Is Residential Real Estate Recovering?

From The Daily Capitalist

I recently published an article on the commercial real estate market, Is Commercial Real Estate Recovering?" In this article I will examine residential real estate.

It is difficult to forecast a bottom of the housing market because of the "shadow" market and government and legal issues which thwart foreclosures.

While some markets are firming up and foreclosure sales are trending down, there is this:

Lender Processing Services (LPS) tracks performance on 40 million mortgage loans in the country. According to a preview of the LPS mortgage report, 9.22% of those loans are more than 30 days delinquent. A total of 6,984,885 loans were non-current. They report that foreclosures registered their first YoY decline since 2006. "January 2009 the percent of seriously delinquent loans that were current six months prior peaked at 2.92% vs. 1.65% in August 2010."

In data published by Dr. Housing Bubble, CoreLogic is quoted as reporting that 11 million US homes are underwater.  Other articles have said 25% of all mortgages are underwater. Dr. Housing Bubble presents the following chart to show the distribution of negative equity among that 11 million base:

On the other side of the equation, foreclosure sales are declining. LPS reported that "The August delinquency rate on U.S. mortgages fell 5.1% from last year ..." This is borne out by other data:

CoreLogic (CLGX: 18.29 -0.76%) said tax credit-induced sales helped push distressed sales to a seven-month low in June, but the share of distressed sales is expected to bounce back in coming months, according to the firm's inaugural U.S. Housing and Mortgage Trends report. The bi-monthly report will track housing sales, valuation, negative equity and foreclosure activity. In June, the distressed sale share fell to 24% of overall sales, down from a peak of 35% in early 2009, according to CoreLogic. ...

"Since the peak in home sales in 2005, non- distressed sales have dramatically declined and there is a clear relationship between the decline in non-distressed sales and the level of negative equity."

The firm said non-distressed sales fell nearly twice as much in high-negative equity zip codes in comparison to low-negative equity zip codes.

Las Vegas with 61% and Riverside, Calif., with 59% continue to lead the nation in distressed sales for the largest 25 metropolitan markets, according to CoreLogic. Phoenix , Sacramento, Calif., and Orlando, Fla., were the only other markets to have distressed sales account for more than 50% of home sales.

Also, from RealtyTrac:

[F]oreclosure filings in August fell 5% from a year ago, the third straight month of declines.

The last time foreclosure filings increased was a 1% uptick in May, when 322,920 properties received either a default notice, scheduled auction or bank repossession. Since then, foreclosures have dropped 6.9% in June, and 10% in July. ...

"On the front end, seriously delinquent loans are rolling into foreclosure at an unusually slow rate, while on the back end the dammed-up inventory of properties already in foreclosure is moving to REO in steady stream rather than a flood — presumably to prevent further erosion of home prices," James Saccacio, CEO of RealtyTrac said.

Florida notices fell 46% from last year but still held the second highest foreclosure rate in the country. In Arizona, one in 165 properties had a foreclosure filing, the third highest. California foreclosures accounted for 20% of the national total in August with more than 69,000 receiving a foreclosure filing in the month. It's a 9% drop from last year.

These data came in before the news about banks, i.e., BofA, suspending its mortgage foreclosures in order to review documentation validity. The class action lawyers will make a killing on this one. No one loves banks (as in, "The bank took my home."). But that doesn't change the underlying reality of the market.

One in 10 mortgages in 100 largest metropolitan area were seriously delinquent as of March 2010, according to a study done by the nonprofit Center for Housing Policy.

Working with the Local Initiatives Support Corp., and the Urban Institute gathered and analyzed delinquency data on 366 U.S. metro areas. Seriously delinquent mortgages are behind on payments by 90-plus days or in foreclosure. According to the study 10.2% of all mortgages in the top-100 populated areas were in this category, up from 7.7% in March 2009.

According to this latest study, the severity of delinquencies vary widely across the nation. Austin, Texas had the lowest share of seriously delinquent mortgages in March at 4.4%, while Miami had 26% of its mortgages in serious delinquencies.

As the above paragraph tells us, it depends where you are. If you are in Miami, Phoenix, Las Vegas, or the Inland Empire (California's desert counties: Riverside, San Bernardino, Imperial) then the excess supply of homes is still being worked off. But, I think that is changing. More in a moment.

The other reality is that sales are increasing:

[T]he National Association of Realtors' index for pending sales of used homes in August increased 4.3% to 82.3, the industry group said Monday. Economists surveyed by Dow Jones Newswires had expected pending home sales would increase 3.8% in August. Year over year, the pending sales index was 20.1% below its level of 103 in August 2009.

Home prices rose for the fourth-straight month in July, but at a slower pace than in previous months, and they could start falling again as the expiration of government home-buying incentives has put a brake on sales.

