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A Look at the Case-Schiller - No Good News
The April Case-Schiller report tells us very little. The 3.8% average
rise reflects the end of home buyer tax credit. Sales and prices have
evaporated since May 1. The CS index will tell us a much different story
when the data is released 30/60 days from now. While the April report
provides little insight as to where we are today there is some
interesting information that is worth noting.
Of the 20 cities the CS index tracks 18 showed price increases. The two
that fell were Miami (-.8%) and NY (-.3%). With that in mind consider
this chart:
The information is based on April data and is therefore consistent with
the CS report. Both New York and Florida are at the top of the list of
states with the longest period between initial default and final
foreclosure. For the nation as a whole the number of days has nearly
doubled over the past few years. NY and Florida are 31% and 21% higher
than the national average.
This is not a coincidence. This is cause and affect in action. I live in
metro NYC and own property in S.Fl. I see what is going on. There are
many middle to upper price homes on the market that have not seen an
offer for more than a year. A good number of these are already in
default. The borrowers are underwater and there is nothing they can do. A
HAMP style ReFi accomplishes nothing. I know people in both areas who
have contacted their lender and have been told to come up with an
acceptable short sale or deed in lieu transaction. The borrowers have
been told by the bank(s) that if they do not cooperate they will have
their credit wrecked and be subject to default judgments. So the
borrower puts the house on the market and hopes for an offer that is
acceptable to the lender. In the mean time they stay in the home for up
to two years and pay very little (if anything) on the old mortgage.
There is substantial evidence that these people are buying IPhones and
going on vacation with the money they are saving by not paying the debt.
Some thoughts:
-This “extend and pretend” at its worst.
-The lenders will not let this continue forever. The day of reckoning is
coming. It well be felt in all of the states. It will be felt hardest
in the states that have the highest days to foreclosure numbers.
-As a former owner is foreclosed they will be forced to rent. Given that
few in this category are paying any meaningful amount of their current
monthly mortgage it is likely that they will have less disposable income
post foreclosure.
-My conclusions:
(A) RE in Fl and NY is going to tank this fall.
(B) Consumer demand for things from clothes, gadgets and leisure is
going to suffer an out sized decline.
(C) The extend and pretend policy is catching up with us. This approach
was a “buy some time” idea in the hope that things would work out. They
have not worked out. We are about to pay the price for that failure.
If we revert to more traditional levels in the ratio of initial default
and foreclosure we are going to hit an economic wall. This is just one
more thing stacking up against us.
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I agree that the market still has a way to go down. Here in Chicago, foreclosures on apartment buildings are outpacing foreclosures on single family & condo's.
That said my mortgage broker just called with a 4.25% 20 year fixed deal where they pick up all closing costs. I bit, was at 4.85%, which I did on my dime last October. Sometimes it is better to be lucky than good. We bought our place pre 2000 and still have plenty of pos. equity & solid credit. Have to pay for the !@#$%^ property tax increase somehow.
Bottom line there is a lot of smart money sitting on the sidelines. Not every one was buying 2000-2008.
The macro versus the micro has a different impact. Dallas has a 7 year shadow inventory according to one of the sharpest RE persons I have met. Things are not Ca or Fl dead but slow. Most of the building industry is in a struggle or under water.
The micro I saw today was sad. 57 year old computer guy, unemployed 2 years and if there is no job in 6 months the house will go up for sale. His work partner just went into foreclosure. I suspect because it is a small 14 acre tidy spread with a modest house, it will be upside down and foreclosed. They have owned it for 12 years but no borrow room. So he is selling off stuff. But, everybody is putting a squeeze on the dollar and no willing buyers. The man may be a fool, but his large stash sank with the stock market (he obviously was not using all his bucks on drugs), the house crash crashed his home investment (nicely done, frugal), and his job disappeared due to no fault of his own.
So, if the consumer spender is gonna bail us out, I did my part today. I bought a tractor, boat, and big buck Toro. At 10 to 30 cents on the dollar and an expanding market with falling value, the consumer may spend, but not at a store. This is how it was in the Great Depression, and how it is developing in this GD part 2.
A couple of super-canes will cluster and hit Florida and spray oil and destruction everywhere. This kind of event will take 10-30 years to recover from. Time to find another tourist/retirement destination. New Zealand? California? I will leave without any hesitation... We are nomadic. Internet makes almost any place acceptable to me.
Can you take an intertube from Miami back to Cuba.
The lenders will not let this continue forever. The day of reckoning is coming. It well be felt in all of the states. It will be felt hardest in the states that have the highest days to foreclosure numbers.
