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On the Latest Housing Numbers
I read Diana Olick's Realty Check blog on CNBC.com
on occasion. I must admit that she is considerably more credible and
serious than the vast majority of personalities to be found over there.
In her latest piece she questions the validity of the sales bump seen
in the last three existing home sales reports. She queries Lawrence
Yun, NAR's chief economist. He volunteered,
"We have seen some bulk purchases by
investors, but we are not picking up that data through the Multiple
Listing Service or through our release data, but we do know that there
is some bulk purchases by investors who plan on releasing those
properties within a year's time, when they see a better market
condition."
I don't believe "better" market conditions are coming any time soon. We
are just coming off of the best market conditions anyone will see in
their lifetime. Those market conditions were predicated upon
unsustainable conditions, hence they came crashing down. They are
crashing down, not crashed - as in past tense. I believe we have some
ways to go. That is why I am not buying real estate, and I believe that
those that are jumping in now are jumping in prematurely.
Personally, I don't consider Mr. Yun to be a credible source, either.
He may be smart and capable, but the extreme bias of his employer (the
ultimate real property perma-bull) and the incredibly biased reports of
his predecessor color his opinions by default. He is not nearly as bad
as David Lereah (who was literally sensationalist-style perma-bullish)
was, but he is still not objective. See The Reggie Middleton Real Estate IQ Test - Who believes the NAR?
This is an excerpt from that post on Tuesday, 08 January 2008
From CNBC.com
Home Sales Seen Holding Steady In Coming Months
Pending sales of existing U.S. homes inched lower in November and should hold
steady over the next few months, a real estate trade group said. (I
ask, "Why should they do that? Credit is tighter, recession evidence is
stronger. Supply is greater, and demand is lower. Hmmm, let me consult
the book written by that ex-NAR guru for the answer." )The National Association of Realtors Pending Home Sales Index, based on
contracts signed in November, dropped 2.6% in November, to 87.6 from an
upwardly revised 89.9 in October.Economists polled by Reuters ahead of the report were
expecting pending home sales to decline by 0.5 percent from October's
originally reported 87.2.The November number was down 20% from a year earlier.
The pending homes sales data suggests that the volume of sales will
hold steady for a while before turning upwards before the end of the
year, said NAR chief economist Lawrence Yun.
With all due respect to Mr. Yun, Mr. Lereah and the NAR, anyone swift
enough to complete the registration form for this blog should know, by
now, to discount this association's data and opinions. They do not do
the industry justice with this nonsense. Realtors should actually be
the first in the protest line. It is their credibility that is being
called into question, for this is THEIR trade group. Credibility is the
key!
Notice how accurate that prediction was for 2008! From my blog post that day in 2008:
My take: I believe that my
blog's readers are considerably above average in financial acumen and
common sense. The NAR is simply not an entity to be taken too
seriously, due to the obvious conflict of interest exemplified by their
ex-economist, [[David Lereah]], who published some of the most absurd
BS I have ever seen come from a nationally reknown organization.
Examples of his work from Wikipedia: Are You Missing the Real
Estate Boom?: Why Home Values and Other Real Estate Investments Will
Climb Through The End of The Decade, And How to Profit From Them was published in February 2005 at just about the tippy top of the bubble (that takes some talent). One year later in February 2006, as the market is already on it's way down, Lereah retitled his book Why the Real Estate Boom Will Not Bust and How You Can Profit from It. Lereah's previous book The Rules for Growing Rich: Making Money in the New Information Economy touting investment in technology company equities was published in June 2000 at the onset of the collapse of the dot-com bubble.
This extreme cheerleading has died down substantially, but the overly
optimistic spin is still evident with their new economist, Lawrence Yun.
I actually believe the Case Shiller graph above to be misleadingly
optimistic due to my doubts about seasonality filtering and the
exclusion of investor related properties (flips, see A reminder concerning popular housing indices)
which are dominating the lower end of the market. On this note, Ms.
Olick consults someone who I feel is considerably more credible and who
I have dealt with personally...
I found that so interesting that I
emailed over to Mark Hanson, a housing and mortgage expert out in
California. He says the bulk buying was much bigger last year than it
is now, and in fact there is no shadow inventory around to buy in
California today. Yun says the same: "Interestingly what I hear from
Las Vegas, San Diego, Riverside and other areas is they are really
desperate for inventory in the lower price range....and even though
they have buyers that want to buy there's not enough inventory." Yun
put it out there to banks to release anything they have. [Reggie note: Which
brings us to the logical argument that supply must meet demand, and
pricing must come down significantly to meet the demand at the lower
price points. The demand and credit/liquidity at the higher prices
points is very, very low.]But in my chat with Hanson, he said I should be focusing on something else: "Flip Adjusted Sales.'
