15 years, though this cycle will be more severe because it should have ended in 2003, and was artifically extended by the irrational ease and access to credit.
I agree another wave is coming, but right now there are more buyers than at any time in the last three years out here. Who will win that battle in the years to come…? What I can say is that right now, for the first time in two years, we are flipping homes for a profit because there are so many retail buyers. Prices are so far below replacement cost, and the cash-on-cash returns are so high, its atracting a lot of smart money. It remains to be seen.
I can say with certainty one thing that NO ONE is talking about right now. You can’t change the population demographics of CA – and this will eventually lead to a housing shortage down the line. (!). I say this simply because no new housing is being built, or will be built, relative to CA organic household creation and population growth. This is a trend that’s been in place for a few years and will be for years to come – no new housing in being built. Though Ca is expected to conservatively grow from 38 mm to 49 mm in the next fifteen years. All those people will need shelter – either through rent or own. At some point the foreclosure supply will end, it will not last forever, but the population growth and need for housing will continue. Right now are when real fortunes are created, at the bottom and not at the top, when prices are artificially way below replacement cost.
- M.M.
May 26th, 2009 at 7:47 am
Uh oh. Looks like Max McDermott is another bottom caller!
Thank you for your continued wisdom, Mark Hanson. You and other similar bloggers saved me from being stupid in the bubble years like so many others. Right now, I got my 20% down, and waiting another year or so before jumping in. Even if I bought next summer, there’d still be another two years or so of decreases or stagnant prices!
May 26th, 2009 at 8:47 am
Max-
On the CA demographics: As I’m sure you know, an increase in population alone (even in the face of decreased new construction) is not enough to prop up real estate prices. It has to be an increase in those with purchasing power.
Are you expecting that the expected 10 million new Californians in the next 15 years are going to be above-average earners or are they expected to be primarily low-earning immigrants? Are you expecting a wave of baby boomers to move here when they can no longer sell their houses in Michigan? The demand for houses that these folks have will be for lower-tier housing. This won’t drive rents/prices up at the low tier, it will drive down rents/prices in the mid tier.
And all this is assuming that California generates decent-paying jobs to support the said migration. Given the state of the State, one could argue this is unlikely.
May 26th, 2009 at 11:52 am
Max –
All I can say is you are delusional and you contradict yourself as well. You, like many prior to the bust speak with such certainty of future events based on incomplete and/or incorrect assumptions and models. LOL
You say – “Regular buyers simply can’t compete because the best deals are bought and bid up by private investors who make cash offers.” And then you state “Prices and rates are so low that a two-income family on minimum wage can afford a home if they can find a family friend for the down, if they don’t have it themselves.”
So which is correct? You can’t have it both ways!
You say “All the buyers now will have equity in 3-5 years and THEN the move-up market will come back to life.” Really? Prices are still in decline, unemployment continuing to rise and government spending out of control. Buyers will be lucky to break even in 3-5 years.
With regard to CA you state “I say this simply because no new housing is being built, or will be built, relative to CA organic household creation and population growth. This is a trend that’s been in place for a few years and will be for years to come – no new housing in being built.”
You speak with certainty, but no facts. Ever hear of supply and demand? You’re telling me that if one were to believe the growth prediction, that no new housing would ever be built to meet demand? The reality for CA (I’m a native) is that the middle class are being squeezed out and I would guess that more upper class will/are leaving because of taxation. Buying a house in CA for any purpose other than shelter is not a smart move at this point.
Good luck with your flipping houses. I’ll stick with the only bull market (precious metals). A lot easier to buy and sell.
May 26th, 2009 at 12:20 pm
Max,
Re: household formation. My mother-in-law and her 80 year old aunt both live with us because they cannot afford to pay rent in the inland empire. Many houses on our street (large newer homes) have 4-5 cars in front of them and much of this is recent. People are combining households to save money (perhaps after foreclosure) and they can do it easily with the scores of 5-6 bedroom houses that have been built in Southern California during the boom. This might support rents for these McMansions, but I doubt that rents for apartments and smaller houses will have any support at all. How do falling rents affect your “cash on cash” returns?
