The Age of False-Bottoms in Real Estate is Here
The Anatomy of a Housing Market at a Potential False Bottom
I do a significant amount of work for distressed funds and thought this research would be interesting to share. This is only the San Diego MSA but most other MSA’s in the state look very similar. Mark
I was on CNBC several weeks back with Erin Burnett and she asked if there was any chance for the Case-Shiller to suddenly spike one month in the near-term. I said ‘no major spike — but there absolutely will be price leveling and even rising in some the hardest hit MSA’s’. It’s time to revisit this.
In my April 30th report entitled ‘Housing (bottom) Update’ I highlighted the reasons why some of the hardest hit MSA’s might do well over the near-to-mid term:
- artificially depressed supply through gov’t and bank-specific foreclosure moratoria;
- artificially low rates and temporary tax benefit;
- foreclosure mix-shift creating an artificial skew higher in reported median and average prices;
- And fleeting seasonal demand.
Essentially, everything is artificial and so should the bottom that comes out of it. I have been looking for this false bottom phenomenon to play out for months and believe it is here.
The San Diego MSA is a perfect example of a market experiencing a false bottom. It is a very interesting and unique market that I believe will show a bottom in reported house prices as soon as the next Case Shiller report. It may even report a decent sized increase in median and average house prices.
San Diego MSA – The Anatomy of a False Bottom
San Diego is not unlike most other hard hit MSA’s. Prices are down significantly, sales have increased year-over-year creating excitement and speculation, and the majority of the sales are happening at the low end. The mid-to-upper end is languishing. For various artificial and temporary reasons, there is only a couple of months supply at the low and literally ‘years’ of supply at the high.
San Diego total sales are hovering around 3k per month. This is up sharply from the lows of 18-months ago when prices were still near the highs and all of the exotic loans went away suddenly creating a sudden and violent sales trough.
But sales are nowhere near robust in a historical context especially when considering that median house prices are down 44% from the peak and rates are at historic lows. If this market was truly on the mend, sales would be much higher especially now, during the peak season. Sales actually dropped 10% from April to May.
Some will argue that low sales reflect low inventory, which I do not necessarily agree with. But, if that is the case we should see a price surge in the near-term that proves it.
Prices have also fallen sharply in the past 18-months. The sudden fall coincides perfectly with the sudden loss of all exotic loan programs in Q3 2007. Please note the series of events that took place during the dramatic house price slide from over $500k in June 2007 to a low of $280k in Jan 2009.
The 2008 surge in foreclosures shown below kept this market over-supplied in all of 2008. This accounts for much of the relentless home price slide through the end of 2008 as pictured above. Then, foreclosure moratoria beginning in Q4 2008 (below) kept foreclosure-related resale supply at a bare minimum…much less supply than demand for low priced properties.
When you combine a median price decline of nearly 50% with artificially low rates and a genuine lack of supply through moratoria, it will create support — and it did. But as noted in the first chart showing sales counts, it has not created a surge in sales.
The average present value of properties entering the REO supply pool as shown in our data below, revealed a price turn in March. We highlighted this in our April report entitled ‘San Diego Housing Market Alert’.
But because REO resales only make up only about 35% of total sales vs roughly 60% statewide, they are not as much of an influence over pricing as in other hard hit MSA’s around the nation. This may point to the loss of exotic loan programs as more of a problem for this market initially than foreclosures.
But even with foreclosure-related sales running lower than the statewide average in this market, they will still influence prices. And the shift in the value mix of properties entering the REO resale pool to higher priced properties will influence median and average house prices going forward.
Shown below — the low priced band (blue) is shrinking relative to total new REO supply from the upper price bands. As this higher priced property mix is resold, it will have the effect of lifting median and average values. In other MSA’s where the percentage of REO to total housing is much greater, the mix-shift has a much greater effect.
The following chart of monthly bank owned properties is the last look available at the pool of REO resales before they are listed with a Realtor and resold. These data are unique and totally proprietary to ForeclosureRadar.com and The Field Check Group.
