Included in our analysis is a survey consisting of 11 questions concerning the California residential real estate market. These questions were answered by 237 residential real estate agents located throughout California, each with at least three years experience.
The answers to the following questions will give a better understanding of the 2009 and 2010 California residential market from an agent’s perspective. Each agent was asked 11 questions regarding inventory levels, buyer activity, sales volume, foreclosures, short sales, and financing, all in relation to the California real estate market. The following data was accumulated from February 14, 2010 to February 25, 2010.
1. Are inventory levels in your market on average increasing or decreasing?
Over 60% of those surveyed agreed that inventory levels are currently decreasing, while only about 30% believe that inventory levels are increasing. The current market is demand-driven, and is therefore absorbing much of the supply (inventory levels).
2. To what extent has buyer activity increased or decreased over the past year?
Over 79% of those surveyed agreed that buyer activity has increased over the past year. On average, prices for a single family residence decreased dramatically, leading to an increase in buyer activity and an increase in demand.
3. What do you expect will happen to buyer activity in 2010?
Over 60% of those surveyed believe that buyer activity will continue to increase throughout 2010. The sustained increase in demand (buyer activity) can be attributed to the continuation of low prices as well as the buyer tax credit.
4. What do you expect will happen to sales volume when the buyer tax credit expires in April?
Over 70% of those surveyed believe that sales volume will decrease now that the tax credit has expired. The current tax credit includes up to $8,000 in government assistance for qualified first-time home buyers purchasing a principal residence, and up to $6,500 in government assistance for qualified repeat home buyers.
5. What proportion of buyers in your market are owner-occupants, not investors/landlords?
Over 75% of those surveyed believe that buyers are owner-occupants as opposed to investors or landlords. To some degree this is due to the current mortgage incentives given to owner occupant residencies.
6. Is favorable financing for purchases readily available?
Over 75% of those surveyed agree that favorable financing is either somewhat or readily available. Although lenders have become more stringent concerning lending and FICO scores, historical trends confirm that financing has become easier to obtain.
7. Have foreclosures in your market increased or decreased since early 2009?
Foreclosures vary typically by market. Although there is an increase in default payments, the variations in foreclosures can be attributed to the increase in loss mitigation efforts (short sales, loan modifications), which have helped many homeowners find ways to avoid foreclosures.
8. Have short sales in your market increased or decreased since early 2009?
Over 80% of those surveyed believe that short sales have increased since early 2009. The downturn in the California residential market has led many homeowners to seek assistance in the form of loss mitigation, in an effort to avoid foreclosures.
9. In your opinion, what effect have short sales and foreclosures had on home values during 2009?
Over 86% of those surveyed believe that 2009 home values were negatively affected by short sales and foreclosures. Due to homeowner debt and a lender’s willingness to rid itself of a property in default, many short sales are typically priced below fair market value, leading to a negative effect on home values.
10. In your opinion, what will be the future effects of foreclosures and short sales on home values?
75% of those surveyed believe that short sales and foreclosures will still have some effect on home values in the future. Therefore, a majority of the agents surveyed believe that home values will continue to decrease.
11. In your opinion, what will be true of housing values in 2010?
There is disparity concerning housing values in 2010. Over 44% of those surveyed believe that housing values will decrease in 2010. This can be attributed to the continuation of short sales and foreclosure, which lower housing values.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
Monday, August 30, 2010
Wednesday, August 25, 2010
Conclusion
The outlook for 2010 was summed up appropriately by Dr. Alex Villacorta, Senior Statistician at Clear Capital, when he stated: “The sustainability of the current price gains will be challenged in 2010, given that most lenders and analysts predict a significantly larger number of REOs will reach the markets. Further, this suggests that as the dynamics of supply and demand evolve, different markets will have varied responses to the increased REO activity. That is to say, depending on the market, if the supply of housing does not dramatically increase for reasons outlined in the previous section, or if demand does not become curtailed due to reasons explained above, then it is believed that housing will have bottomed in most affordable markets and will stay flat or experience modest price growth. Top-tier, less-affordable markets remain weak and unbalanced.
