Chuck Ponzi July 22nd, 2008

It’s no secret that almost every real estate blogger is talking about the unbelievable level of foreclosures. The mainstream media has latched on as well:

Foreclosures across the state surged to a 20-year high during the last three months, as tens of thousands of additional Californians lost their homes and more than 100,000 neared the brink.

Notices of default, the first step in foreclosure proceedings, rose nearly 125 percent from a year ago during the second quarter and trustee deeds recorded, which reflect the actual homes taken back, soared more than 260 percent, according to research firm DataQuick Information Systems.

But, this doesn’t even come close to telling the full story. Fact is, it isn’t the highest foreclosures in the last 20 years, which would imply that it was higher 21 years ago. Not so. In fact, these are the highest foreclosure statistics EVER.

Noone demonstrates that better than BubbleTracking in the update to the LA Times graph of foreclosures. Thanks OCRenter!

What’s noteworthy is the backstory to the image. The original LA Times article was somehow attempting to soothe buyers that the real estate market was healthy, in part because foreclosures were at historic lows.

Even more onerous than the picture above is another factoid of the story.

The number of defaults and foreclosures were the highest in DataQuick’s statistics, which go back to 1992 and 1988, respectively. Among homeowners who fall into default, an estimated 22 percent now emerge from the foreclosure process by catching up on their payments, refinancing or selling. That’s down from 52 percent a year ago.

That’s an incredible fact. In other words, 78 Percent of those entering the foreclosure process end up going through foreclosure. Considering that there is a record number of notice of defaults, we are ensuring years worth of upcoming foreclosures to push down prices. Recent report have showed that banks are swamped simply with the volume current in process and unable to expand to the need. Early in the bubble blogging world, more than 90% of those who received a notice of default were able to cure their delinquency due to quckly rising prices. Now, with prices falling 30% or more per year, one misstep is a lucky break for a would-be homeowner to simply walk away.

• Housing Crash , Inventory
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Chuck Ponzi October 26th, 2007

Jonathan Lansner reported on the most recent moves in median sales prices:

Early October home-selling stats from DataQuick show the credit crunch’s grip on the market. Difficulties getting mortgages meant sales activity was down 41% vs. a year ago for the 22 business days ended Oct. 12. If that holds, it’ll mean that O.C.’s losing streak will hit 25 straight months where the buying pace failed to meet last year’s activity levels.

Pricing was also weak. The overall median selling price, down 8.8% in a year, held at the 31-month low ($570,000) hit last month.

It appears that median prices are beginning to show the overall trend in pricing. This could mean one of 2 things:

1. Lower end is recovering

2. Higher End is also feeling pressure now.

Originally, I forecase a median price down year over year for 2007 to be in the 3 to 5% down range. That may prove to be too optimistic, and reality further from that.

Consider what is now typical pricing:

23 Nopalitos Way, Aliso Viejo

1923 Sq Ft 4-bd, 2.5bth. Gated Community. Recent foreclosure. Landscaping dead, dead, dead.

List Price: $604,900

Last Purchase Price: $740,000

Last Purchase Date: 9/13/2006.

Loss in Last 13 months if asking price is met: $135,100 (18.3%) (23% after commissions)

Zestimate: $756K (Can you say disconnected?)

These houses sold 5 years ago in the 300K range. I wouldn’t be surprised to see mid 400’s, if not low 400’s.

So, isn’t the 8.8% reduction in median price still skewed a bit high? Yes. On upswings, it understates the increase, and on downswings, it understates the decrease. It’s more of a lagging indicator.

Enjoy your weekend

• Housing Crash , Inventory , Mean Reversion
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Chuck Ponzi August 9th, 2007

This was the headline of some financial reasearch issued by Joseph Hargett of Schaeffer Research on March 27th, 2007.

I’ll let you decide how prudent that advice was by viewing the top homebuilders’ stocks from that date until today measured against the S&P 500.