This is adjusting total sales to back out flips....
"Buy and hold is not the top strategy of these investors," claims
Hanson. "It is buy and sell quickly. So unlike any other time in
history, the exact same house is being counted twice within a 2-6 month
period of time, skewing the numbers. These investors were especially
motivated to sell before the end of the tax credit on Nov. 30th -- or
thought to be the end -- which is why median and average prices keep
falling." [Reggie
note: this will not skew the Case Shiller numbers though, for they use
an econometric model that filters for just such events, although this
filtering introduces other unrealistic biases as well.]
Ms. Olick goes on to state:
"When the investor flips the property, it is not listed as a distressed sale, but as an organic sale [Reggie note: Nearly all flippers buy from distressed owners, so this can be misleading as well].
I don't know if anyone could ever figure out the real "Flip Adjusted
Sales" numbers, but as we see more foreclosures come to market in the
coming months, we shouldn't underestimate the trend. Right now there
are about seven million homes somewhere in the foreclosure process, and
banks are moving borrowers through the modification more quickly than
ever. No question we will see rising distressed inventory come 2010,
and investors will undoubtedly be poised to take advantage."
Well, I agree with Mark (who really, really knows his stuff - he busted Lehman with their overstated inventory very early on as Mr. Mortgage on YouTube),
and Diana. As for the ability to find the "flips", it can be done by
literally performing the opposite of the Case Shiller index. Look for
properties that were held for less than one year, and have different
and/or dissimilar names in the most recent transaction in the chain of
title - usually from an LLC to personal names. The vast majority of
these will most likely be flips. Back those out and you will get a much
clearer picture of the organic sales numbers. In terms of the Case
Shiller index, add those in and adjust for seasonality, etc. and you
will bet a much clearer picture of the direction of actual pricing.
If the flippers and investors are the ones involved in most of the
action on the lower end, and most of the action is on the lower end,
then the sales price increases reflected by the Case Shiller index are
quite misleading.
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Excellent post Reggie. I consider you and Mr. Mortgage the foremost authorities on real estate. Thanks also to Euclid and LitoralKey. I see things as you do Euclid. A deflationary spiral. The whole economy was built on overvalued real estate. Without that bubble the economy is slowly suffocating. The Silverdome just sold for-99%. Real estate's finished. I also am looking to buy SRS.
Reggie, your hard work is just awesome.
I'm accumulating some SRS calls these days.
Very nice post Reggie. I live close to ground zero in SW FL. In my immediate neighborhood in golden gate city there are literally dozens of vacant, unrented (half with no signage either to rent or sell) homes that have sat for over six months. In the late 1990's, these homes would have been occupied and sold for no more than $120,000--$80,000 for a fixer upper. When they do sell, half the time the seller listed in the paper is FNM, FRE or some Trust. Point is this, they are somebody's inventory; they have been held off the market; to clear the market takes a real bargain price on top of the tax-credit incentive--somewhere in the price range above. Nobody seems to be in a rush to get these places occupied--which implies an institutional lender. The bargain hunting and tax credit hasn't really made a dent in the low end inventory available down here. These sales are still coming, but it won't knock the stuffing out of the biased to the high end "median" price index scheme the realtors use. Now they've got a new way to report the data, median price under $300,000 or median price over $300,000. What thieves. One year, the Naples Real Estate Board wouldn't even report their data to the state board. Things were just too bad to report, you see--damaging to the marketplace.
The last condo bulk sale I saw written up was right off I-75, something like 75 units for $25,000 each--these units were trading north of $350,000 at the peak 3 years ago. I think the seller was a local bank that had taken them back from the defaulted developer. At least they cash flow at these prices--hard on the rental communities though who have watched vacancies climb and rents drop. These are national rental outfits/REITS. What would this sale do to an honest guage of prices?