However, despite any promising data today, there are a multitude of reasons to believe that the fundamentals recently supporting stability in the housing market will diminish in 2010. Specifically, the reduction of loan purchases by the Federal Government and subsequent increasing interest rates, the expiration of the tax credit, and the continued weaknesses in the overall economy will likely stymie demand in 2010. Furthermore, the failure of loan modifications to prevent foreclosures, and the anticipated increases in defaults from borrowers of Option ARMs and other loans, will serve as a continuing source of bank-owned properties to be liquidated in competition with one another and will greatly increase the inventory of homes. Any economics student can tell you that when supply goes up or demand goes down, prices must go down. And that is expected to occur in 2010. The extent of this price decline is undeterminable at this stage, but the risk is palpable.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
However, despite any promising data today, there are a multitude of reasons to believe that the fundamentals recently supporting stability in the housing market will diminish in 2010. Specifically, the reduction of loan purchases by the Federal Government and subsequent increasing interest rates, the expiration of the tax credit, and the continued weaknesses in the overall economy will likely stymie demand in 2010. Furthermore, the failure of loan modifications to prevent foreclosures, and the anticipated increases in defaults from borrowers of Option ARMs and other loans, will serve as a continuing source of bank-owned properties to be liquidated in competition with one another and will greatly increase the inventory of homes. Any economics student can tell you that when supply goes up or demand goes down, prices must go down. And that is expected to occur in 2010. The extent of this price decline is undeterminable at this stage, but the risk is palpable.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
Tuesday, August 24, 2010
2010 Forecast
The outlook appears promising despite formidable obstacles that will be realized in 2010, which will pose significant challenges to continued recovery. Our market-by-market analysis of housing values and supply trends shows that most California markets appear to be stabilizing. Home value direction has gone from decreasing to flat and, in some markets, turned positive, while supply of housing in most markets is in balance with demand or less. However, despite the stability of home values achieved over the second half of 2009, there are many factors that suggest 2010 could expose this façade and become another down year for the housing market, with values dropping further before stabilizing. Those factors are addressed below:
1. Rising Mortgage Rates: Just as low mortgage rates were partially responsible for the recovery manifested in 2009, increased rates could be the cause of a housing slump in 2010. Homeowners tend to buy a home not on the basis of what the home costs in absolute terms, but rather on how the mortgage payment will affect their monthly earnings. That is to say, for most home buyers, the key to home affordability is monthly cash flow. A rise in interest rates decreases the overall affordability of the home. Therefore, buyers will be willing to spend less overall, driving economic demand down. This could cause housing to again become overpriced.
2. FHA Restructuring: The Federal Housing Administration suffered heavy losses during the housing downturn, which could lead to additional bailouts from the government. As a result, the FHA slightly tightened standards and raised fees in January. If increased tightening occurs, it could reduce availability of financing and diminish the qualified-buyer pool. That would decrease demand and force further decline in values.
3. Failed Loan Modifications: Loan modifications are the reason many delinquent loans have avoided foreclosure, which has served to moderate the supply of foreclosed homes entering the market in 2009. During 2009, the REO saturation rate dropped 16 from 41.5% in the first quarter to 25.5% upon the release of the HDI Market Report in January 2010.vii However, while 728,000 homeowners have signed up for modifications, just 31,000 have permanent workouts. So it is reasonable to expect that many homes that have been in the modification pipeline will be moved belatedly into the foreclosure pipeline and will add to the supply of foreclosed homes in 2010.
4. Expiration of Mortgage-Backed Securities Purchase Program: The government set aside $1.25 trillion to buy back mortgage-backed securities (MBS), which has been the primary cause of low mortgage rates throughout the downturn. The program is set to expire March 31st. Purchases from the program made up 50% of the MBS issued in 2009, and it is very possible that interest rates will rise without the supplementary demand created by the Federal Government. Also, as stated previously, a rise in rates decreases the affordability of owning a home and will depress demand at current market prices.
5. Mortgage Interest Rate Resets: California has a high concentration of option adjustable rate mortgages that gave the borrower the option to pay a monthly amount less than that necessary to pay the interest on the loan. Thus not only are these loans in a negative equity position due to a falling market, but they are also building negative amortization. Interest-only loans that allowed interest payments for three, five, or seven years were popular with purchasers in expensive markets that did not quality for government-backed loans. Both negative amortization and interest only-type loans are about to reset, dramatically increasing the monthly payments for those borrowers. Of the pool of outstanding Option ARM loans, 88% have not yet experienced a reset event. Research carried out by Fitch showed that 94% of borrowers with Option ARM loans made only the minimum payment. And in the past year, the portion of Option ARMs that were delinquent, in foreclosure, or foreclosed rose from 16% to 37%.1 From the graphs, it seems evident that by the end of 2010, and through 2012, those resets will place heavy burdens on borrowers, who will likely forfeit their homes to banks that in turn will have to foreclose and liquidate the properties. These re-sets will likely cause the next wave of foreclosures, one that will be large and weigh on home values for a long time. Therefore the re-casting of Option ARM loans in the coming months and years will be the source of a tremendous amount of bank-owned housing inventory, which will exert downward pressure on home values.
6. Expiration of the Home Buyer Tax Credit: The program established by the federal government giving buyers an $8,000 tax credit, enacted to shore up the housing market, expired on April 30, 2010. Many home buyers have entered the market prematurely to take advantage of this additional incentive to buy a home now. Many of them perhaps would have waited until 2010 to buy a home, but opted to buy sooner to take advantage of the credit. Those buyers will not be available to buy in 2010. As a result of the expiration of this credit, the demand for housing in 2010 could be greatly diminished, and home prices could decline.