Bruce, I do not think we make it until the fall. Right now from the Tampa Bay area to Naples, FL market many communities have CRE vacancies north of 30 to 35%. Add in the understaffed judicial system to process pending foreclosures and the formula is there for a massive wave of repossessions and increase in bank owned real estate. As it sits now, the locals I deal with from Orlando to Tampa and points south all agree that Florida should drop another 20+% from the recent lows with many communities enduring a 75% drop from 2006/2007 peak prices.
The oil spill is the wild card for most of coastal Florida. If the oil starts impacting our coastline as some marine biologists and scientists are projecting for late August, then some markets on the coast could see 90%+ wipe outs due to the destruction of the beaches and our oceans. It might recover ecologically in 2 to 4 years, but the lack of financing, horror headlines being projected nationwide, and over building could feasibly keep prices suppressed for upwards of a decade; worse if the retirement haven status of our state is lost due to the economic and ecological disaster. It would not be shocking to see a new real estate downturn comparable to the 1926 (post Miami hurricane real estate crash) to 1978 real estate depression Florida experienced.
Unlike that depression, millions of people invested directly and indirectly in Florida's and Arizona's real estate boom. That will be the next rude awakening to the uninitiated.
NICE!
There may have been some lone fool talked into overpaying for a house/condo by a Fl RE thief, urrrr, agent. But you'll be hard pressed to find many areas in S Fl where RE prices have truly risen.
Of course, one would have to be savvy enough to totally disregard any NAR, or government propaganda. Shadow inventory alone will keep pressure on prices for another four to five years.
Rising real estate prices are not measured by "medium price". As foreclosure sales move up the price ladder, medium sales price will rise, but that does mean that the price of the same (comparable) home that sold last month has risen.
Homes in the super exclusive Boca Raton neighborhood of Royal Palms, or Miami's Coral Gables have plummeted and many are in foreclosure.
The real situation isn't pretty at all. Watch out for the RE agent planted land mines.
I can't stand to watch Larry (or anything else on CNBC).
His interview style reminds me of "DR. RUTH" the sex therapist. I always called her show "DR RUTH INTERVIEWS HERSELF."
I see the banks having private conversations with the govt. either now or in a few months. What will be in these private conversations, it will be to make it a federal crime to walk away from a mortgage and also make law where even though the bank gets the house, what they can get for it in sale you will make up for the rest of the mortgage. You may say this is impossible, they can't do that etc. etc.. Well we already seeing the first shots over the bough in changing law or new law. They are making it where if you walk away from a Fannie or Freddie mortgage (which is most of them) or don't try to get a modification (this is gray, because the bank can say we modified but you may say it's not enough), then you can't get another loan through these facilities for at least 7 years.
Desperate people do desperate things, you can say the same thing with govt.. If they see the banks going under again, they will market this as going after the people who can pay the mortgage but in reality it's going after anybody who has one.
ouch
ouch
ouch
You should never have been able to walk away from a house, without a bankruptcy, to begin with. The 'non-recourse' loan was born of bankster greed. THEY never figured that housing could go down so they were happy to get whatever they could out of the sucker homebuyers...they could care less if the note got paid because they would just find another sucker...at the same price or higher and get the fees all over again.
There was a car dealer...Cal Worthington...that pioneered this concept decades ago. He would sell anybody a car, and try to sell a car they would lose to the repo man. Then he could sell it again, and again. He died fabuously wealthy of old age. I never understood why he didn't die of lead poisoning.
But how can the banks maintain the mark to fantasy lunacy if they foreclose?
Hmmm,
Slaves not paying mortgages = Bad for Banks
Assets being valued truthfully = Bad for Banks
Hey, I have an idea. Lets bail out the banks again!
http://i48.tinypic.com/21e2qo0.jpg
Here's a more realistic picture of what the housing market is actually looking like from a historical perspective. Existing home sales data unfortunately doesn't go back very far unless you pay for it, but here's what new home sales look like when you do insane things like apply a CPI deflator and take median value sold into account. May 2010 for new home sales was clocking in at about 18% of what the market did in May 2005. As much as the commonly presented data has been manipulated/cajoled/pimped/etc., the inescapable fact, using the government's own data, is that the new homes market cliff dived way, way farther than is commonly reported. We're talking about asset misallocation on an ungodly scale. The fact that this hasn't completely cratered our economy is a testament to how much farther we need to drop before we get to an economy that's actually based on reality. There should literally be a new word for it, Great Depression doesn't really do it. It's like a Fucktession.
I'll have to admit to being an avid Kudlow viewer -- it is painful but his guests (when they get a chance to say something) are useful. LK is a prime contrary indicator. He has come to accept gold for what it is and says so openly. When he becomes rabid and froths at the mouth it is all I can do to hold on for the next guest. There is plenty of political slant (I'll leave you to guess which way) but occasionally a liberal gets to have his lunch eaten on the show. A commenter above noted that LK has a low pain threshold. His idea of roughing it is more than 3 rings for room service. Poor guy will have to be institutionalized if the economy really, really tanks. A fatal attack of confirmation bias denied will be his demise.