Naples is a weird market. At the over $1 mil range, which is sizeable, you have execs fly in and write a check. No financing. This segment is probably off 30-40% pricewise but down 75% volume wise (all comparisons to our peak year ending in August 2005). A seller can still get lucky and get out. Everything is for sale. The high end high-rise condos on the water seem to be hanging in there for this reason--stupid wealthy first time buyers. Just the die-off in these buildings implies an implosion down the road (yes, old people still die in Naples). Again, huge numbers of listings. (no conventional financing available in this variety of building and price range). I worked on one of these buildings where the monthly maintenance fee started at $6,500 on your third floor $3.500,000 sixty-five hundred square foot condo. This building was completed in 1999--totally sold out and wait listed. They all sell for less than original prices now. A decade later.
I fear the real disaster is coming next year. $300-1,000M price range with the ARM resets. There is a huge entrepreneurial storeowner/merchant and two-earner, public- employee family population segment down here. They all played the move-up and HELOC game. Lots of superficial prosperity. Harley's, Suvs, Beamers, fishing boats. Their kids all drive new cars and have iphones--still in HS. They live in these mid-range gated communities and have lawn services and pool-men. They've held on, but the resets from the mania year begin next year.
What caught my eye this month was the state foreclosure data that correlated prime defaults to unemployment--MI and RI. Well, welcome to Naples FL. Naples used to live off building retirement abodes for middle and upper class northerners and servicing them when they got here. Lots of: shops, malls, restaurants, golf courses, (illegal cleaners and construction workers, small banks, boat dealers, car dealers, contractors, developers, pizza parlors, fast food. County govt, the school district, the police force all doubled in a decade. Now, the construction market has vaporized and all the services are holding on by the skin of their teeth. We survive off that monthly social security check getting spent. Its just-just, getting scary.
Here's what could happen here. Unemployment could double. Our under-reported unemployment rate is 11-12% as season begins and the snow birds fly in. A lot of restaurants have closed in the last year. A lot of illegals have moved on up north, but the school district has kept this quiet. The Feds are just beginning to weed out and close the small banks here (article this Sunday pointed out that only two of 16 local banks were profitable so far this year).
-the speculators are long gone here. The bargain hunters were out in force over the last four months but that traffic seems to be drying up. Short sales are cumbersome and take a long time in the mid-range. There is simply too much low-end supply and not enough buyers who qualify for those programs.
-Three and a half percent down on a new $500,000 FHA loan is only $17,500. This is about one month's depreciation on a $750,000 home last year. What madness is this?
-over the next two years 5000+ homeowners have their ARMS reset in the mid-range and get foreclosed. About $2.5billion worth loan value. Knocking $10B off market values for those left standing.
-property tax revolt finally commences, knocking public-sector employment and budgets down 20-30%.
-retail/office/industrial space (already bad) totally vaporizes. Suddenly our retirement mecca begins to resemble Dresden. Harder to sell the place up north. Leads to flat to lower in-migration from retirees.
-retirees can't use the tax credit programs nor can the unemployed. No work=no mortgage. No work=no in-migration of the not retired. Out migration of the foreclosed and bankrupted small businessmen accelerates. More Illegals follow.
If we're the tip of the spear, then this is nowhere near over and the potential for a really nasty deflationary plunge in real estate and employment is directly ahead. Take all index based real-estate price "recovery" talk with a large dose of salt. The ARM clock is ticking.
Euclid
Euclid,
I just escaped from one of those upper market houses in SW Orange county in September (top 3% house value in orange county according to Zillow). Everything you said is the same for Orange county and the rest of central FL (Osceola, Lake, Brevard etc). You know that, I know that, I was dropping the list price on the house 3.5% a month to attract a buyer. In my zip code my house and another house of equal size/quality sold in same week in mid September. It set the ceiling on all list prices... and prices are still dropping at 2.5% a month.
(Orange county only being different due to the larger tourism industry sector.)
I was and am overly informed on the market, I know people working with banks in Florida and Georgia to clear CRE, and the banks offer lists of residential properties that include both the commercial multifamily units and due to their internal lazyness their single family and iundivdual condo units also. In my zip code in the houses in the top 5% of house values in Orange county... the shadow inventory was at least 400% larger than the MLS and listed REO market combined. However, the shadow market at the top end is selling to insiders who are in cahoots with the listing brokers with listing agreements with the banks.
On the low end.... combine the MLS, REO listed and shadow inventory in Orange County FL, and there was approximately 58 months of inventory in September 2009. I had thought about selling my house and buying 10 foreclosed rental income condos... but the rental and low end supply is nearly reaching theoretical infinity when you consider the average length of occupancy for a household in Orange county is slightly under 4.5 years. Add to that the built in slack in the labor market and downward wage pressure in FL for the next god knows how many years...