7. More Defaults & Foreclosures: Due to such factors as persistent unemployment and failed loan modifications as aforementioned, foreclosures will likely increase in 2010. There are nearly two million mortgages that are 90 days delinquent, and virtually all of them will end up in foreclosure. About 2.3 million have already been foreclosed on by lenders. Flooding the market with increased bank-owned (REO) properties could increase the housing supply beyond the bounds of demand at current pricing and force lenders to compete by dropping REO home prices. Similarly, short sellers, or property owners attempting to sell a property for less than what is owed on it, will be prominent in most markets, adding to distressed inventory. Home owners with negative equities have proven to have a high rate of default. According to a new study released by First American CoreLogic February 23, 2010, more than 11.3 million residential properties had negative equity at the end of 2009. That is equal to 24% of all mortgaged homes in the United States. This study also reports that an additional 2.3 million mortgages had less than 5% equity. These two numbers combined equal 29% of all mortgaged properties in the U.S. In California, 35% of all mortgaged residential properties are underwater, accounting for the largest number (2.4 million) among all the states. First American reports that once negative equity is 25%, or $70,000 greater than the property’s value, owners tend to walk away from their debt obligations and properties to the same degree as non-occupying investors.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
1. Rising Mortgage Rates: Just as low mortgage rates were partially responsible for the recovery manifested in 2009, increased rates could be the cause of a housing slump in 2010. Homeowners tend to buy a home not on the basis of what the home costs in absolute terms, but rather on how the mortgage payment will affect their monthly earnings. That is to say, for most home buyers, the key to home affordability is monthly cash flow. A rise in interest rates decreases the overall affordability of the home. Therefore, buyers will be willing to spend less overall, driving economic demand down. This could cause housing to again become overpriced.
2. FHA Restructuring: The Federal Housing Administration suffered heavy losses during the housing downturn, which could lead to additional bailouts from the government. As a result, the FHA slightly tightened standards and raised fees in January. If increased tightening occurs, it could reduce availability of financing and diminish the qualified-buyer pool. That would decrease demand and force further decline in values.
3. Failed Loan Modifications: Loan modifications are the reason many delinquent loans have avoided foreclosure, which has served to moderate the supply of foreclosed homes entering the market in 2009. During 2009, the REO saturation rate dropped 16 from 41.5% in the first quarter to 25.5% upon the release of the HDI Market Report in January 2010.vii However, while 728,000 homeowners have signed up for modifications, just 31,000 have permanent workouts. So it is reasonable to expect that many homes that have been in the modification pipeline will be moved belatedly into the foreclosure pipeline and will add to the supply of foreclosed homes in 2010.
4. Expiration of Mortgage-Backed Securities Purchase Program: The government set aside $1.25 trillion to buy back mortgage-backed securities (MBS), which has been the primary cause of low mortgage rates throughout the downturn. The program is set to expire March 31st. Purchases from the program made up 50% of the MBS issued in 2009, and it is very possible that interest rates will rise without the supplementary demand created by the Federal Government. Also, as stated previously, a rise in rates decreases the affordability of owning a home and will depress demand at current market prices.
5. Mortgage Interest Rate Resets: California has a high concentration of option adjustable rate mortgages that gave the borrower the option to pay a monthly amount less than that necessary to pay the interest on the loan. Thus not only are these loans in a negative equity position due to a falling market, but they are also building negative amortization. Interest-only loans that allowed interest payments for three, five, or seven years were popular with purchasers in expensive markets that did not quality for government-backed loans. Both negative amortization and interest only-type loans are about to reset, dramatically increasing the monthly payments for those borrowers. Of the pool of outstanding Option ARM loans, 88% have not yet experienced a reset event. Research carried out by Fitch showed that 94% of borrowers with Option ARM loans made only the minimum payment. And in the past year, the portion of Option ARMs that were delinquent, in foreclosure, or foreclosed rose from 16% to 37%.1 From the graphs, it seems evident that by the end of 2010, and through 2012, those resets will place heavy burdens on borrowers, who will likely forfeit their homes to banks that in turn will have to foreclose and liquidate the properties. These re-sets will likely cause the next wave of foreclosures, one that will be large and weigh on home values for a long time. Therefore the re-casting of Option ARM loans in the coming months and years will be the source of a tremendous amount of bank-owned housing inventory, which will exert downward pressure on home values.
6. Expiration of the Home Buyer Tax Credit: The program established by the federal government giving buyers an $8,000 tax credit, enacted to shore up the housing market, expired on April 30, 2010. Many home buyers have entered the market prematurely to take advantage of this additional incentive to buy a home now. Many of them perhaps would have waited until 2010 to buy a home, but opted to buy sooner to take advantage of the credit. Those buyers will not be available to buy in 2010. As a result of the expiration of this credit, the demand for housing in 2010 could be greatly diminished, and home prices could decline.
