Tag Archives: Foreclosure

DrHousing: The Good, the Bad, and the Ugly aspects of the American housing market

The Good, the Bad, and the Ugly aspects of the American housing market: Key indicators of the 2013 real estate market.

The US housing market is massive.  You would expect this from a nation of 315,000,000+ people spanning over 50 states.  So it is important to understand the various dynamics occurring over many states.  In regards to single family home buyers, in most of the United States home prices are very reasonable.  This is hard for some in the coastal regions to digest or even comprehend.  When you look at certain markets in high priced areas, many people have a hard time penciling out the financial details.  Yet with such a large number of investors purchasing with cash, a new market has been created.  But if we are to take the US market and make a wide-eyed observation, we will find some good, bad, and ugly aspects of the current housing market.  Whereas in 2008 through 2010, the market was dominated by the bad, ugly, and grotesque.  What can we say about the current US housing market?

The Good

One good aspect of the market is overall, affordability is back in line to historical trends:

housing affordable

Price-to-rent ratios are back in line in many parts of the country.  In fact, this is the big push from the all cash buyers in places like Arizona, Nevada, and Florida.  The one thing I would be cautious about is in places like Arizona, you have over 50 percent of buyers coming from the investment bunch and when you look at rental prices, they are weak and vacancies are very common.  But with such a high number of investors buying, you basically have investors selling to other investors thinking they will produce higher yields.  However, for non-investors in most US markets prices are now affordable thanks to the big drop in prices but also the Fed’s tantalizingly low interest rates.  Sure, the Fed’s balance sheet is well over $3 trillion but that is an issue for another day.

If you follow the mainstream press and use this as a barometer of what most Americans see as their primary source of information, then the Federal Reserve might as well be nuclear physics because it is never discussed or even explained.  So most people are driven by the monthly nut psychology.  Low rates have boosted affordability dramatically.  Americans are horrible savers.  Something like 50 percent of Americans do not have a retirement account.

I was having a conversation with someone and their mentality is similar to many coastal folks.  “Good luck finding a property in the US for less than $300,000 in a safe area!”  Of course, it is hard for some to understand that in many states, homes can be had for $100,000 in good areas and a $200,000 home will buy you a very nice spot.  Heck, even in the Inland Empire in California you can find a great place for $300,000.  Of course this person is obsessed with buying in prime Pasadena so good luck on that one when you have limited inventory and many other clones with similar thinking.

The Bad

While not as good as it should be, household formation is now picking back up:

household formation

Funny how in 2005 when all you needed was a pulse for credit, household formation was up to a blistering 1.8 million per year.  The crash brought on the “move in with mom, dad, or friends” trend and you can see this in 2008 where household formation was at a stunningly low 400,000.  This is also another reason why the housing market is now picking up nationwide.  From 2011 to 2012 household formation went from around 600,000 to a healthier 1,000,000.  That is a big jump.

The one element I see getting in the way of this is the massive student debt in the market now above $1 trillion.  Many younger Americans are still financially strapped so it is hard to see this improving anytime soon.  Although we are nowhere close to the boom days, household formation does seem to be on an upward trend and this is a positive for housing in general.

The Ugly

The housing market is still a mess when it comes to distressed properties:

bad loans

Over 5,000,000+ Americans are in one of the following:

1,927,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.

1,483,000 properties that are 90 or more days delinquent, but not in foreclosure.

1,694,000 loans in foreclosure process.

The market is full of bad loans but the number is going down.  Many investors buying in bulk have connections that allow them to purchase many of these properties at auction before they even hit the MLS for the regular Joe and Jane.  So the low inventory is simply a manifestation of banks leaking out properties at their own pace and to select individuals.

In most parts of the US, the housing market is fairly normal based on price and financing options.  However, in places like California good luck buying a home when many in the industry think prices will keep going up and bidding wars are now fairly common.  Get your PowerPoint presentation ready and your heart wrenching story (and wallet out) to make a bid in many prime markets.  California is a boom and bust market and we’re currently in the boom phase.  It is interesting how many e-mails I get where the person is actually sad and emotionally troubled that they got out bid on an $800,000 or even $1,000,000 home.  Obviously you can only get so much from an e-mail but some people seem miserable because they can’t spend $1 million on a home!  I got an e-mail like this from someone in San Francisco.  You know what my recommendation was?  Go ahead and buy because you seem absolutely miserable!

