To be clear, Bill’s forecast is based on prices of the key housing indices i.e. Case Shiller and CoreLogic without seasonal or inflation adjustments. He is very clear about the definition of a housing bottom which is key to the argument – in fact, there are two housing bottoms:
First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.
New Home Sales Bottomed in mid-2010 (moved sideways ever since).
Housing Prices Will Bottom Around March 2012 (will move sideways after that).
He provides a logical argument but I think he’s missing a key ingredient in the logic – how will the market be impacted by distressed properties and how they will impact the price trend:
Falling inventory is masking significant shadow inventory built-up during the credit crunch. Inventory is declining to more manageable levels, not because there are fewer homes to sell, but because sellers are holding back until conditions improve – big difference.
In other words, the call of a bottom is missing a huge element from the equation – supply. The forecast of a housing bottom could certainly be right in the short term, and housing prices could bottom in March temporarily, but there is a lot of excess supply to be dealt with and I suspect that prices will begin to slide as REO activity begins to slowly enter the market. It simply has to – there is too much of it.
No gloom and doom here, just that the market still has a lot of distressed inventory to absorb. Distressed real estate (foreclosure) volume has fallen by about one third in 2011 as lenders/servicers held back releasing more units into the market largely because of the “robo-signing” scandal in late 2010 and the potential AG settlement that has been languishing for much of the year.
The housing market got an REO reprieve in 2011 and has caused housing bulls to get ahead of themselves and the housing market, way too focused on demand, and not enough focus on supply.
Posted by Jonathan J. Miller -Friday, February 3, 2012, 10:44 AM 1 Comment
Had a lot of fun with Tom Keene, Bloomberg’s editor-at-large, radio and TV anchor on his must watch show Midday Surveillance yesterday. Always flattering to be asked to guest co-host for the hour and a challenge to keep up with his fast paced wit. I’ve always felt that Bloomberg news, now with new emphasis on TV is business news the way it should be delivered – longer interviews and neutral presentations.
The show’s theme was housing and I felt compelled to give him more reasons to hand-wring about his upcoming apartment rent increase. Was fun to do.
The hour was divided into 4 segments, the last three with guests:
“Foreclosures were in full delay mode in 2011, resulting in a dramatic drop in foreclosure activity for the year,” said Brandon Moore, chief executive officer of RealtyTrac. “The lack of clarity regarding many of the documentation and legal issues plaguing the foreclosure industry means that we are continuing to see a highly dysfunctional foreclosure process that is inefficiently dealing with delinquent mortgages — particularly in states with a judicial foreclosure process.
“There were strong signs in the second half of 2011 that lenders are finally beginning to push through some of the delayed foreclosures in select local markets. We expect that trend to continue this year, boosting foreclosure activity for 2012 higher than it was in 2011, though still below the peak of 2010.”
All the prognostications about declining foreclosures as some sort of sign of strength in a particular housing market were simply myopic. This announcement isn’t “new” news – its more about confirmation that more volume is coming.
Gotta love New York State – if there is one way to prolong the housing downturn, keep credit tight and depress prices, it’s government intervention to slow the process down:
The average foreclosure process in New York has increased 37 percent during the same time period, and New York properties foreclosed in the fourth quarter took an average of 1,019 days to complete the foreclosure process — the longest of any state.
Posted by Jonathan J. Miller -Monday, January 9, 2012, 6:00 AM 1 Comment
Ok, so I thought my son shooting a basket would be better than a boring graphic of the Fed – indulge me. I’ll say “the Fed took the ball drove and took a well executed shot.” Ok, back to the Fed’s sort of full court press…
From the FT: Finally, a regulatory body offers tangible realistic advice on housing to Washington policy makers:
Among the ideas is forming a national strategy to facilitate the conversion of foreclosed properties into rentals; allowing banks to rent their repossessed homes rather than forcing lenders to sell them; changing the compensation structure for mortgage servicers, companies that collect payments from borrowers and pursue foreclosures in the event of a default; creating a national online registry of liens to track ownership interests; and altering existing Obama administration policies to allow for more refinancings and mortgage restructurings.
The insight was provided to the Financial Services committees (who brought us Dodd-Frank) and while much of this has already been considered or is in the works, it’s presentation by the Fed all in one message helps bring clarity.
I like these ideas since they are foreclosure-centric and US housing doesn’t recover until we clear the market of excess foreclosure volume.
Here’s the Fed’s white paper - what jumped out at me came in the beginning with the fed identifying housing as a key economic problem:
a persistent excess supply of vacant homes on the market, many of which stem from foreclosures
a marked and potentially long-term downshift in the supply of mortgage credit
the costs that an often unwieldy and inefficient foreclosure process imposes on homeowners, lenders, and communities.
I really like the rental idea for REO houses stuck in lender inventory. In many cases, lenders are forced to sell so they don’t fall below their capitalization requirements by the regulators. Now they would be able to rent the property out to get the cash flow going plus having an occupant helps protect the asset.
Here’s a crazy and too simplistic but-it-sounds-like-a-reasonable-foreclosure-failure-spiral:
Home sales are weak because credit is so tight
The rental market is strong because credit is tight – rents are rising.
Consumers have less disposable income to help the economy because rents are high.
As more rental supply becomes available from Fed recommendation, renting becomes more affordable.
