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 5th, 2009 at 6:33 am
Excellent information and analysis!!!
Very impressive. Thank you!
June 5th, 2009 at 6:46 am
“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″
I predict.. as far as I can see.. that will see this in June 2012:
“Prices have also fallen sharply in the past 36-months. The sudden fall coincides perfectly with the sudden loss of all FHA loan programs in Q3 2008 – Q3 2011″
June 5th, 2009 at 6:48 am
Can you say STAGGGGGGGGGGFLATION 10 times really quick?
June 5th, 2009 at 8:17 am
Question for Mr. M – With regards to your graphical representation of %of REO by price point and NTS by price. It seems to me that all homes in excess of the 225K price point has either stayed stable or actually decreased, as is the case in the 650K+ area over the last couple of years. Are you suggesting that this is about to change? From a selfish standpoint, I’m waiting for the move up area to implode. Is it just going to take another year or so, before we see the % increase for these higher end homes? Thanks for your work!!
June 5th, 2009 at 8:22 am
ex owner now renter – what are you referring to when you say there is a loss of all FHA programs in Q3 2008 and beyond? I believe the % of FHA loans as a percentage of loans has increased from 2% a couple of years ago to 25% today.
June 5th, 2009 at 9:09 am
housingrealist,
Unless you think in today’s market or next couple of years prices are going higher, and the FHA loans are rock solid, and the economy has turned the corner.. I would imagine that the new (FHA) buyers, will not blame anyone when they get laid off, and not blame anyone but themselfes, when their home that they bought to live in goes under value, will simply walk.
June 5th, 2009 at 9:20 am
AND……………………
The surge in interest rates aint gonna help!
June 5th, 2009 at 10:03 am
PRINCIPAL REDUCTIONS
June 5th, 2009 at 10:23 am
Javagold.. you’ll get it when you loose (forclose) your house!
June 5th, 2009 at 10:25 am
Take responsability for your action! stop beging and blaming banks, like it’s not your fault! Be a man like Partyboy!
June 5th, 2009 at 11:25 am
Thanks Mark for another excellent factual analysis. For those who have not seen his you tube videos from last year…. you should. They can be found under Mr. Mortgage. His analysis was “right on” then as it is now. This housing/foreclosure issue is HUGE and most people do not see what is probably coming. This week, Jim Cramer called another housing bottom…and recommends you go out and buy a house, like he’s going to do. Sounds like he’s trying to create one that doesn’t exist, and probably won’t until well after 2012/2013.
June 5th, 2009 at 12:16 pm
Wonton.. r u still there? Do blame yourself, for not buying a home few days ago, cause you’re greedy and waiting for rates to go up, so you can get a cheaper price..AND NOT HELPING THE (70% consumer based) ECONOMY … I thought it was a place for you live in not an investment, and nothing wrong with 450K home…if you can afford it… (I CAN’T BUY NOW, CREDIT JAIL) ..but what’s your excuse? GREED MUST BE ALIVE EVERYWHERE!
June 5th, 2009 at 12:43 pm
Where’s the other greedy *potential buyer*..David The Renter?… GO HELP THE ECONOMY AND BUY A HOME… the economy now waits on people like you… OBAMA IS COUNTING ON YOU… and gave you $8000 incentive..
June 5th, 2009 at 12:44 pm
Am I entertaining enough for you WoW in California… I’m still waiting for your INPUT (something with substance? maybe)
June 5th, 2009 at 2:30 pm
Ex-owner, Any chance you can take the edge off? Remember this is a professional website Mr M uses to market his services…
June 5th, 2009 at 2:37 pm
ex_owner_now_renter
can you please stop spamming Mark’s blog with your inane comments?
June 5th, 2009 at 3:30 pm
ex_owner, you need help.
June 5th, 2009 at 3:31 pm
Would you say that by the end of July, we can look back a couple months and see a flood of foreclosures on the market?
June 5th, 2009 at 3:45 pm
I’m sorry I didn’t like this show the first time it played, do we have to watch it again !?!
June 5th, 2009 at 4:00 pm
Unknown: it’s SPELLED: I N S A N E
Show Spelled Pronunciation [in-seyn] Show IPA
–adjective 1. not sane; not of sound mind; mentally deranged.
2. of, pertaining to, or characteristic of a person who is mentally deranged: insane actions; an insane asylum.
3. utterly senseless: an insane plan.
This site has been calling about BALANCE REDUCTIONS for two years!! THAT’S INSANE!! (by the government of course… go talk to your bank, if they do it..great!.. but STOP STEALING OUR TAX MONEY.. from my generation, my kids’s generation, and their kid’s generation)
NOTHING PROFESSIONAL ABOUT THAT! YOU DON’T LIKE THE COMMENTS.. THEN DON’T GIVE THE PEOPLE AN OPTION TO POST!
June 5th, 2009 at 4:20 pm
Wonton, I don’t need help, the “Supply and Demand” model that we have in place for housing needs help, or buyers. You guys want to fix the problem? I’m all ears… but don’t tell me the PR is the solution… MORONS!