The S&P/Case-Shiller 20-city home-price index rose 0.6% in July from the prior month and was up 3.2% from a year earlier. That marks the sixth time in a row prices rose, compared with the same month a year earlier, an important distinction in an industry where sales vary sharply according to the time of year.

The index is based on a three-month moving average, and analysts noted May and June saw larger price increases than July.

Again, look at this chart which appears to be a dramatic rise in prices, but the YoY index was only up 3.2% YoY.

The table below clearly shows where the action is. As you can see coastal California is doing well. People still want to live there and there is lots of money floating around. Quite a bit of the money flowing into the coastal California market is from speculators who have put a floor under the foreclosure market. This causes competition for homes, and prices have been rising, also bringing in other buyers who think we've hit the bottom.

This is not the case elsewhere.

Things are changing in the poor markets as well:

The Viceroy, a swanky condominium complex in downtown Miami, gives the impression that the United States is in another real estate boom. The sales office is strangely exuberant. Buyers gush about the glam condos — designed by hipster tastemaker Kelly Wearstler — and their hotel-like amenities: poolside libations, daily housekeeping and room service food stirred up by a celebrity chef.

Since January, 262 of the Viceroy's 372 units have sold. But there's a twist: Almost 90 percent of the buyers are foreigners. And they all paid cash.

The Viceroy's story is playing out across Miami. Individual investors from as far as Argentina, Canada, Colombia, France, Israel, Italy, Norway and Venezuela are swarming the city's sales offices to get in on what they see as one of the greatest real estate fire sales in the history of the United States.

There are two factors to this. One is cheap prices. The other is a cheap dollar. For example the Canadian dollar is at parity with the USD:

For foreigners with cash, the deals can make them money from day one. Jim Chuong, a 38-year-old Novartis sales manager from Toronto, buys two-bedroom condos [in Phoenix] for less than $40,000 [$50sf] in low-crime areas. He only picks up units that already have renters. After paying association fees and taxes, he walks away with $300 a month, pre-tax, on each. The deals are now easy to do, thanks to the cottage industry of companies that has grown up to manage virtually everything for foreign buyers, down to badgering renters for the monthly check.

Another bit of data worth watching is the status of RMBS from Alt-A and subprime mortgages. Moody's just downgraded tens of billions of dollars of these residential mortgage-backed securities:

The lower ratings are due to the rapidly deteriorating performance of the mortgage pools that back the securities, in conjunction with macroeconomic conditions that remain under duress, according to Moody's. In February, the ratings agency updated the loss expectations on Alt-A and subprime pools issued in 2005 to 2007.

Of the 2005 vintage alone, Moody's rates more than 5,600 tranches of MBS and has adjusted ratings on nearly 2,000 tranches already this year with another 119 on review for possible downgrade.

Moody's also now expects housing prices to continue to fall until the third quarter of 2011, analysts said in the most-recent ResiLandscape report from the firm's structured finance group. The agency previously expected housing prices to stabilize in the first quarter of next year.

You should understand that Moody's was spectacularly deficient, along with S&P and Fitch, in rating these securities in the first place.

This is all supply and demand stuff. I thought things were going along well down the foreclosure path at last, despite HAMP, HARP and legal issues to delay the process. And then the BofA robo-signing scandal hit last week and they suspending foreclosures. MAC Home Mortgage, Inc., a unit of Ally Financial Inc., and J.P. Mortgage Chase & Co.’s home-loan unit followed suit.

This will impact the market by reducing the quantity of homes on the market. Ivy Zelman expected big price declines in Q4 2010. In Florida one estimate is that it will reduce supply by 15%.

All this does is to delay the inevitable. I'm even reading mainstream articles that agree with me that:

But economists say the delays impede recovery of the U.S. housing market.

They argue the best way to heal the market is to let banks foreclose quickly, allowing homes to be resold at lower prices to qualified borrowers. That would clear the market and help stabilize prices.

"If foreclosures slow down dramatically now, from a months supply perspective, the length of time it takes to work through all of it gets longer, " said Sam Khater, senior economist with CoreLogic, a real estate research firm.

And, even from the New York Times!:

Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

One wonders why this recession is lasting so long and unemployment stays so high. The government has done everything it could to delay the corrective market forces in a failed attempt to make things better. They have failed on all fronts and now fellow Democrats are even attacking the Obama Administration (well, he is a Clinton man):

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

Of course, we all know that.

The bottom line for the housing market?

Areas which are firming up will continue to firm up. We've not hit bottom in problem markets, and, while the suspension of foreclosures may give a but of a temporary price bump, prices will stall out  or continue to decline (depending where you are) until we've worked through the bad loans. Unfortunately this could take some time. I look at the overall economy to make my forecasts here because a rising tide would help many home owners who are upside down but don't wish to move. I see stagnation ahead, so it could be several more years before the weak housing markets turn around.