More affordable rents delay increase of home sales.
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Then of course there are many other uses that are thrown into the same caldron of confusion:
Appraised value – the value on an appraisal report
Investor value – value of the property is to a specific individual or entity – not necessarily market value
Fair market value – an accounting term, “old school” market value name and commonly used within the legal system
In layman’s terms let’s talk about how “market value” is being misused.
When a home is properly exposed to the market (listed so buyers can see it in a reasonable period of time), it sells in the marketplace for its value as of that moment.
Market value isn’t precise
Hence my problem with a Zillow “Zestimate” where the presentation is an exact number for the value of a home i.e. $257,532. Perhaps that’s why this tool has long been buried in their web site after being so prominent on their home page after launch. I have never heard of a housing market today that has that kind of precision. If I appraise something for $500,000 and it sells for $505,000 or $495,000, I was spot on the money so to speak.
I see market value of a home as some sort of “range of gray” that I am comfortable with given what I know about the housing market that the property sits within and how its amenities are considered in that market.
One sale does not make a market
As crazy as it sounds, we appraised a Manhattan transaction a long time ago where the buyer was in a 5 way bidding war of a multi-million dollar listing and offered $2M above list “to avoid the stress of a bidding war and get the property they wanted.” They knew they over paid but it was worth it to them. Was this sale price a new benchmark for market value? Of course not yet it was what someone was willing to pay. That’s investor value to the buyer, but not an establishment of market value. It was worth it to them, not the market (wouldn’t we all love to be the seller in that situation?).
During the dot com boom more than a decade ago, there was a townhouse in downtown Manhattan that was purchased by a newly minted dotcom type for $12M, about 2x the market level at that time as I recall (and that was generous). That sale actually seemed to slow down the high end market for a few years within the neighborhood as sellers continued to point to that sale as establishing “market value.” As a result, many overpriced listings sat for extended periods of time until reality sank in. The sale’s impact on the market eventually dissolved and the market returned to sanity.
banks can’t foreclose on a house if they don’t own the mortgage, went one step further in a closely watched case and said a sale after that foreclosure doesn’t transfer the property. Therefore, the buyer couldn’t bring his court action against a previous owner, the court ruled.
So logically it follows that if this home was resold by the bank even though the bank did not have valid ownership, the chain of title has been broken and the re-sale is not valid until ownership in each step has been proven.
If this is universally adopted (can’t see why it wouldn’t), it will scare investors, keep foreclosure sales activity artificially low, keep credit tight and prevent the housing market from clearing excess supply anytime soon. Of course, it isn’t unreasonable to prove you actually own a property when selling it.
That’s why this housing crisis reflects a systemic breakdown – there was a lack of respect for the rule of law (and no criminal penalties to those who did break it) so we keep uncovering problems that have to be resolved before we can start at square one.
I’ve been on a 6 month hiatus from podcasting after 150+ interviews over the previous 2 years – had a bunch of other things going and I needed to take a little break. I’ve been itching to return and was talking to my friend Barry the other day and he wanted to do another one (his 3rd) and here it is.
Posted by Jonathan J. Miller -Wednesday, September 28, 2011, 9:27 AM 1 Comment
…at their current pace – courtesy of the Harper Index in the current issue of Harper’s Magazine. Of course the foreclosure pace now is much slower than lenders are capable of. The robo-signing scandal last year and the inability for the 50 state AG’s to come to an agreement with the primary servicers has made the banks slow wayyyyy down and make sure all the paper work is “reasonably” accurate. Realtytrac indicates that it takes a bank in New York an average of 900 days from notice of default to foreclose and sell the property.
You need a Harper’s subscription (I recommend it) to view the entire index of 3 dozen or so but here’s a couple of salient housing-related data points mentioned:
At current pace, it will take 61 years for lenders in New York State to foreclose on all homes currently in default.
In 9 previous recessions, there was an average of 10 months to move from economic recovery to employment recovery – this time its forecast to be 60.
4.3% of the $47B allocated to TARP plan to let homeowner’s refinance was actually used for that.
60% of those who took a mortgage-interest-deduction have not used a government social program.
As an alumni plus all the attention given to Greece lately, 2 items that caught my attention:
Last day ancient Greek was taught at Michigan State University: 4/29/2011
Start date for Greek “rush week” for Michigan State University: 9/11/2011
He says “Drift Lower” Is best-case scenario for housing. In NYC, which is one of the better US housing markets, I have been saying for more than a year that “move side-ways” is the best-case scenario for housing in the region.
With millions of foreclosures to occur before this bad dream is over, it’s easy to pick on a large lender like BofA who is dealing with a massive amount of administrative headaches with plenty of mistakes to be made. But on the other hand, no one made BofA purchase Countrywide who was already known as the poster child for bad mortgage lending. Countrywide owns the poster child for bad appraisal management companies, Landsafe. BofA might have escaped relatively unscathed from the foreclosure crisis if they had not purchased Countrywide.
So while there are many smart, nice people, some of whom are my friends, we have license to make fun of BofA, the institution.
Had a fun interview with Tom and Sara this morning on the always MUST watch/listen Bloomberg Surveillance. We talked housing, rentals, vacancy and inventory. An added bonus was the addition of Adam Davidson – co-founder and co-host of Planet Money... Read More