There are tones of forclosures now – go work with a real estate that’s in cahoots with the Bank’s REO division, and he’ll take you to properties that don’t even have a FOR SELL sign!
June 5th, 2009 at 4:25 pm
Yay for graphs!
I also have a couple thoughts about the graphs. I really like them. However, I’ll put two cents in to suggest that some of the points that are made in four busy graphs could be illustrated more clearly in one or two. For example, a line graph with 5 lines: 1 for the avg price of each tranche, and the 5th, thicker, line showing the avg sale price across all tranches. Alternatively, a bar graph where each bar is comprised of 4 colors, with each color representing a tranche, which makes it easy to see the changing weight of the components within the aggregate figures.
I can’t quibble too much, since you give great information for free, but increased clarity also increases the value when the private clients pay you. There are probably lots of business school students armed with the latest graphing software that can do it for you, if you don’t want to go back to school yourself.
June 5th, 2009 at 4:26 pm
SINCE some of you can’t even buy with an 8000$ incentive, 18000$ in cali, for a new home…and waiting on rate hikes/further price drops.. why not let ex-owners come back (and soon prime/alt a) after 1 year in CREDIT JAIL, and repaired credit… you’ll get a true price bottom very soon!
Cause it doesn’t serve the (greedy) banks? Then let TIME TAKE COURSE, and stop the INSANITY with (gov) PRs!!!!!!!!! ASK THE BANKER FOR ONE!
June 5th, 2009 at 4:26 pm
And adding to the more vibrant parts of the debate:
Inane’s a different word from insane. And so’s inane!
June 5th, 2009 at 4:29 pm
Thank you Andy, English after all is my 3th language.
June 5th, 2009 at 4:36 pm
Unknown-
ex_owner_now_renter likes to bait people into flame wars on this great informational site that MM runs.
If everyone in the village, ignores the village idiot, he has no platform to stand on.
I myself will not respond or comment to his rants anymore.
June 5th, 2009 at 4:39 pm
WoW… 3th comment from you, and nothing worth a substance to add..AGAIN!
June 5th, 2009 at 6:43 pm
Intresting article since I just read this in an SD newspaper. You can’t believe anything anymore to do with real estate- thanks for clearing it up-BTW I live in SD
EX- stop changing every post to be about you-YES EVERY post, no matter what it is about- is consummed by you. You sound bitter- maybe you should be-fixing your situation isn’t going to fix the nation. Please I beg you to stop.
BTW its 3RD- not 3th.
June 5th, 2009 at 7:32 pm
Your article states that there will be a huge influx of upper tier homes coming soon and no buyers for them. Then the article ends with “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”
So which is it?
I’m in the market for a 750k-850K house. Should I buy now, or wait? How long should I wait?
Thx.
June 5th, 2009 at 7:46 pm
I’ll stop.. but I beg you guys as well (before it’s too late) to stop the (gov) PR bullshit!
Keep in mind, I’m not the ONLY ex_owner_now_renter.. There are millions like us…that are learning the hard way…and millions more that will learn as well
All of you that think that think Banks, lax gov regulation, FRAUD, GREED, and the last 30 years had nothing to do this… is about to get a RUDE awakening!
June 5th, 2009 at 7:54 pm
Sharon:
I don’t think Jim has anything up his sleeve.
The one thing I can say, after watching his stock picks over the years, is that he can make a wonderful contrarian indicator, when he indicates – like he did earlier this week.
June 5th, 2009 at 8:00 pm
Mark,
Thank you so much for your research.
This coming Thursday, I believe the government is scheduled to auction off about 300 billion in Treasuries. I wonder if we will see another spike in interest rates like we did last week on Thursday.
I hope that Mr. Geither’s trip to China was as successful as is being reported, but I have my doubts.
June 5th, 2009 at 9:09 pm
Mark,
Wow that is some serious research!! Could you please explain why my clients have written 5 offers for Single Family Homes in the subs of SD in the 425k-469k range and been bid out of everyone, by about 10k. And can you tell me why my investor clients bidding on homes in the 200k-230k of Oceanside, chula vista, San marcos are up against multiple offers.?? And could you please maybe make a positive comment on the wonderful time it is for first time buyers to being to afford a home with crazy low interest rates.
June 6th, 2009 at 1:32 am
@SistaSue – this was obviously some serious research because you missed the whole point that this is a false bottom brought on by:
a) artificially low interest rates
b) moratoriums on foreclosures by .gov
c) ‘green shoots’ chicanery on behalf of the fed/nar/banks and d) the impending alt a/option arm (high-end) implosion thats just beginning to happen (if you went to college and you took at least lower division macro/micro economics you would see know what a ‘lag period’ is..)
e) not mentioned but implied: median income/median house price discrepancy (ma and pa sales/move up)
f) not mentioned but obvious: highest unemployment rates since the the GD (how do you pay your mortgage when you have no income and your FIRE industry job is…toast?)
Couple of cliches that ring true: the exception never disproves the rule and correlation is not causation.
June 6th, 2009 at 8:29 am
Can Sue explain why there were multiple offers in 2005?