7. More Defaults & Foreclosures: Due to such factors as persistent unemployment and failed loan modifications as aforementioned, foreclosures will likely increase in 2010. There are nearly two million mortgages that are 90 days delinquent, and virtually all of them will end up in foreclosure. About 2.3 million have already been foreclosed on by lenders. Flooding the market with increased bank-owned (REO) properties could increase the housing supply beyond the bounds of demand at current pricing and force lenders to compete by dropping REO home prices. Similarly, short sellers, or property owners attempting to sell a property for less than what is owed on it, will be prominent in most markets, adding to distressed inventory. Home owners with negative equities have proven to have a high rate of default. According to a new study released by First American CoreLogic February 23, 2010, more than 11.3 million residential properties had negative equity at the end of 2009. That is equal to 24% of all mortgaged homes in the United States. This study also reports that an additional 2.3 million mortgages had less than 5% equity. These two numbers combined equal 29% of all mortgaged properties in the U.S. In California, 35% of all mortgaged residential properties are underwater, accounting for the largest number (2.4 million) among all the states. First American reports that once negative equity is 25%, or $70,000 greater than the property’s value, owners tend to walk away from their debt obligations and properties to the same degree as non-occupying investors.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
Professional investors move into flipping foreclosed homes
Squeezing out amateurs, private equity funds and wealthy individuals are buying distressed properties at public auctions, refurbishing them and selling them for quick profits.
Hoping there are big profits to be made in the aftermath of
The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits.
Not long ago, the typical home flipper was an amateur tapping a home equity line or savings for an investment property. But professionals have rushed in, partly because of sparse investment opportunities elsewhere.
"In crisis there's opportunity," said Rick Hudson, president of investment firm Prosperity Group Real Estate in
Closely watched gauges of professional buying have surged over the last two years.
The number of homes sold at foreclosure auctions statewide increased to 4,336 in April, from 884 in January 2009, according to research firm ForeclosureRadar. It eased back to 3,483 in July as banks offered fewer properties for sale. The auctions are dominated by professional investors who shop with cash (although not usually with actual greenbacks, for practical reasons).
Another measure, the percentage of all homes sold to absentee buyers, paints a similar picture. In the hard-hit Inland Empire, for instance, 30% of all homes sold in April went to absentee buyers -- up from 19% at the end of 2008 and the highest level in at least seven years, according to San Diego research firm MDA DataQuick. It was at 28.2% in July.
The binge of professional buying has helped spark a nascent housing recovery in
Home sales in the six-county region rose 7.2% in June from May and 2.6% from a year earlier, according to MDA DataQuick. In July, overall sales tumbled primarily because of the expiration of federal tax credits, falling 20.6% from the month before in
The fragile rebound in the broader market contrasts with the behind-the-scenes scramble at foreclosure auctions.
"There's a tremendous amount of capital that is desperate to just buy anything right now," said
In some cases, well-financed newcomers are elbowing out smaller investors at auction sales.
"The people who want to go and buy a house to flip, and do one or two, are already exiting the market," said Jan Brzeski, who manages a residential investment fund at Standard Capital in
The swarm of new investors, however, is making a treacherous and labor-intensive business even tougher.
Investors must do their homework on dozens of homes for every one they buy. Legal and other impediments usually prevent them from going into homes prior to buying them, leaving no way to gauge repair costs. And despite being foreclosed on, the original owners often still live in the houses. That forces buyers to pay them to leave, a dynamic known as cash-for-keys.
The influx of new players is pushing up auction prices and squeezing profits. The average discount at auctions -- the difference between a home's sale price and its actual value -- is 21.6%, down from 28% in January 2009, according to ForeclosureRadar.
Last year, Chase Merritt, a
Chase Merritt launched its first foreclosure fund in May 2009 and has started two more funds since then. But "it's literally gone from a business that's very attractive, even lucrative, 12 to 18 months ago to something that almost doesn't make sense," Horning said.
"It's just like the housing bubble," he said. "It's almost like we're in a bubble at the courthouse steps."
The scramble was on display recently at an auction at the
A semicircle of people crowded around auctioneer Elwood Brown. Most were clad in cargo shorts and flip-flops. A few sat in lawn chairs. But their laptops and cellphones, as well as the thousands of dollars' worth of cashier's checks they clutched, marked them as professional investors girding for battle.
Brown took a swig from his oversized water bottle and announced that bidding for a four-bedroom duplex in
The price shot up within seconds as two men and a woman raised one another's bids in $1,000 increments.
"It's at 229, Daryl," a man in a polo shirt and sunglasses whispered intently into his cellphone. "About to close. Do you want it?"
He increased his offer, but a rival bidder claimed the home a few seconds later for $237,000.
Competition at the auctions is brutal, said Bruce Norris of Norris Group, a real estate investment firm in
Norris unwittingly bought a house that was the site of a gruesome double murder. No one else bid -- a rare occurrence that showed others knew the history -- leaving Norris with less cash to bid for other houses.
"It's a very lonely place out there," Norris said.
That's only one of many risks in the foreclosure business. People who've lost their homes through foreclosure sometimes vent their anger by smashing walls, knocking over water heaters or ripping out toilets.