I’m predicting that even with all of the price declines, I believe there’s still a lot more.

Here is what Joseph had to say:

It seems you can’t talk about the housing sector these days without mentioning the “S” word. Subprime, yes I said it, has even wormed its way into the vernacular of many Fed watchers and Fed members – not to mention the warning shots fired from the sidelines by former Federal Reserve chief Alan Greenspan every other week or so. This morning, the Fed sounded yet another gloom and doom note for the housing sector, as Sandra Braunstein, the director of the Fed’s division of consumer and community affairs, stated that borrowers could see “more difficulty” in the next one to two years. In particular, those borrowers with recently originated adjustable-rate mortgages are likely to experience more delinquencies and foreclosures, Braunstein said.

and

Admittedly, the situation is not very flattering for the U.S. housing market. However, I think that the hype over the popping of the so called “housing bubble” is being overplayed just a bit too much. Just take this quote from a March 18 New York Times article titled “On the Homefront”: “In many quarters, Greenspan was essentially accused of cheating the country out of the depression we deserved: instead of allowing the swooning Nasdaq to bring down the United States economy and punish us for our sins, he had rolled the tech bubble into a housing bubble and allowed the party to go on.”

Blaming Greenspan seems convenient at this point, especially with Bernanke’s Fed in a holding pattern. And comparing the “Dot-com” bust to the current situation in housing seems rather irresponsible. After all, betting on virtual real estate seems a far cry from betting on housing prices and “real” real estate. I mean, can you really compare the long defunct Pets.com and WebVan to Lennar ( LEN: sentiment, chart, options) and Hovnanian (HOV: sentiment, chart, options) ?

I have sat on this article for 5 months to see if my research was right on where they were headed… in an effort to dispel any myths. He was dead wrong, and worse than that, revealed poor research on the underlying fundamentals of the housing problem. It is and still is an affordability crisis. The decline in sales will not abate until that affordability standard is reachieved. At current course and speed, that won’t be for another 2 years at the minimum.

I believe that we will still see some of these builders declare bankruptcy (ch 11) before this bust is through.

• Bubble , Contrary Indicators , Housing Costs , Housing Crash , Inventory , Mean Reversion
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Chuck Ponzi April 20th, 2007

DR Horton is doing what I have predicted builders would do:  offset falling housing prices by building more, not less (as housing bulls suggested).  Their reported earnings fell 85%.  Not much of a surprise.

Here comes the best quote, related to DR Horton’s cancellation policy:

Unlike other home builders, Horton said it has no plans to weed out potential buyers who may not be able to qualify for a loan in order to bring down the cancellation rate.

“As I’ve said to all our salespeople, if a buyer is warm and has a pulse, we want to put them on paper,” he said.

You could tell the whole story in that single phrase.

• Housing Costs , Inventory , Mean Reversion
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Chuck Ponzi March 27th, 2007

There is quite a bit of contention of just how many foreclosures will be a part of the housing/credit bubble unwinding.

Here’s a breakdown of the differing theories:

1.1 Million

Americans borrowed $2.2 trillion from 2004 through 2006 in the form of adjustable loans, which start with low monthly payments that reset to higher rates. As those loans reset, 1.11 million people will lose their homes, according the study by First American CoreLogic, a firm that tracks mortgage risk for the financial services industry.

The figure is significantly less than a widely published number from the Center for Responsible Lending.

1.5 Million

As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.

2.2 Million

A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households are likely to lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market.

The CRL study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006.

CRL’s research suggests that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market, projecting that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

5 Million

But Ackelsberg listed that as one of the myths about subprime borrowing.

Actually only 11 percent of subprimes are made to first time buyers, he says. The majority are homeowners convinced to refinance into inappropriate loans.

The second myth is that subprimes are good credit repair products. The pitch here is that by paying a subprime for a while, borrowers will increase their credit scores and soon transfer into a prime loan. Ackelsberg says there is scant evidence that this happens very often.