So due yourself a favor and try to find the Census.gov info on the average length of occupancy in your area... then try to add that into your well thought out bullet points above.
As you said ,
No jobs=No interstate migration
regards,
Lito
Orange county tax collector has monthly statistics on all taxes brought in by the county. It is incredibly scary.
http://www.octaxcol.com/OccLicNewBusiness/Local%20Business%20Tax%20Repor...
"However, the shadow market at the top end is selling to insiders who are in cahoots with the listing brokers with listing agreements with the banks."
Excellent comments Lito, but please explain the above statement. How does this work in reality>
'Any bank better known by an acronym' has a portfolio of foreclosed properties.
A senior bank employee is put in charge of managing this portfolio, be it liquidation, or a long hold slow release strategy, or some combo of such. Bank lawyers, accountants, auditors, Board of Directors, etc also.
Senior bank employee has several subordinates working the portfolio, friends at the bank, lateral position coworkers to curry favors, in-laws, college roommates, dentists, neighbors, clergy, and golf buddies.
Senior bank employees' responsibilities include contracting a pool of brokers to market properties to be released from inventory and sold off.
These pools of brokers and their agents also have friends in the field, lateral position coworkers to curry favors, in-laws, college roommates, dentists, neighbors, pastors, and golf buddies. The brokers' agents also have RE industry people they need to curry favor with, such as mortgage loan officers, flipper customers, shady appraisers, etc.
At different levels with the senior bank employees being the highest, down to the lowest, properties are whispered through grapevine, and well before the property is put on a MLS, the sale has already been agreed upon.
The property might not even be put on MLS, though that leaves those directly involved agents, brokers bank employees, in a precarious position.
If put on MLS, the first purchase offer is submitted by the sellers' agent, securing the agent both the buy and sell side commission. (Agency issues involved.) The agent immediately takes the property from Listed to Sale Pending within hours.
The insider gets the property for a bargain, the agent gets 5% or 6% of 65 to 95% of a reasonable guess of market value, instead of 2% or 3% of a reasonable guess of market value. The bank can book the loss amongst hundreds of other losses, and book the income.
It really sucks for the residential RE industry, as both real estate agents at large, and the market buyers at large feel (correctly) they are getting shafted in a fixed game.
For further enlightment , check out Jim Klinge,
http://www.youtube.com/user/JimtheRealtor
http://www.bubbleinfo.com/
Also, i posted wrong link before, try this for Orange county Fl tax reports:
http://www.occompt.com/index.php?option=com_docman&task=cat_view&gid=48&limit=10&limitstart=0&order=date&dir=DESC&Itemid=128
Euclid...thank you for taking the time to share your insights.....most helpful!
I think you have a great grasp of the problems and challenges that lay ahead. I can only wonder what central and southern Florida are going to look like in the next ten years. A couple of months ago we were looking at some potential acquisitions in the Naples area... now (due to other pressing matters) I think we will wait until we see signs of stability... judging by your comments this may take some time... you don't try to catch a falling knife after all...
Thanks for your insight.
Anomoly just like CFC
Many closed in October assuming that the 1st time buyer credit would not renew. There will be good numbers for Nov. for the same reason.
This is the same type of bump seen from cash-for-clunkers. Then transactions go back to depression levels.
How many times do we charge the paddles before the patient is declared deceased?
There's more than an anomoly going on.
Here in the S.F. Bay area, it was all over the news that prices had rising. The San Jose Mercury News reported it once during the week, and twice during the weekend, for Santa Clara Valley.
But something significant was completely ignored. You see, the SJMN reports graphs of sales and inventory over the past year, and numbers for the past twenty days.
Prices had declined, while the front page said they had risen. Somebody is outright lying here. And given that the SJMN publishes those charts every week, I'd say that they give more weight to the weekly numbers.
You won't see this mentioned anywhere. Even the graphs are only available in the printed version, and aren't online.
Another statistic, in line with what Reggie has reported above, is that inventory is WAY low. The chart is amazing.
I suspect this Spring we're going to see a bloodbath.
Mark Hanson's articles are terrific. He writes a blog entry every month or so.
http://mhanson.com/blog
Thanks for posting Mark's new new new website address.
Mark seriously should have mothballed his first (or second) url and gone back to it, the original Mr.Mortgage (and the secondary link at Mr.Mortgage to his 2nd website) are dead links on untold scores of blogrolls to this day.