"We've literally had people take $20,000 of cabinetry out and feel perfectly justified doing it," Norris said.
The daily auction ritual begins each morning when banks signal which homes they are likely to dispose of that day. That sets off an early-hours scramble as would-be buyers speed through suburban neighborhoods to investigate the homes.
On a recent day, Norris steered his sport utility vehicle into the driveway of a 3,300-square-foot McMansion on a corner lot in
Aiming for an all-important look inside, Norris rang the doorbell and delivered the bad news to the teenage boy who answered the door that the home was scheduled to be sold that day.
"Do you mind if I poke around a little bit to see what kind of condition it's in?" Norris asked, angling his body to get a glimpse of the living room.
Then another car sped up and a rival buyer hurried up the driveway. She studied the house for a few seconds and craned her neck over the wooden fence protecting the backyard.
"This is a dream compared to a lot of them," she said in a satisfied tone as she rushed back to her car.
In the end, no one bought the home. The sale was delayed after the owner filed for bankruptcy protection.
Norris was philosophical, knowing that there were plenty more foreclosures.
"If you miss one," he said, "oh well, tomorrow's another pile."
walter.hamilton@latimes.com alejandro.lazo@latimes.com
Copyright © 2010, Los Angeles Times
Tuesday, August 17, 2010
Housing Market: 2009 Review
When 2009 began, the stock market was in the grip of a terrible bear-market sell-off that didn’t end until early March. By that time, the Dow Jones Industrial Average was half the level at which it had peaked just two years before. Credit was so limited that the situation was termed the Credit Crisis. The housing market had just taken another large leg down, and even high-end housing segments were feeling the effects of a pervasive housing price collapse that had begun two to three years before. Negative headlines assured wary home buyers that the end was not yet in sight. So 2009 was off to an abysmal start.
However, inventory absorption and recovery were evidently taking root in the most affordable and most depreciated housing segments. Buyers were encouraged to re-enter the market as the Federal Government enacted an $8000 tax credit for first-time home purchasers, which was subsequently extended (on a more limited basis) to all consumers. This federal tax credit has been believed to have spurred activity throughout the American economy. In March, the stock markets began to recover as investors took a chance that the worst was behind us. Aside from the tax credits and stock market recoveries, there were several other reasons for the stabilization of housing in 2009:
1. Low Mortgage Rates: The Federal Reserve Board kept mortgage rates low at approximately 5% throughout 2009 by purchasing $1.25 trillion in mortgage-backed securities. Buyers, aware of these historically low rates, believed that there would be a small window of opportunity to buy before financing costs increased. The result was a sense of urgency that spurred an increase in home purchasing as well as mortgage re-finance applications.
2. FHA Loans & Fannie Mae and Freddie Mac: After nearly disappearing during the market boom, FHA loans have returned. One half of all sales nationwide to first-time home buyers were insured by the FHA during the peak buying period in 2009. Also, Fannie and Freddie, now wholly owned by the federal government, purchase nine of ten mortgages.
3. Loan Modifications: In 2009, at the encouragement of federal and state governments, banks and other lenders increased their efforts to modify troubled mortgages. This provided borrowers with alternatives to foreclosure, and prevented (or perhaps only postponed) many foreclosures. According to Clear Capital’s Home Data Index (HDI) Market Report, the REO saturation rate dropped from 41.5% in the first quarter of 2009 to 25.5% in January of 2010. This decline served to limit the foreclosure inventory and thereby assisted price stabilization.
As a result of these stimuli, and as demonstrated by our market-bymarket analysis of California, by the end of 2009 values in most markets began to stabilize and, in home select markets, show consistent appreciation for the first time since 2006. According to RealtyTrac CEO James Saccacio, new foreclosure filings had been declining since peaking in June. This decline was due to trial loan modifications as well as state legislation extending the foreclosure process. The U.S. Treasury Department reported that as of early December 2009, more than 700,000 homeowners had received trial modifications. In the fourth quarter, foreclosure activity fell by 7% from the previous quarter.v All these factors have served to limit the supply of foreclosed homes and to help support a stabilized market. According to Clear Capital’s HDI Market Report, the Western United States Region, including those states that previously registered the largest decline in values (Nevada, Arizona, and California), showed a 1.2% quarterly gain in the fourth quarter. The Inland Empire (Riverside-San Bernardino-Ontario) MSA showed a 4.2% quarterly increase despite having an REO saturation rate of 51.3%. This increase provides evidence that the appetite for discounted REO homes is strong, and that the presence of these REOs is not having the expected depressing effect on the market that some anticipated.