According to him, the entire subprime meltdown should come as no surprise to anyone. Subprime mortgage lending was the modern equivalent of a gold rush with home equity the gold. Furthermore, even though foreclosure stats are spiking, they represent subprime loans that have mostly not yet reset.

He guesses that as many as five million foreclosures may occur over the next several years, basically saying, if you think it’s bad now, wait until all those ARMs reset.

How many will there really be? While it’s easy to say that it’s probably somewhere in the middle, that middle area is awfully large between 1.1M and 5M.

• Bubble , Credit Bubble , Inventory
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Chuck Ponzi March 7th, 2007

Realtors predict a better year… for themselves, not for homeowners or home sellers.

The real estate market traditionally picks up in the spring, but Remax Gold Coast’s Virnig said waiting until then to put up a “For Sale” sign might not be the best strategy.

“I always think if you’re a seller, it doesn’t really matter. You can wait for a busier time,” he said, “but there are going to be more buyers and sellers out there. It’s not like there’s going to be a bunch more buyers out there and the same number of sellers.”

Nothing like a little common sense to shake up a seller. How many do you think are really thinking like this? Last year was the year of insane asking prices and a disconnect. This year seems to be the year of cognitive dissonance. Buyers are vanishing, and sellers are in deep, deep denial (except a few… I actually saw a home priced somewhat sanely in Mission Viejo the other day)

Meanwhile.. elsewhere in the southland…

Continue Reading »

• Housing Costs , Inventory , SoCal
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Chuck Ponzi February 6th, 2007

Our favorite housing troll is at it again. Gary Watts has proffered his happy-talk feel-good delusional forecast for 2007 to the OC Register. Visit your local pharmacy (or drug-dealer) as it may be before reading his report. It prvides the additional clarity needed to see things his way. I highly recommend dropping acid chase with a fifth of vodka.

After his stunning calling it wrong defeat last year, it’s surprising that he even issues a forecast at all. He is most assuredly going to be wrong since he missed the turn. Like “Hopin, and Wishin’” David Lereah, he’ll be gracing our covers once again as the d-bag of the year award with his 7% forecast for 2007.

Not a chance.

Last Year:

My Forecast: Flat to slighly Down
Watt’s Forecast: Up 15 to 17%

Actual: Up 3.4%

(In my defense, November 2007’s numbers were at NO CHANGE so December and likely the first few months of this year are likely to be in a technical short-term oversold rebound aka dead cat bounce)

As one of our previous contributors noted, predicting local housing trends is pretty easy when viewed through recent historical data. It is when people start trying to read too much into the data that they get lost. This is where Mr. Watts finds himself (has he really found himself?). While he is trying to see all of the rich people moving into the area, he has lost sight of the consumers of most of the housing; the people already here. As one of the most expensive housing markets in the US, we have very few newcomers with substantial equity to match the current values, and this places additional emphasis on lending. OC housing lives and dies by exotic financing.

The real d-bag move Watts made last year was pulling out whole-year numbers to get closer to his median increase. This year will offer him no such soft-landing.

What does Watts’ prediction hang on?

If the inventory of homes listed for sale balloons again this spring and summer, Watts warned, the market won’t appreciate as expected. He said he was surprised by a huge increase in the number of homes being offered for sale last year, which held prices in check. Many sellers last year were expecting the same types of double-digit gains seen in recent years. “We’ll just have to see and hold our breath for the inventory numbers next spring and summer and see if that explodes again,” he said.

No need to hold your breath. Numbers courtesy of Bubble Tracking:Note that Inventory as of the end of January is already 58% higher than last year. I am therefore dubbing this spring (in honor of last year’s “Silent Spring”) the year of the ‘07 Spring Smackdown. From now on we will refer to the inventory figures as ‘07 Spring Smackdown figures.

Good luck Gary, hope you have your fingers and toes crossed.

• Bubble , Inventory
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