Comments

[Ms. Erable]

Way to ignore the 900 lb. elephant in the room...

[Kina]

So BoA has decided to seel houses it doesn't own or ever had a mortgage over. Sweet.

Lauderdale man's home sold out from under him in foreclosure mistake

When Jason Grodensky bought his modest Fort Lauderdale home in December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage.

Grodensky knew nothing about the foreclosure until July, when he learned that the title to his home had been transferred to a government-backed lender. "I feel like I'm hanging in the wind and I'm scared to death," said Grodensky. "How did some attorney put through a foreclosure illegally?"

Bank of America has acknowledged the error and will correct it at its own expense, said spokeswoman Jumana Bauwens.

http://articles.sun-sentinel.com/2010-09-23/business/fl-wrongful-foreclo...

[TheClub55]

No! All economics is "local", been trying to sell my place for 6 month, we can't even get a showing... and I live in a town with only 2 foreclosures in 2009 (with a 30k population or some 5K homes) no numbers for 2010.

[williambanzai7]

I believe it recovered momentarily at 2:30 NYT this afternoon then it crashed again 8 minutes later.

[tom]

This is almost as stupid as Leo's stuff. Almost.

[Thoreau]

It's absolutely DOA in Georgia. Sure, there are pockets - small ones; but pockets alone do not make a worthy coat. But fear not; foreclosures will come to a halt which should add confidence and value to the markets, which will, in turn, save X-mas, thus saving the soul of Amerika for a few more months.

[RockyRacoon]

SIMI VALLEY, Calif. (KABC) -- A battle over a foreclosed home is shaping up in Simi Valley.

A family claims they were illegally evicted, and Saturday, they broke the locks and started moving back in even though the home has already been sold.

Jim and Danielle Earl, along with their nine children ranging in age from 3 to 23, returned to their house of nine years on Mustang Drive.

The family was evicted from their home in July after they fell behind on payments.

Their bank, GRP Financial Services, foreclosed on the home, but since then the house has been bought by an investor, remodeled and sold to someone else.

The new owners were expected to take possession of the home in a few days, but the Earls and their attorney hired a locksmith to open the doors so they could reclaim the house.

"This is a really exciting day, a day we've been waiting for," said Danielle Earl. "My kids have been begging to go home and we're finally home.

This comes at a time when some banks are halting foreclosures across the country due to flawed paperwork. The family and their attorney said the bank used fraudulent paperwork to force them out.

The Earls said they had been working with the bank to catch up on payments, but discovered a $25,000 difference between the amount they thought they owed and what the bank claimed they owed so they stopped making payments.

"This is only the beginning of this," said the Earl's attorney, Michael Pines. "I chose this family because we needed to get back in before the investor and the real estate broker defrauded a new family by having them move in, which would have created a bigger mess. (The Earls) have done absolutely nothing wrong."

Police arrived at the home Saturday but did not take action to make the family leave.

http://abclocal.go.com/kabc/story?section=news/local/ventura_county&id=7...

[chopper read]

and we're finally home.

thats heartwarming. 

[RockyRacoon]

My cockles are all heated up.

[chopper read]

ha, ha.  :)

[Agent P]

I'm no attorney, but I believe that until the foreclosure is proven fraudulent, these people are illegally breaking & entering / occupying the property, which means the new owner can have them arrested and has recourse back to them for any physical damage done to the property and/or loss from the sale to the new new owner falling through as a result of their actions.

Just because mortgage foreclosure fraud is now in the news, doesn't mean that every foreclosure that has occurred is invalid.  One thing to keep in perspective in all this is that mortgages, by definition, allow the lender to take the property if the borrower doesn't meet the terms of the loan (mainly making the payments).  It's usually the least preferred option for working out a bad loan, but it can and does occur.  Bottom line is, if you don't make your loan payments, the bank can kick you out.

[RockyRacoon]

They were all lawyered up and ready to go!  This is no night-move by some squatters.  The subsequent investor and buyer are going to be the losers in this deal.

This story ain't over yet.

[anolmec]

hmmmm.....where you seem confused is that there WAS a mortgage......it has CONVERTED into a Mortgage Backed Secvurity or CDO, basically a derivative in an unregulated market. Doing so added terms and conditions on the "mortgage" not contemplated or agreed to in the original "mortgage". The "mortgage" became part of a pool. The folks that funded the "mortgage" do not have a promisory note, they have a bond. So, basically, if you believe it to be legal to add terms and conditions on agreements after they are signed, then I see your point. Otherwise what it means is yes indeed EVERY forclosure of a securitized mortgage is invalid.