At the Notice-of-Default stage, the mix shift is even more pronounced and occurred earlier. This is because the REO chart above is made up of loans that may have gone into default as long ago as a year — during the heart of the Subprime implosion. Subprime loans were lower in loan amount attached to lower priced homes generally.
The Notice-of-Default mix-shift chart below shows real-time monthly loan defaults containing a much greater number of higher loan amount Alt-A, Jumbo Prime and Prime loans on higher priced homes.
Much More Supply Coming
But before you get too excited about the prospects of San Diego real estate and put in an order for a pool of REO’s to flip or notes to work out, a wave of foreclosures is coming.
In the past three months alone, Notice-of-Trustee Sales are back at near peak levels of 2500 per month. An NTS is the second stage of foreclosure that comes 14-60 days prior to the property being taken to the courthouse and sold.
With most loss mit and mortgage mod plans known to servicers now, there is little reason to file an NTS unless in fact the property has a good change of going to foreclosure. With San Diego sales at about 3k per month, 2500 NTS per month could cause a serious supply/demand imbalance that must be absorbed for this market to become and remain healthy. This will be especially difficult considering that the peak sales season ends in August and Notice-of-Defaults (two charts down) that feed NTS, have also surged recently. Judging by the flow, recent NODs will feed foreclosures perhaps through the end of the year — that is as far out as we can see.
This NTS surge is especially troubling considering that foreclosure related supply only presently makes up approx 15% to 20% of total housing supply and Ma and Pay Organic homeowner make up the rest. With 3000 monthly sales and supply coming at a rate of 75% of total sales, that does not leave a lot of demand for organic sellers. First timers and investor can’t carry this entire market on their own. Organic sellers must be able to sell and re-buy in order to keep demand stable and strong.
Notice-of-Defaults – the first stage of foreclosure that occurs after a borrower misses 3-4 payments — have surged in the past five months. The dip down in 2008 was solely due to a CA moratorium law — SB1137 — that had the effect of kicking the can down the road.
There have been more new Notice-of-Defaults each month for the past five months than properties sold. NOD’s turn into foreclosures within 5-8 months — this is not a great sign. The new mortgage mod initiatives had better work well.
Mid-to-High end Trouble
Mid-to-high end loans and the home attached to them are where the real trouble lies in the near-term. The two charts below show the monthly new loan defaults and foreclosures for mid-to-high end properties.
Mid-to-high end NOD and foreclosure counts stand between 35% and 40% of total counts but account for only about 20% of total sales. This means that foreclosure-related pipeline supply is 100% greater than demand in this segment. This is a major supply/demand imbalance that will bring serious trouble to this market over the near-term. Especially considering that this particular foreclosure related supply only makes up approx 10% of total mid-to-high end supply with Ma and Pay Organic homeowner once again making up the rest.
In this market segment especially, first timers and investors have little impact — organic sellers need to be able to sell and re-buy in order to keep demand stable and strong.
This will promote significant house price and rent compression over time that may put in jeopardy the low-price housing stability seen today.
Jumbo REO has also been held artificially low due to moratoria. With only 300-400 units entering the resale pool each month since the moratoria kicked in and more exotic and longer-term loans left over from the bubble years, the mid-to-upper end market has not gone through the same tragic price melt-down as the lower end — yet.
Lastly, third party professional investors/buyers at San Diego courthouse foreclosure sales have not stepped up what they are willing to pay like the retail buyer has. Price declines in this segment have decelerated and may show stabilization soon, but after only one month it is too early to call.
With rents tumbling and the primary purchasers at the courthouse foreclosure auctions being professional investors, I think this chart is very telling.
Bottom Line: Headlines are about to get wild, as the age of false bottoms in real estate is upon us.
At Field Check Group, we do highly granular work on every CA MSA and other states upon request.
Best Regards,
Mark Hanson
Mark@TheFieldCheckGroup.com
Data provided to Field Check Group Real Estate & Finance by ForeclosureRadar.com
June 4th, 2009 at 9:27 pm
Great work, as always!
Thanks for sharing your excellent analysis…….