Larry Kudlow would sell a deviated septum as good news.
Housing is evolving into a "double up" economy...
All the lifestyle at half the price.
Larry made his "F**k You, I've Got Mine" money a long-long time ago, so he is so removed from reality that it is almost funny. He can afford to be a cheerleader, because his idea of hardship is no cream for the coffee.
This highlights the effect of theft on the economy. Why lend money to anyone if you are unlikely to collect on the debt, unable to take the asset in foreclosure, and even if you do take it then unable to offload the asset at anywhere near the amount you lost on the loan.
Would we have this problem if the foreclosures had been allowed to run their normal course? We'll never know, because the Pols got there first.
The next Pol we are going to hear from is no doubt Pol Pot.
30% to go.
add the BP Oil Spill to FL real estate (especially on Gulf side) and the downward slope just got a lot more slippery
Good analysis... I'd really like to see regular updates on these numbers re: avg days between default and foreclosure. Its hard to find this stuff.
check this every month, has what you are looking for.
http://www.lpsvcs.com/NewsRoom/IndustryData/Pages/default.aspx
Before this mess is over, probably 5-7 years, we will set a record for extend and pretend in all areas of the economy.
Nothing will improve in CA until at least 2012......there remains a mountain of shadow inventory in this State.
Nearly 800,000 mortgages in CA are 30+ late. And only 132,000 homes are listed on the MLS.
When the higher end coastal properties finally come down to earth, there will be a lot of bad paper to be eaten by some major financial institutions/investors. Good charts on the link.
www.doctorhousingbubble.com
Way too good to pass on this talent.
Rainman, thank you for drawing meaning from context; Shit Creek, CA., or Up Shit Creek, Ca.
Btw.......you make cool impressions and I like your mo, in mho for what that is worth.
As for people paying rent, I don't buy it, not yet anyway. The last article I read on that a couple of months ago indicated that citizens who finally foreclosed are moving in with relatives and friends rather than renting, which is causing deflation in rental prices. Also, college grads can't find jobs and are moving back home.
In general rents are supposedly down across the board (I haven't seen this in my market) which is in turn putting pressure on landlords who are leveraged. I saw it firsthand in phoenix, where some people affected by a bit of greed were upside down on a rental, thus when they foreclose they will be ejecting the tenant who has been there for quite some time.
So, this article assumes that landlords are not also leveraged to the hilt, and I believe there are enough out there to cause some bad things to happen in the market. If rents are indeed falling, we'll see upside down landlords and even more foreclosures. But even if we don't see deflating rents, property tax increases will cause home values to go down, which will then make them underwater. Worst case is both happen at the same time, and it looks like at least the property tax increase is happening even if the rent deflation isn't.
That's not the scary part. The scary part is the government owns the banks who own these loans, and therefore the government will be the landlord of last resort. Maybe that's the plan. Or, you could say the banks own both the government and the loans, so renters will be stuck renting from the squid. Either way it's bad.
Edit: I went back and found some links:
http://www.fool.com/investing/general/2010/06/02/heres-why-the-rental-ma...
http://pewresearch.org/pubs/1423/home-for-the-holidays-boomeranged-paren...
http://www.lohud.com/article/20100420/NEWS01/4200308/Property-tax-bills-...
And here's one that refutes some of my contentions:
http://www.azcentral.com/arizonarepublic/business/articles/2010/06/17/20...
Bruce........you no doubt know already, but your name has been mentioned fairly prominently in the UK Telegraph article entitled Time To Shut Down The US Federal Resreve? Good on you, and Zero Hedge.
Gulp! Thanks for the heads up.
b
And that group of guys in that black government looking car with the blacked out windows outside your house is nothing, nothing at all. Same with that white van with the satellite dish across the street, "fixing the cable," even late at night, is nothing to worry about.
As you can see, Mr. Krasting, we've been keeping an eye on you for some time...
What a curious coincidence........as if a merge of Orson Welles and George Orwell.
Housing prices won't recover until everyone stops paying attention to them. That is years away.
House prices will not recover until the Government lets
1. Prices correct and hit bottom
2. People who can't afford homes actually lose them
Once the first 2 things occur (1 & 2), the true excess inventory can be worked off.
The good news is that houses will become more affordable.
The bad news is the US will cease to exist before actually allowing any market to clear.
Obama will certainly not be facilitating any market clearing prices in RE (or anything). If foreclosures get bad enough there will be more talk of "shared sacrifice" with a nod to mortgage debt holders. Either that or the 30 million or so new citizens created by amnesty will all be getting catalogs (in spanish) in the mail with glossies of recently foreclosed homes and pre-approved Fannie mortgage coupons which will double as voter registration cards when they submit them.