About a month and a half ago we began looking for a place to buy because our potential mortgage payment on an FHA loan (which requires 3.5% down now BTW) would be lower than our rent. We quickly found that many other people were bidding on the same properties that we were and decided to sit it out for a little while. Most of this competition is coming from the lack of supply (due to moratoria) rather than a large spike in demand (as was demonstrated by Mr Mortgage here).
May 26th, 2009 at 12:31 pm
Speaking of moratorium, doesn’t that end in about a week? Does that mean starting June, we’ll see a crap load of foreclosures dumped on the market? Will look ugly from here, I think.
May 26th, 2009 at 12:46 pm
I think Max has a defensible position: that, at least for the present, the credit crunch has acted to restrain demand even more than the supply has appeared to satisfy it. Consequently, the value of cash on hand provides enough value to turn a profit. The fact that he’s made profit on some houses this way is proof in itself. And Ron’s knowledge of bidding wars on low-priced houses tells the same story.
But we all know that the supply has also been held back artificially. When those gates open, the market will not be satisfied, instead it will be saturated, and prices will drop. If it gets some temporary stability Max will again be able to capture value from his cash position; the danger lies in putting in too much capital at the wrong time. Mr Mortgage is saying the wrong time is now, but it is approximate: I doubt he’ll pick a specific date. In the meantime, the ROI is lovely until you take a principal wipe-out.
May 26th, 2009 at 1:03 pm
moratorium ended April 1st. Foreclosures in the pipeline galore, will hit the market July 1
May 26th, 2009 at 1:38 pm
Max,
In the town I am looking a flipper has been sitting for 6 months, even though it is the same price per sq foot as the short sales, nobody is buying it because we all know where flipping got us.
Rents are deteriorating as investors flood the market with new rentals. So in my view these ‘all cash’ investors you can’t compete with will end up holding the bag, as they should.
Go invest in the stock market, homes are to live in.
May 26th, 2009 at 2:02 pm
Max, are these all cash investors foreign? I’ve heard that people from Asia, particularly China and Vietnam are buying homes left and right with cash. Hard to compete against them… as they believe current price is dirt cheap.
May 26th, 2009 at 2:23 pm
I don’t see any discussion about the California Foreclosure Prevention Act of 2009 (California Civil Code § 2924 ) passed on March 6, 2009. Isn’t this amendment going to have a large impact on the number of foreclosures entering the market after July 1?
The amendment requires the lender to wait an additional 90 days after filing the NOD, beginning July 1. This may also be a reason why the number of NODs increased the last few months, since lenders may want to clear as many loans as possible.
May 26th, 2009 at 2:43 pm
California Foreclosure Prevention Act of 2009
an additional 90 days will just push it out 90 days, but these people can’t refi or pay so they are coming.
Most NOD’s are waiting 90 days anyway, is this on top of the 90 days they just waited?
May 26th, 2009 at 3:17 pm
I will answer my own question. The NOD’s I am seeing being foreclosed on today were filed back in Oct 08, with all moratoriums they are well within the 211 days now, so they
are going to auction today.
May 26th, 2009 at 3:18 pm
Wonton,
talked to my banker, they are not Asian. They are international investors and they are not buying single family homes, they are looking at commercial real estate as single family homes are too risky for them.
May 26th, 2009 at 4:23 pm
Great replies – all. Can’t add much. With respect to the new CA Foreclosure Prevention Act..it will be enacted on July 8th stretching out the time frame between and NOD and NTS by 90 days. Funny, ‘prevent’ foreclosures by stretching out the time it takes the true owner of the property to properly dispose it it. This just pushed out the problem 90-days and keeps me billing 90-days further into the future.
The CA Foreclosure Prevention Act was in part responsible for the surge in NOD’s to 55k in March. I estimate between 10-20% of the action in Feb – April was due to servicers filing NODs to get on record so they can file the NTS BY July 8th.
The unintended consequences of the Act will be surge of foreclosures between now and July 8th.