Based upon our research, it seems evident that the least-affordable housing markets are not experiencing the balance in supply and demand that a stable housing market would demonstrate. This disparity is evidenced by high housing inventory and few sales at prevalent prices. High inventory relative to sales has, in past years, indicated that a price correction is on the horizon. Top-tier housing may be generally defined as homes valued at more than $1,000,000; but as average prices for a neighborhood increase, it appears that the sales decline. The factors driving this phenomenon include home owners in these markets being more fiscally resilient and more financially able to patiently wait to sell a home at a high price while making mortgage payments in the meantime. However, demand for these homes remains tepid, as would-be buyers experience difficulty in finding financing that does not require a large down payment to qualify. For example, in Los Angeles County, FHA and conventional loans are available to the amount of $729,750, which is expected to expire at the end of 2010. So presently, a borrower pursuing a $1,000,000 home purchase would have to bring to the transaction at least $270,250 of his or her own cash. Note the two graphs below, which are Multiple Listing Service snapshots of listing and sales activity in expensive Beverly Hills and Malibu markets from February 2010. It is evident that demand for housing at the prevalent prices is very low, and typically we would expect this to foreshadow a price correction.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
However, inventory absorption and recovery were evidently taking root in the most affordable and most depreciated housing segments. Buyers were encouraged to re-enter the market as the Federal Government enacted an $8000 tax credit for first-time home purchasers, which was subsequently extended (on a more limited basis) to all consumers. This federal tax credit has been believed to have spurred activity throughout the American economy. In March, the stock markets began to recover as investors took a chance that the worst was behind us. Aside from the tax credits and stock market recoveries, there were several other reasons for the stabilization of housing in 2009:
1. Low Mortgage Rates: The Federal Reserve Board kept mortgage rates low at approximately 5% throughout 2009 by purchasing $1.25 trillion in mortgage-backed securities. Buyers, aware of these historically low rates, believed that there would be a small window of opportunity to buy before financing costs increased. The result was a sense of urgency that spurred an increase in home purchasing as well as mortgage re-finance applications.
2. FHA Loans & Fannie Mae and Freddie Mac: After nearly disappearing during the market boom, FHA loans have returned. One half of all sales nationwide to first-time home buyers were insured by the FHA during the peak buying period in 2009. Also, Fannie and Freddie, now wholly owned by the federal government, purchase nine of ten mortgages.
3. Loan Modifications: In 2009, at the encouragement of federal and state governments, banks and other lenders increased their efforts to modify troubled mortgages. This provided borrowers with alternatives to foreclosure, and prevented (or perhaps only postponed) many foreclosures. According to Clear Capital’s Home Data Index (HDI) Market Report, the REO saturation rate dropped from 41.5% in the first quarter of 2009 to 25.5% in January of 2010. This decline served to limit the foreclosure inventory and thereby assisted price stabilization.
As a result of these stimuli, and as demonstrated by our market-bymarket analysis of California, by the end of 2009 values in most markets began to stabilize and, in home select markets, show consistent appreciation for the first time since 2006. According to RealtyTrac CEO James Saccacio, new foreclosure filings had been declining since peaking in June. This decline was due to trial loan modifications as well as state legislation extending the foreclosure process. The U.S. Treasury Department reported that as of early December 2009, more than 700,000 homeowners had received trial modifications. In the fourth quarter, foreclosure activity fell by 7% from the previous quarter.v All these factors have served to limit the supply of foreclosed homes and to help support a stabilized market. According to Clear Capital’s HDI Market Report, the Western United States Region, including those states that previously registered the largest decline in values (Nevada, Arizona, and California), showed a 1.2% quarterly gain in the fourth quarter. The Inland Empire (Riverside-San Bernardino-Ontario) MSA showed a 4.2% quarterly increase despite having an REO saturation rate of 51.3%. This increase provides evidence that the appetite for discounted REO homes is strong, and that the presence of these REOs is not having the expected depressing effect on the market that some anticipated.
Based upon our research, it seems evident that the least-affordable housing markets are not experiencing the balance in supply and demand that a stable housing market would demonstrate. This disparity is evidenced by high housing inventory and few sales at prevalent prices. High inventory relative to sales has, in past years, indicated that a price correction is on the horizon. Top-tier housing may be generally defined as homes valued at more than $1,000,000; but as average prices for a neighborhood increase, it appears that the sales decline. The factors driving this phenomenon include home owners in these markets being more fiscally resilient and more financially able to patiently wait to sell a home at a high price while making mortgage payments in the meantime. However, demand for these homes remains tepid, as would-be buyers experience difficulty in finding financing that does not require a large down payment to qualify. For example, in Los Angeles County, FHA and conventional loans are available to the amount of $729,750, which is expected to expire at the end of 2010. So presently, a borrower pursuing a $1,000,000 home purchase would have to bring to the transaction at least $270,250 of his or her own cash. Note the two graphs below, which are Multiple Listing Service snapshots of listing and sales activity in expensive Beverly Hills and Malibu markets from February 2010. It is evident that demand for housing at the prevalent prices is very low, and typically we would expect this to foreshadow a price correction.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
Monday, August 16, 2010
Housing Market: 2000-2008 Review
During the first half of the past decade, California experienced a remarkable period in which home values began rising at incredible rates. By 2005, some markets saw home values double and triple as buyers flooded the market, enticed by easy financing and the promise that values would continue to increase in California. While there was talk of a housing bubble by some, there was an equally convincing group that suggested that California real estate values would only go up as more and more people flocked to the Golden State. However, soon cracks started appearing in the market and the boom was followed by a nationwide housing market bust of historic proportions that eventually spread fear among holders of stocks, corporate bonds, and government and municipal bonds. Credit-default swaps threatened to destroy insurance giant AIG, the company having been ultimately saved by a titanic government bailout. Mortgage giants such as Countrywide, Wachovia, and Washington Mutual, facing insolvency, were bought by stronger competitors, who were also severely weakened and ultimately bailed out by the U.S. government. Investment banks, such as Bear Stearns and Lehman Brothers, which were century-old beacons of high finance and trade, were left bankrupt. Even companies such as General Motors and Chrysler Motors, far removed from the housing market, were driven to
declare bankruptcy. Arguably further removed still, international markets all over the globe also crashed.