Before there will ever be a stabilization, much less a recovery in the economy, at least two things have to happen. The first is break up the big banks so there is no financial nuclear trigger out there. The second is that people must be completely disabused of the notion that a home represents a source of savings and/or income. Savings should be cash, fixed income, equities, gold...whatever, just not homes. It is an inefficient means of capital formation, and it encourages recklessness, because eventually everyone will try to tap the perceived "wealth" so as to live above his or her means.
I read the Bruce's post.
I live in S. Florida.
And I have a different take.
Yes, homeowners are living for 2 years without making a payment, true enough.
However, the strange reality is that after the house finally gets to the short sale, they buy another house.
Fannie Mae has made that increasingly more difficult, and now FHA also is putting roadblocks. But they still manage to do it.
Also, it is a big State, if Bruce bought in sw FL (Cape Coral/Naples) that's one thing; but there are areas were prices have been going up since late 08.
It's not that black/white.
where in FL has it been going up since late 08?
It's a big state but I'm having trouble finding much positive RE gain. SW is toast (Naples etc.), SE is hammered (Palm Beaches, Miami, Boca, up through Port St. Lucie), Tampa not doing well, Tallahassee under some good stress (I have a friend with 20 properites here including condos, hammered regardless of Universities and Gvt presence), Panhandle beaches/vacation homes getting hit. Orlando - ouch. Admittedly I don't know Jacksonville but it's tough finding much positive here. Maybe very rural and farming areas I guess. I did always like Lake County (totally serious here), nice rolling hills and farms - never stopped but driving through sure made me want to.
I spent 20+ years in FL and was down in WPB, Tampa, and Orlando for two weeks a few months back. I came away with these thoughts 1) vastly overbuilt resi and commercial 2) depression.
(and answers wang underneath)
From first hand experience, Miami (Miami-Dade County) is comprised of 27 odd +- municipalities (last time I counted) most of Miami is down, that's true, but not all.
Coral Gables, Key Biscayne, Palmetto etc saw the low "prints" in Oct 08.
In Palm Beach a similar situation. Most of the county beat up, but then look at the North.
Matin County, look not at Stuart, rather look at the super high end: Jupiter Island.
etc...
In regards to super high end a la Jupiter Island - forget that. A few properties sell yes but not volume to support a market. I know realtors and owners, very different story, no volume is supportable which has been the key to high end real estate - do not transact unless you have to and wait for your price. If properties actually have to be moved and some of that truly will happen, look for much lower prices as demand is not significant enough.
I think super high end baring an outright doom scenario will weather the market over time providing they don't need to sell as it's tough to take out someone with >30-50m liquid without destroying everyone else. Still plenty of pain though in many of these areas. The high income people now that's a problem as those jobs are under pressure and that will bring down the market of formerly $2-5m houses.
I never mentioned volume.
Ever.
I mentioned prices and since you seem to know Jupiter Island/Hobe Sound, then you know that the lowest "prints" were in late 08.
Same for every other place I mentioned.
On a graph, you would see a vertical line for prices around Oct 08.
I understand your point. That said I prefer to look for some kind of confirmation or volume of transactions. A low volume market doesn't allow price discovery as supply/demand are not meeting and people are instead opting not to transact. I know you know this but that's my criteria for a claim of real increases. I honestly don't find any fundamentally sound increases anywhere in Florida. Kind of like CA where in many areas 90+ and bank owned homes are sitting around with only a tiny portion sitting on the MLS. I don't believe price discovery there either and the very best that situation will manage is a sideways grind for years which will need to be masterfully orchestrated. Reality is that at some point it becomes visible and we actually have to deal with the problem.
Yeap, can't argue with that.
All good points.
FL has gotten off with light hurricane seasons in the past 3 years, if predictions are accruate that there will be a number making landfall this year that will be just one more negative. (I mentioned below the oil spill is not only impacting the situation in the panhandle but anywhere along the west coast of FL) Who would buy anywhere on/near the Gulf until it becomes clear what the impact of the spill will be both directly and to the overall Gulf ecosystem?
Same for Europe. In spain prices dropped 60% already, but in Belgium (950 miles away) prices have kept going up 10% a year for example.
A housing recovery prediction, again? Supported by what?
The unemployment rate? The forclosure rate? The personal bankruptcy rate? The real inventory rate? The vacancy rate? The own vs rent ratio? The loose lending standards? Buyer sentiment? Income to debt ratios?
Let's be serious.
Didn't you see that shack those russians lived in? That was worth 535.000$!
So that means real estate is okidokeli tiptopomondo in oké!
Nu uh. You can clearly see that russian spies are causing the skewed housing prices.