A recent report from the San Francisco Fed explains the recent strength in lower end housing. Easy lending terms by FHA have brought the subprime borrower back into the market. The percentage of new homebuyers with subprime credit scores is back up to where it was at the height of the housing bubble in 2006.
This shift in mortgage finance has had a profound impact on the types of borrowers receiving loans. In
the fourth quarter of 2006, approximately 10% of originations in our sample were labeled by originators
as “subprime.” For the entire universe of mortgages, subprime loans are estimated to have made up
about 20% of originations in 2006. By the first quarter of 2008, the subprime share was effectively zero.
Since then, increased FHA lending—identified here by Ginnie Mae’s share—has revived this segment of
the market. After plummeting in early 2008, the share of borrowers with FICO credit scores lower than
660 has returned to just higher than 20%, the same share as when subprime securitization peaked in
2006.
What's the downside risk for a low end buyer with bad credit? They already have a bad credit score. They have to put little or no money down. If the value of the home goes up they make money. If the value of the home goes down, they will look for a writedown of the mortgage balance or some other type of relief; failing that they'll hand over the keys.
The SF Fed report also explains why the high end real estate market has not experienced any recovery. The major sources of lending to that market have disappeared and there has not been a taxpayer funded entity to step in and subsidize the market with loans no sane private lender would make:
The collapse of nonconforming loan originations has had a particularly strong impact on the higher end
of the market. The share of jumbo mortgages was nearly 9% at the peak in 2006. By the end of 2008,
jumbo loans accounted for just 3% of new originations. Meanwhile, in another big shift, option ARMs
made up about 6% of originations in the fourth quarter of 2006. By year-end 2008, option ARMs had
vanished from the data set.
basically, investors bought properties at the beginning of the tax credit cycle, spun them to low-down payment "first time buyers" (many "first time buyers" initially shut out to cash purchasers). anything on inventory prior to the end of the tax credit was dumped to reduce the risk of getting stuck with dead inventory (prices sagged in October).
and as stated by Diana, probably skewing the actual sales numbers by all the flipping.
nice!
"That is why I am not buying real estate, and I believe that those that are jumping in now are jumping in prematurely."
I think if you find value you should buy. We look at the property recorders records and if we see that the building sold for this price in the 70's, we buy. You have to act fast and use cash.
We have found several apartment building that qualified during the past year.
Buy smart because now is the time that YOU have the upper hand. If you buy stupid there will be no monetary reward. We will not see free money again for at least 10-12 years.
Higher price point demand in Cali is very low and inventory very high.
That about sums up the inventory situation in a nutshell.
Thanks, Reggie.
As a realtor in S. Ca., the residential housing market shot straight up starting in July due to the $8000 tax credit, record low interest rates and the 3% down FHA loans. The banks/FED are keeping many homes off the market (shadow inventory) creating a false impression of the market. My buyers were first time buyers employed teachers, city, and state employees. They all believe they lush pay and benefits will only grow in the future. This housing rally was as phony as the rest of the "green shoots". Next year housing prices will be much lower in my opinion and there will not be any optimistic buyers who will or can plunge into a big $400,000 mortgage.
What part of So. Cal are you in? I've been looking, sold my house in 2003 a bit too early I'm sorry to say, but 1800 sq ft condo's are going for about 700,000 with 1000/mo HOA fees (effectively 200,000 added to your mortgage at these rates). I don't see any 400,000 detached homes anywhere in the greater los angeles area (maybe watts or compton, haven't looked in those areas).
Just wondering what people think of these crazy HOA fees out there? Is it another way for these real estate companies to make back their money on the back end? I don't remember HOA fees being so high before, at least not in California.
Same thing in S. Florida but the bubble is back. As the USD falls against other currencies it makes buying a nice home in Florida a half-price reality for those in strong currency markets. As a result we are seeing prices in some areas over and beyond peak bubble prices! And everything else is feeling the gravitational pull...
As a result we are seeing prices in some areas over and beyond peak bubble prices!
You're FOS.
I read Diana Olick's Realty Check blog on CNBC.com on occasion. I must admit that she is considerably more credible and serious than the vast majority of personalities to be found over there
I'm glad that you said this. She is the ONLY one over there that does not spin things.
Have you forgotten Mr. Santelli??
Sweetness.... I stand corrected and offer my apology to Mr. Santelli.
45% minimum down from here without question. Bravo Reggie, keep up the good work.