[Agent P]

A mortgage note doesn't go away when it's securitized.  It's sold to an SPE that issues debt (MBS) to buy the note.  Additional terms (including default provisions) are applied to the new debt that was issued, NOT to the original mortgage.  Take it a step further and carve the MBS into pieces for a CDO...even more terms are created, but again NOT on the original mortgage.  All that has happened is more parties now have an ownership interest (indirectly) in the original mortgage note.  The documentation for the additional security layers have provisions for dealing with defaulted loans, which contract the servicer (or another party) to proceed with foreclosures...no different than the servicer collects and distributes interest and principal payments from the borrower, which passes to the SPE, which passes to the MBS holders.

I honestly believe all the reports you're seeing in the media about banks not owning loans, so therefore they have no right to foreclose will end up being moot if they are indeed the contracted servicer on the loan (again, I'm not an attorney, so this is just my belief).

Still, the main point that can't be overlooked is that if you pledge collateral to a lender (as is the case in every mortgage), the lender has the right to the collateral if the borrower fails to live up to their portion of the agreement, which in the story above was clearly the case.

[drchris]

Somebody did some research in the comments:

"The idiot family bought the property for 539k on 3/30/2001, then they decided to refi out for 750k 6 MONTHS LATER, then they AGAIN decided to refi for 880k first mortgage, and 130k second mortgage in May 2005."

It's hard to defend people who kept taking all the equity out of their home.  By my calculations, they took 471k out of their home and blew it.  I hope this is not the common case.  Perhaps there are better examples than this where the people didn't do everything wrong.  I actually feel sorry for the bank in this case.

[RockyRacoon]

1. You don't know what they did with the money.

2. They were in a work out with the bank when foreclosed.

3. I thought it an interesting story and couldn't care less how it turns out.

4. The pot needs stirring and they are definitely doing that.

5. Most significant:  The constables didn't move 'em out!

[FEDbuster]

I feel like grabbing a shotgun and a lawn chair, and driving out to CA to help these people defend their home.

[Jim B]

Anarchy, got to love it or NOT!  If this speads, things will get really interesting.....

[Downtoolong]

  I have a much narrower view of the residential real estate non-recovery. I put my condo in northern New Jersey up for sale in May. The place shows in model condition. I have followed my realtor’s advice to the letter on pricing, staging, etc. To start, I invested about $6,000 in new carpet, paint and minor repairs. On my realtor’s advice, I lowered the asking price twice to keep pace with market declines. About 40 potential buyers have come to look at my unit during the last six months. To date, I have not received one firm offer. Nothing. If this is what recovery looks like, I can hardly wait for the next big boom. Keep trying Shiller, one day you’ll get it right.

[Ripped Chunk]

No

[Panafrican Funk...]

Dude.  Read again.  Also, 34% of existing home sales in August were on distressed properties.  Foreclosure suspension = sales fall off a cliff.

http://www.realtor.org/press_room/news_releases/2010/09/ehs_move

New sales were also flat.

http://www.census.gov/const/newressales.pdf

As a side note, the hilarity of the margin of error.

"This is unchanged (±16.7%)* from the revised July rate of 288,000 and is 28.9 percent (±11.0%) below the August 2009

estimate of 405,000.

"

The other reality is that sales are increasing:

[T]he National Association of Realtors' index for pending sales of used homes in August increased 4.3% to 82.3, the industry group said Monday. Economists surveyed by Dow Jones Newswires had expected pending home sales would increase 3.8% in August. Year over year, the pending sales index was 20.1% below its level of 103 in August 2009."

[Citizen of an I...]

"This is unchanged (±16.7%)* from the revised July rate of 288,000 and is 28.9 percent (±11.0%) below the August 2009 estimate of 405,000."

WTF

*lulz*

[Sancho Ponzi]

This mortgage reset chart points to a fugly 2011-2012. Check out all those Option ARM resets:

http://1.bp.blogspot.com/_nH2Jyu86MZI/Shll2fKc-KI/AAAAAAAABzM/faHZtNK9UB4/s1600-h/CreditSuisseResetMarch09.jpg

[alexwest]

junk.. only assholes believe Shiller index..

there was article on ZH discussing Shiller index..

seems author long and cheer up himself...

alx

[Cojones]

Foreclosure Fraud, Bitch.

[chopper read]

...ez.

[whatsinaname]

Yes it is recovering - a good way to test the hypothesis is to take a daily look at www.dailyjobcuts.com !

[FEDbuster]

With over 30% of households in the U.S. having FICO scores under 620, the only way for a recovery is to open up the subprime market again.  Fog a mirror loans, NINA (no income, no assets) loans, 120% purchase money loans, etc...  If mortgage credit standards are enforced, there will be NO recovery for a very long time.