Real estate's October report card
Perspective: More convinced of 'W'-shaped recovery
By John Burns, Thursday, October 8, 2009.
John BurnsWhile both the media and stock investors believe that housing has bottomed, they are unaware of the massive supply of homes that are already in the foreclosure process that will certainly drive home prices down even further when they are sold. We have been projecting a "W"-shaped recovery for some time, and we are becoming even more convinced that we are right. The shape of the second leg down is almost completely dependent on the level of government intervention that will take place.
For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resulted in very few distressed sales in comparison to the actual level of distress in the market. This delay in bank-owned home (REO) sales, along with historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market -- temporarily.
It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project what housing will be like in 2010:
- 13.54 percent of the 44.7 million mortgages tracked by the Mortgage Bankers Association are delinquent.
- 7.57 million homeowners are delinquent, applying the same percentage to the 11.2 million mortgages not tracked by the MBA (55.9 million total mortgages in the U.S.). That means that 10 percent of all homeowners in the country are delinquent.
- Based on historical trend analysis by Amherst Securities, 6.94 million homes that are already delinquent will be liquidated, which is more than a one-year supply of distressed sales poised to hit the market sometime in 2010 and 2011. During first-quarter 2005 that figure was only 1.27 million.
- Defaults continue to grow at the rate of approximately 300,000 per month, assuring that the number of distressed sales will grow and will continue through 2012.
2009 government intervention
Government intervention to date has been extremely helpful in preventing an even more dramatic decline in home prices. As shown in the chart below, housing demand has fallen only to "normal" levels and stabilized there. Without historically low mortgage rates, support for Freddie Mac, Fannie Mae and FHA, and an $8,000 tax credit, how far would sales have fallen this year and what would that decline in demand have done to pricing?
Conclusion
Demand needs to continue to be stimulated to bring down supply, particularly while the country continues to lose jobs. Without continued government intervention, home prices will plummet, banks and the government-sponsored entities (GSEs) will continue to lose money, and the economy has virtually no chance of increasing overall employment in 2010.
Our grading system of the economy and the housing market is a "bell curve" model, with statistics at an all-time high receiving an "A," statistics near the long-term average receiving a "C," and the worst times ever receiving an "F." In this grading system, it is OK to be a "C" student.
Here is our current report card:
Economic Growth: D
Economic growth deteriorated in September as the economy remained very weak. Annual job losses continued, marking one of the worst losses in 60 years. The headline unemployment rate increased to 9.8 percent last month, after reaching 9.7 percent in August. Mass layoff events -- defined as a cut of 50 or more jobs from a single employer -- also increased this month, and are up nearly 43 percent year-over-year. Currently, it takes job seekers twice the normal length of time to find employment.
The Consumer Price Index, or CPI (all items), decreased at a slower rate in August, recording a decline of 1.5 percent, while the core CPI (minus food and energy) showed an increase of 1.4 percent. ...CONTINUED
All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.
You must login or register to post a comment.
Submitted by Robert T. Boyer, Ph.D. on October 8, 2009 - 8:06am.
John,
Thanks for the great review. I realize this is a national audience and most of our economics are measured nationally, but at the same time, local markets vary dramatically - e.g., Detroit vs San Diego. Do you happen to have the data that can break down this report card to the next level?
Your comment about it being just a cheap to own as to rent has perhaps never been more true (at least to recent memory). But again, it does come down to locality. I think people will find using http://www.FinestExpert.com a great way to find such properties. If it is positive cashflow for the investor, then it is better to be a homeowner than a renter.
I'm wondering why you rate supply an "F". It would seem that housing starts should be given more weight than permits... and starts are down, keeping inventory lower. Again, this comes back to regional behavior. In San Diego, there is less than one-month of inventory up to the $700K price range (it gets ugly as you approach $1m+). For most of 2009 we have had multiple offers due to a lack of supply.
Circling back, perhaps the two most important drivers for the near term are government stimulus via tax credits and banks releasing foreclosed properties onto the market. These seem to be the two biggest wildcards in the upcoming years. Will the fake-it-till-you-make-it (prop-up the economy) work? Or have its legs cut out from under it.
Again, thanks.
Robert T. Boyer, Ph.D.
Co-Founder - FinestExpert.com
The Cashflow Search Engine
Home of the FE-Score
VP America's Finest Real Estate
Submitted by Wenceslao Fernandez Jr, BS, Realtor, CDPE on October 8, 2009 - 9:22am.
Great article. I also agree that although most numbers are national and each market is different and our local (Miami/Miami Beach), market has been recovering, it concerns me greatly that lenders are slow to add their current REO inventory to an already handicapped market.