May 26th, 2009 at 5:35 pm
Max has a decent arguement if it were’nt for having such a large variable be a future expectation….that CA will see sufficient employment growth to cause home prices to start rising again. This is a huge expectation that is based mostly on the last couple of recessions. There’s no fact nor data to show us where and when such employment will occur in CA. Or anywhere else for that matter.
May 26th, 2009 at 6:00 pm
As much as it makes me want to puke!!! I think Mr. Mortgage is correct about principle write downs. With the newest numbers today in the wall street journal, the mortgage mods are not working. Furthermore though, principle write down mods were also redefaulting at a 20%+ rate. I would suggest a brainstorming of what sort of principle write downs should be used. I think a max write down needs to be imposed, I also think the lender should have an appreciation sharing agreement. Sharing 50/50 with future appreciation, when home is sold, or home is paid off. The lender and owner settle on it. John Hussman writes on this exact issue. He makes a lot of sense. However, I think “homeowners” with DTI in excess of 40% on the current mortgage should be SOL. We can’t save everyone, and if we can save those that had some semblence of financial responsibility I think the write down will work. I do think at the same time, the gov’t needs to have a tax credit for first time home buyers of 10% of the median priced home in the potential owners state of residence. This makes the write down for the losers somewhat palatable! Any principle write down should come with the mortgage becoming recourse as well!
May 26th, 2009 at 6:10 pm
I’m a 1st home buyer and have been extensively looking in the Diamond Bar and Rowland Heights Area in California for 2 years now. These two cities are heavily populated with affluent chinese residents. Any house that goes under 450K is eaten up by 1st home buyers or investors as Mark has mentioned.
Without knowing the exact number of future (defaults/foreclosures/stressed homes) in these areas, I am sure there are plenty of people “affluent chinese” waiting on the fence to gobble up any home that hits 450K for the next 3 years.
Yes, there are enough buyers to last until 2012. My logic is not backed by national numbers, but anecdoctal figures. I’ve bidded on 6 houses and each bid had over 40 bites. Fortunately, I had one opportunity to be chosen as one of the potential buyers for a short sale. I’m feeling lucky just to be chosen with no guarantee of the short sales ever making through fruition. Thats how tough the market is for desireable areas.
May 26th, 2009 at 8:14 pm
One issue that has not been dicussed is intrest rates.As I see things we are on the cusp of much higher rates,maybe not this week or next month,but sooner than later.Higher rates will keep a lid on home prices for a long time as the government swallows the borrowing space,and investors demand more yield.Sure sign of trouble ahead is hysteria and bidding up home prices!
May 26th, 2009 at 8:41 pm
David The Renter,
Diamon Bard is “desirable”? It is an awful valley that’s not close to anything and the freeways that lead in and out are congested beyond belief. I’d live in crappy ass Hawthorne before I’d live in Diamond Bar.
Well, asuming it is indeed desireable, the fact remains that the Chinese are big savers and business-shrewd. They will always beat you and I out. I just can’t figure out why they aren’t smart enough to see the devaluation train coming. Possibly they are so wealthy that knowingly paying an extra 100k is no biggy. You’ll just have to find a place that’s desireable, but not that desirable to Asians.
May 26th, 2009 at 8:54 pm
HousingRealist,
Your idea sounds like H4H program, only chery picking.. and I think we’ve beat it to death! do we need to go through it again??
May 26th, 2009 at 9:01 pm
I’ve been looking at the 90036, 90004 and 90020 area codes.
NOD’s have just been showing up on the high end homes in and around Hancock Park.
Some of the default dates are as far back as 2003 yet they are just being recorded now.
Go figure.
May 26th, 2009 at 9:02 pm
I want to thank BECU, GOLDEN1.. and those that realize that loosing a home in 2008 is not the same as in the past… there are millions of us.. that could qualify (DTI) for new (lower) priced home.. we’re an emerging market.. and learned our lesson! we’re still waiting to get a loan.. hopefully FHA will reduce the 3 year wait to 1.. you’ll have plenty of buyers!!!!!!!!!!