June 6th, 2009 at 8:37 am
We bailed out GM for $50B (probably saved 300K jobs), AIG for $180B and counting. We have spent easily 2 Trillion for all the various TARP, guaranties schemes.
So another 3 Trillion to bailout housing is not an issue. The reason why the Gov has not done so is politics. Just look at the replies on this forum. There is a lot of animosity over “bailing out irresponsible homeowners”. But as the housing rot works its way, “responsible homeowners” who are now faced with unemployment are looking for bailouts. So it is a matter of time before bailouts are acceptable.
Geithner recently made a special trip to China and the whole purpose of his trip was to assure the Chinese. In the end Chinese and US officials came out with a statement on confidence in US$ and US Treasuries and a commitment to US$ as global reserve currency. In short Geithner’s visit to China is a visit to our bankers (China)telling them that US is going to issue another 2 to 3 trillion in debt and not to panic.
June 6th, 2009 at 8:49 am
Hi Sista – I would say the range to $500k will remain strong through the season because artificially low rates to $417k WERE low and supply has not made it yet. But more supply than present demand is coming. Question is – will the demand remain strong after August and in the face of tremendous supply from the foreclosure pipeline. You are strong now because of…
* 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.
not because the macro housing market is improving.
June 6th, 2009 at 9:22 am
I see that Dr Housing Bubble has come around to PRs for the same reasons Mr M has been arguing (link below). This is somewhat surprising considering DrHB’s usual denunciation of bubble buyers.
My guess is that some (incl DrHB) are starting to realize that most of those left standing are the economy. It may be time to throw them a bone.
http://www.doctorhousingbubble.com/loan-modifications-another-taxpayer-bailout-to-the-housing-industry-mortgage-modification-default-rates-over-50-percent-over-4-percent-of-subprime-loans-first-payment-defaults/
June 6th, 2009 at 9:28 am
Mark, your “sold to 3rd party” chart says something different to me than it does to you. It says to me: fewer sales to investors at auction happened because fewer sales at auction happened…period. I assume your chart is volume, not price, and national, not local. You did a lousy job of telling us what it even is.
June 6th, 2009 at 9:31 am
And please don’t tell me that is investor prices paid in SD. I don’t believe for one minute that investors reduced their average prices coincidentally at the same time moratoria were in place. It doesn’t add up.
June 6th, 2009 at 9:33 am
Mark,
I repeat to you and the rest of gang favoring (gov sponsored) PR.. (I have no problem with the Bank doing the PR)…
- I want my credit (ex_owners that lost 2008,2009) cleaned ..REMOVE my forclosure record! I’ve had 750 points before, and no other negative spot… so I can buy a home! BE FAIR TO EVERYONE!
June 6th, 2009 at 9:35 am
Sista can you tell me how many of your first time home buyers are actually qualifing for those low rates and how many of them actually buy and are not out bid by your investor clients.
CV and Oceanside were way over priced especially eastlake. Anyone out bidding by 10k is a fool and I hope to god they are not doing it because some realtor told them it would be the only way to get the house.
June 6th, 2009 at 9:44 am
TomH
“3 Trillion to bailout housing is not an issue”
I think 785 billion that chinese have vested.. they’re already worried.. 1.8 trillion deficit..already worried… Where to get 3 trillion? BORROW/PRINT? DO YOU KNOW THE IMPACT OF THAT? HYPERINFLATION~DOOM SCENARIO
June 6th, 2009 at 10:32 am
I hate to say this, but I think prices will take off from here. Anyone waiting till 2012 to buy to find prices tripled by then. Median no doubt will be well over a million $$. Just my opinion.
June 6th, 2009 at 3:42 pm
Mark,
Excellent post. What you said about median prices being pushed up due to higher priced properties is EXACTLY what I have been telling everyone and they have been laughing at me.
It’s a sad day in RE when the only thing people are buying homes for is to make money. That’s not what it’s meant for.
I truly truly hope…from deep down in the bottom of my heart that flippers and people out to make a buck on RE fry in Hell. I mean that.
June 6th, 2009 at 4:35 pm
Noz, right on man. I hear ya!!
June 6th, 2009 at 5:43 pm
Mr. Mortgage
Just saw you quoted on the FRONT PAGE of Yahoo Finance !!!!
Now that you are the Big stage start pushing the principal reductions is the only solution….you will win a nobel prize
June 6th, 2009 at 6:51 pm
Why worry about buying a home!,credit reports or housing bottoms,intrest rates are going to go up and home prices are going to come crashing down.The government’s reinflation project is at best a D+ which is barley passing,when investors lose faith in government’s balance sheet then support for the housing market goes away and prices go to Rock Bottom!
June 6th, 2009 at 8:29 pm
Javagold, I might have missed your previous posts. Are you currently an owner struggling to pay your mortgage? You seem to really want a principle reduction.
June 6th, 2009 at 8:37 pm
Wow, SistaSue is dense – must be a blond real estate agent by the way she admits to reading the article, but missed the whole point. Even the title of the article would have answered her question in short order. Thank you, Throwspoop for breaking it down for her into a simple outline. Hope her brain made it all the way to point (f) without overheating. (Is my disdain for RE agents too obvious?)