The history and many of the causes of the biggest housing crash since the Florida Land Crash of the 1920s are becoming well-understood. The crisis originated with the Federal Government’s Community Reinvestment Act, which encouraged home ownership and a monetary policy that kept interest rates historically very low. These policies caused real estate values to begin a steady ascent that progressively picked up steam. Wall Street was making a lot of money packaging and selling mortgage-backed securities. Credit agencies determined those investments to be very safe, and the mortgage bonds received high credit ratings. The demand for such bonds seemed endless. Banks and mortgage brokers discovered that they could make very high profits originating loans. So the competition to capture market share gave birth to creative loan products such as teaser rates (where loan rates are low for a short time and adjust to market rates at a later date), option adjustable rate mortgages (which gave the borrower the option to make less than a full payment), and Alternate-A stated income loans (where loans were underwritten based on unverified statements of income and were nicknamed “liar-loans”). Prior to 2003, those Alternate A loans, which allowed for loans to be underwritten less stringently, were a small portion of the loan market. But between the years of 2003 and 2006, those loans increased by an incredible 340%.i In higher-priced markets, such as California, Option ARM loans (those in which a borrower could pay an amount below that required to pay even the interest, and could allow the difference to be added to the loan) were also very popular. Influenced by loan brokers and reassured by climbing values, appraisers became overly-optimistic with regard to valuations. The lucre from those loans wrought fraud and misrepresentation throughout the system, since those loans were sold to Wall Street and no risk exposure remained with most lenders involved in their origination. When the demand for those products subsided and the news of the crumbling housing market spread, the value of those mortgage-backed bonds crashed. Seemingly overnight, the mortgage-origination business virtually disappeared and was irrevocably changed. Many businesses related to lending went bust. The website ml-implode.com began tracking the instances of mortgage lender failures. As of this writing, the number was 374. Nearly 300 closed during the years 2007 and 2008.
From our analysis, it is evident that the California real estate market peaked in 2005 and 2006, then started showing signs of weakness in mid-to-late 2006. In the latter months of 2006, it was evident that the housing bubble had popped. Sellers began to reduce their prices. Unsold inventory began to build. Where there was smoke in 2006, there was fire in 2007. Home buyers had vanished and sellers were unable to sell their homes at once-prevalent high prices. The inventory of unsold homes began to pile up at a rapid rate as private sellers and banks with newly acquired foreclosed homes flooded the market. Absorption rates for sales of homes plummeted. Financing began to dry up as banks reduced their exposure by withdrawing from the market and tightening lending standards. Buyers who wanted to buy were unable to act, limited by the availability of favorable financing. Throughout 2007 and 2008, the housing market seemed to be in free fall. Some parts of California saw home values decline by 75%. The declines were most evident and severe in areas where the most affordable homes could be found, and where home prices were within reach of the lower tiers of income earners and investors. The declines were also plaguing areas where developers had overbuilt small communities on the edges of cities, and prescient builders began to liquidate new tract homes. But the symptoms soon spread to the upper levels of the housing market. The market crash in 2008, and the credit crisis that erupted in the fall of that year, caused the crash to affect the wealthiest individuals. Consequently, all rungs of the housing ladder, including homes in the top tier priced at over $1 million, were negatively affected. In 2005, the number of $1 million-plus homes sold was 54,773. In 2006, it was 50,010; while in 2007, it was 42,506. Then, in 2008, it dropped 42.5% to 24,436.ii So although top-tier housing was resilient to price declines during the initial housing correction, during 2008 and 2009 significant weakness developed to cause foreclosures and price corrections to be manifested within this upper-level price market.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
declare bankruptcy. Arguably further removed still, international markets all over the globe also crashed.