This is exemplified in our local market by the 30,000 or so new condo units built during the boom, which have been turned into rentals in order to help these builders from being foreclosed on which helped us from experiencing a much worse real estate market situation and a deeper collapse of our local economy while helping keep rents low since a lot of that inventory remains available.
In combination, they reflect exactly the great news for us. It is no secret that the inventory levels are high and that we would certainly be in much worse situation if all the REO inventory were revealed.
As depressed as the market already is and will continue to be, gaining consumer confidence and allowing them the opportunity to own real estate at prices and payments they can afford long term is good news for many buyers (investors who can finally enjoy cash flow and appreciation and first-time buyers who can often buy a better home at great prices and rates).
Yet, it is also no secret that many ARM and Option-ARM loans are reseting in 2010 and 2011 and that defaults within these loans and even Alt-A and A paper loans are already on the rise and set to peak in both of those years, and that this is likely to add tens and even hundreds of thousands of new REO properties to the market.
Wanna-be investors will be the biggest losers. Those who bought property with the intent of "flipping" them and got caught holding the bag.
First-time buyers who got greedy or felt their chance of homeownership would pass them by if they did not buy then, are also in a bind, just as are those who took out additional loans against their existing home in order to "invest" (using the term loosely since what they did was not actually "invest" but gamble instead), buy property that they could rent out or flip and be finally rich.
The sad part of this story which no one is talking about is the greed that continues to exist within the walls of the board rooms of all the major banks and Congress.
Here are the individuals who let it all hang out and either created, facilitated or even encouraged the behavior we are all now suffering from.
Banks lobbied to have the GSEs loosen their requirements, the GSEs, in the interest of growing the economy and the well-meaning desire to improve homeownership to everyone, took the eye off the ball as did the politicians that failed their constituents by not plugging loopholes or creating backstops and even not forcing enforcement agencies like the SEC to do a better job at ensuring the financial instruments that were then sold as "A-paper" weren't so loosely-rubber stamped and sold to others around the world. These in turn, trusted the name of the institutions who "supposedly" had the understanding of what was being rubber-stamped as A-paper and allowed themselves to be sold, with understanding that these carried the "good-faith and credit" of the underlying institutions, the USA (implicitly), and the assets (which turned out to be liabilities).
These instruments were cashed in to create more cash for the banks and other lenders who created more cash to lend and continued to devise program after program to promote lending products using wrong data and loose assumptions and helped fuel the frenzy we experienced.
In addition, and although nobody put a gun to the heads of those who signed the dotted line and assumed the liability of the loans they applied for, neither were the banks forced to underwrite and lend to many unqualified individuals but were instead encouraged by their own greed and the greed of wall street added to the greed of the people who borrowed.
This is where Greenspan summed up the entire period by saying (paraphrasing) that greed ran through the entire spectrum of what took place, at all levels.
Still, the lenders today are after the borrowers that the lenders themselves should have never pursued or lent to by often seeking deficiency judgments against these borrowers, keeping the short sale process slow and handicapped, forcing many to lose their home to foreclosure, only to then sell the asset while still recovering from insurers like those with PMI, MIP, FHA and/or VA backed loans.
From the top down, this entire process needs revision NOT FROM THE BOTTOM UP. Those at the top have all the College graduates, post-graduates, PHD's and systems and analysts at their disposal dropped the ball major!
Those who can afford to buy these distressed properties stand to gain immensely. Those loosing their homes are being penalized dearly.
What is happening to the institutions and politicians that failed us? Who's asking them and investigating this all the way to the top? Only CNBC's David Faber made the best attempt of all so far. He and others need to carry the ball the rest of the way and ensure that TRULY, WE NEVER see this behavior again (although this may only successfully happen when greed is removed from our DNA).
In addition, problems related to new lending guidelines are stifling our ability to sell condo inventory since many buildings are facing financial doom. Not only do borrowers have to go through a wringer, but condo buildings also must qualify and this remains a problem.
Not dropping the tax credit (as they did the credit for buying cars which caused sales to drop again), but expanding it instead in order to encourage more to buy real estate, improving the employment situation so that those on the fence because they are unsure about their future can finally decide to buy and those who finally start to be employed choose to take the plunge as well, coupled with fair lending practices and guidelines that will allow inventory to be financed with sound loan programs are key to our recovery.
Just as important is not adding to our deficit or national debt with programs that do not help improve our nation in the areas of housing, consumer confidence and spending and employment.
Wenceslao Fernandez Jr, BS, Realtor, CDPE
Certified Distressed Property Expert (http://www.CDPE.com)
Keller Williams Realty Miami Beach
Serving Eastern Miami-Dade & Miami Beach, Fl
Seach Florida Properties in YOUR language: http://www.Immobel.com/MiamiRealEstateKing
http://www.ISellMiamiBeach.Info