For most Americans, the decision to buy is fairly simple in today’s market.  In other markets, there are definite manic like behaviors.  We’re seeing some mania in California.  Buying a home is a big decision yet some are willing to drop $700,000 (i.e., finance 80+ percent of the purchase) and treat this as if they were buying a car. Buying a home is a 30 year commitment for most.  Many sell within 7 to 10 years but that is assuming prices keep going up.  Some that bought in 2005 are still underwater today (8 years later).  You want to know what was going on 30 years ago?  Ronald Reagan was President, we were in the Cold War, The Red Hot Chili Peppers launched their first self-titled album, and a fixed rate mortgage was 13.4 percent.

There are good, bad, and ugly things in today’s housing market.  The scope of each of these really depends on where you live in the US.

Leave a comment

Filed under Housing

Read of the Day: Modified mortgages re-enter shadow inventory

Modified mortgages re-enter shadow inventory – By next month the housing crisis will have cost 5,000,000 Americans their homes via foreclosures. Distressed inventory still above 5,000,000.

If we were to take a count of how many people lost their homes to foreclosure since 2006, that figure will reach 5,000,000 by the end of the year.  This is an enormous number and is rarely discussed as a historical case study in action.  It is interesting how many seem to ignore this grim figure and pretend that it never happened.  So keep in mind the turmoil those 5,000,000 completed foreclosures have had on the overall housing market.  Will the current shadow inventory impact the current upward trend in housing?  Banks are selling into some fierce momentum but things are still tepid with the overall economy.  Most importantly, household income growth is nowhere to be found.  Completed bank repossessions are still running at about 50,000 per month and foreclosure starts are still close to 100,000.  This housing bounce as we have mentioned is coming from a trifecta of low interest rates, Wall Street investors, and foreign money.  I think it is useful to take a look at where we were and where things are heading.

The impact of the housing crisis

RealtyTrac put together an excellent chart highlighting the damage caused by this housing bubble bursting:

foreclosure starts and complete reos

Source:  RealtyTrac

If you want to take 2006 as a baseline, it appears that repossessions run at around 20,000 per month and foreclosure starts are around 50,000 in better times.  Since 2006 the housing crisis has cost nearly 5,000,000 Americans their homes while another 10,000,000 have faced the prospect of foreclosure.  This is an incredibly high figure considering that nationwide, roughly 50 million households carry a mortgage on their property. This context is important when we examine the following current data:

shadow inventory

You still have over 5,300,000 mortgages in the foreclosure pipeline.  Rising home values make it easier for banks to unload these properties via short sales and other mechanisms.  Given that the entire market was turned upside down because of 5 million completed foreclosure, the 5,300,000 homes in the foreclosure pipeline is still a big concern and the fact that nearly 100,000 are being put back into this bucket each month is concerning.  The current momentum is clearing out properties but as we had mentioned, prices in areas like Arizona are actually turning investors away.

Modifying out of the shadows

There was an interesting angle taken over at SoberLook regarding the shadow inventory figures:

Mod redefaults

“This could be a cause for concern. However, banks have some leeway in when they actually take charge-offs during the year, so it is worth taking a look at a more up to date delinquency data. JPMorgan recently published the October delinquency results. Indeed there was an increase in delinquencies, mostly in October (there seems to be some delay in reporting delinquencies that the Fed picked up in Q3, particularly by Bank of America). But delinquencies seem to the heaviest in sub-prime mortgages. Is this another wave of subprime defaults?”

A modified mortgage is yanked out of the shadow inventory pipeline.  From data from the OCC and other figures from HAMP, re-defaults on modified loans are very high.  It might take one or two years to re-default but the success rate is poor.  In other words, was the shadow inventory figure temporarily depressed because of these weak modifications?

From looking at the figures, this does seem to be the case.  What is interesting however, is the massive jump in short sales being approved by banks.  The shell game allowed these homeowners to tread water until the Fed went into QE3 and now, banks are “working” with these homeowners to unload the properties at higher prices to new buyers and in many cases, investors.  I’m not sure if this is really the core function of helping homeowners out.

Something is definitely going on recently because charge-off rates have spiked recently and the housing market is moving up:

Charge-off rate

Source:  FRB

So how many mortgages have been modified?  Since 2008 it looks like over 2.5 million:

mortgages modified

In other words, you have a solid number of modified homes re-entering the shadow inventory figures.  With investor demand and short sales, the figure is moving lower.  But it is important to always keep things in perspective especially when moving buckets around.

Leave a comment

Filed under Housing