The history and many of the causes of the biggest housing crash since the Florida Land Crash of the 1920s are becoming well-understood. The crisis originated with the Federal Government’s Community Reinvestment Act, which encouraged home ownership and a monetary policy that kept interest rates historically very low. These policies caused real estate values to begin a steady ascent that progressively picked up steam. Wall Street was making a lot of money packaging and selling mortgage-backed securities. Credit agencies determined those investments to be very safe, and the mortgage bonds received high credit ratings. The demand for such bonds seemed endless. Banks and mortgage brokers discovered that they could make very high profits originating loans. So the competition to capture market share gave birth to creative loan products such as teaser rates (where loan rates are low for a short time and adjust to market rates at a later date), option adjustable rate mortgages (which gave the borrower the option to make less than a full payment), and Alternate-A stated income loans (where loans were underwritten based on unverified statements of income and were nicknamed “liar-loans”). Prior to 2003, those Alternate A loans, which allowed for loans to be underwritten less stringently, were a small portion of the loan market. But between the years of 2003 and 2006, those loans increased by an incredible 340%.i In higher-priced markets, such as California, Option ARM loans (those in which a borrower could pay an amount below that required to pay even the interest, and could allow the difference to be added to the loan) were also very popular. Influenced by loan brokers and reassured by climbing values, appraisers became overly-optimistic with regard to valuations. The lucre from those loans wrought fraud and misrepresentation throughout the system, since those loans were sold to Wall Street and no risk exposure remained with most lenders involved in their origination. When the demand for those products subsided and the news of the crumbling housing market spread, the value of those mortgage-backed bonds crashed. Seemingly overnight, the mortgage-origination business virtually disappeared and was irrevocably changed. Many businesses related to lending went bust. The website ml-implode.com began tracking the instances of mortgage lender failures. As of this writing, the number was 374. Nearly 300 closed during the years 2007 and 2008.
From our analysis, it is evident that the California real estate market peaked in 2005 and 2006, then started showing signs of weakness in mid-to-late 2006. In the latter months of 2006, it was evident that the housing bubble had popped. Sellers began to reduce their prices. Unsold inventory began to build. Where there was smoke in 2006, there was fire in 2007. Home buyers had vanished and sellers were unable to sell their homes at once-prevalent high prices. The inventory of unsold homes began to pile up at a rapid rate as private sellers and banks with newly acquired foreclosed homes flooded the market. Absorption rates for sales of homes plummeted. Financing began to dry up as banks reduced their exposure by withdrawing from the market and tightening lending standards. Buyers who wanted to buy were unable to act, limited by the availability of favorable financing. Throughout 2007 and 2008, the housing market seemed to be in free fall. Some parts of California saw home values decline by 75%. The declines were most evident and severe in areas where the most affordable homes could be found, and where home prices were within reach of the lower tiers of income earners and investors. The declines were also plaguing areas where developers had overbuilt small communities on the edges of cities, and prescient builders began to liquidate new tract homes. But the symptoms soon spread to the upper levels of the housing market. The market crash in 2008, and the credit crisis that erupted in the fall of that year, caused the crash to affect the wealthiest individuals. Consequently, all rungs of the housing ladder, including homes in the top tier priced at over $1 million, were negatively affected. In 2005, the number of $1 million-plus homes sold was 54,773. In 2006, it was 50,010; while in 2007, it was 42,506. Then, in 2008, it dropped 42.5% to 24,436.ii So although top-tier housing was resilient to price declines during the initial housing correction, during 2008 and 2009 significant weakness developed to cause foreclosures and price corrections to be manifested within this upper-level price market.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
Record Low, Then Another, Then Another, Then…
The news regarding mortgage rates almost has become passé. Nearly every week this summer, Freddie Mac has announced that one of the mortgage rates it tracks has hit a new record low. According to its Primary Mortgage Market Survey, 30-year, fixed-rate mortgages are sitting at 4.44%! While the housing market certainly remains muted, according to some experts, the low rates are helping generate sales activity that would not be happening without these incredible rates.
At the Federal Reserve’s latest Open Market Committee meeting, the Fed noted that the economy is still on a recovery path, but that the rate of recovery is slowing. Many market participants were pleasantly surprised to see a change in the Fed’s policy announcement. Over the course of the last year, the Fed has acquired a massive holding of mortgage-backed securities (MBS) and Treasury debt. Up until this point, the Fed has simply collected the payments on these instruments. The Fed has now decided to begin using the collected money to purchase more government debt. While this will not have the same impact as the recent $1.5 trillion campaign, it will make some impact. Ultimately, this should help maintain ultra-low interest rates for a while.
Low rates have certainly become the norm over the last few years, as the economy has struggled. At this point in time, it is highly likely that we’ll be seeing low mortgage rates for quite some time. Even a few months ago, the economy looked as if it was going to claw its way back. Now the picture is not as certain. One of the biggest challenges is that this recovery has been driven by growth in manufacturing. However, manufacturing is beginning to lose steam. Until we see consumers spending again, the economy will remain sluggish. Of course, the big key to consumer spending is jobs. If the fall brings us good news on the labor front, we’ll see rates beginning to tick upward. Otherwise, more and more record lows will be recorded.
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