A Foreclosure-Driven Housing Bottom?
Interesting NYT article on the nascent housing “recovery,” focusing on Sacremento, California.
Housing prices in the Sacremento area have been cut in half from their mid-2005 peak, primarily driven down by (you guessed it) foreclosures. The lower prices have attracted both speculators and first-time buyers, the latter who made up 53% of the market.
The headline, Where Home Prices Crashed Early, Signs of a Rebound, is perhaps more optimistic than the body of the article.
“Sales volume tends to recover long before prices. In fact, some analysts think price declines in many markets are accelerating. First American CoreLogic, a real estate data firm, reported that “the depth and breadth of price declines continued to worsen in February.” Fitch Ratings recently revised its estimate of future declines to 12.5 percent, from 10 percent, saying the drop would extend to the end of next year. . .
When the market peaked and the ability to refinance all those costly mortgages dried up, the carnage began. There have been 28,898 foreclosures in Sacramento County since 2005.”
Interesting stuff . . .
>
Sources:
Where Home Prices Crashed Early, Signs of a Rebound
DAVID STREITFELD
NYT, May 4, 2009
http://www.nytimes.com/2009/05/05/business/economy/05turnaround.html
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May 5th, 2009 at 10:27 am
the way it is supposed to work- what better way to get home prices down and inventory reduced- when governments get involved in market fundamentals they only “slop it up” and the market correction will not work as efficiently as it might otherwise.
May 5th, 2009 at 10:29 am
@Ahab,
The point wasn’t to stop foreclosures entirely. The point was to stop a cascade-effect of foreclosure driven foreclosures.
May 5th, 2009 at 10:29 am
the number of default notices filed in Sacramento County in March to 2,819, a record. Thousands more bank-owned houses are likely to come to market this summer and fall.
“That will stall any progress toward stability,” said Michael Lyon, chief executive of Lyon Real Estate. “The prospects for a recovery are fool’s gold.”
I heartily recommend Field Check Group site for anyone interested in CA RE (formerly Mr Mortgage)
May 5th, 2009 at 10:34 am
The instant gratification culture of ours will not like how many chapters will be included in this mess before all is said and done. This foreclosure-driven selling is one chapter of many.
May 5th, 2009 at 10:37 am
What we are seeing in CA is a market that is headed towards the “undershoot” that follows all large bubbles. It is the undershoot that will bring in first time buyers and help stabilize the market. But we are not there yet.
Any market will work towards price discovery when it is free, and will be frozen whenever it is propped up by intervention. The collapse of the upper end of the housing market is coming next and it is going to have some interesting consequences. There is a lot of financial pain behind those hedges.
May 5th, 2009 at 10:44 am
@leftback: I’m with you on the higher end homes being next to feel the pain. That is precisely what Ben & co are trying to avoid with all of their reflation attempts because they know that once the higher end market deflates, the economy and markets (and likely the banks) will tank again. This is what they’re feverishly trying to avoid – deflation for their friends in high places. They might succeed but I doubt it. The higher end homes that I’ve seen on the market here (a lot of very nice ones too) have languished on the market for many months, if not over a year or more now. Went on a bike ride yesterday and saw several very nice homes that have been on the market well over a year now around the Lake of the Isles neighborhood, the nicest neighorhood in Minneapolis (gorgeous multi-million dollar homes all around the lake).
May 5th, 2009 at 10:55 am
franklin-
please- I’m begging you- stop defending Obama on every point- you are as bad if not worse than the Bush aficionados- take a breath and please understand that you cannot be taken seriously if your only point is to always defend Obama’s policies- good or bad
May 5th, 2009 at 11:05 am
Geez, people buying up properties when they are 50% off, big surprise… Clearly the policies are wrong and we as a society should have subsidized those property owners to have inflated prices in perpetuity.
Also, young people should never be able to buy an affordable house. Remember, $1million is perfectly reasonable for a 1 bedroom, 500 sq ft apartment because real estate only goes up and interest rates are at post-war lows! Lawrence Yun is my homeboy!
=) HCF
May 5th, 2009 at 11:13 am
The charts in Mish’s latest post about wage deflation are truly compelling.
http://globaleconomicanalysis.blogspot.com/2009/05/wages-contract-in-us-uk-japan.html
May 5th, 2009 at 11:18 am
Denninger today: “…lenders are sending out NODs (default notices) and then sitting on the process intentionally.”
http://market-ticker.denninger.net/archives/1008-Stress-Tests-Whats-That-Light.html
May 5th, 2009 at 11:21 am
Yet high end California is still priced at about $900/sq ft. You’ll be asked to pay nearly $2 million from a 3/2 ranch with upgrades in Palo Alto.
In the past, there was a chain of buyers from subprime upgrading to the next stage leading to the promised land of Palo Alto, Bel Air, and Manhattan Beach. After that chain fell apart, the story became, well these buyers are wealthy, they’ve got stock market wealth to pay a lot or even nearly all cash. Then the stock market fell apart. So what is it now?
How does a Silicon Valley family making a solid $300K justify a $2 million dollar home?
https://www.wellsfargo.com/mortgage/rates/assumptions
Wells Fargo is charging 5.125% for a jumbo arm. They calculate a monthly payment of $2213 on a $450K loan. Lets say our family finances $1.8m at this plan. Their monthly payment would be $8,852.
Compare that with an IO product at bubble era 4.25% and a similar $1.8m finance. Their monthly IO payment would have been $6,375.
$8,852 is almost 40% higher.
Biff and Muffy and Brad and Molly are probably thinking twice about whether $2M is a fair price. They’re also probably thinking about their jobs.
May 5th, 2009 at 11:36 am
“The lower prices have attracted both speculators and first-time buyers, the latter who made up 53% of the market.”
I read this as the former (or speculators) made up 47% of the martket. Soon “Flip This House” will return to the airwaves. This is what got us into this predicament with housing prices to begin with. So, now it’s just more of the same.
May 5th, 2009 at 11:47 am
Ritholtz, are you prepared to rail against how empty and cosmetic this recovery will be for years? You will keep pointing out structural problems in this money-printed recovery such as how foreclosures are driving a housing bottom, while the rest of America – including the masses of U-6 nation whose fates will be to remain underemployed forevermore – rejoices in the so-called “recovery” and “bull market”.
You serve a noble cause, Ritholtz, but in the end, our addiction to you only keep us from the final few orgies before the ultimate reckoning.
May 5th, 2009 at 11:47 am
In So Cal the inventory has been drawn down tremendously by the relative lack of new REOs due to foreclosure moratoriums that started all the way last July with SB 1137. Now many people who would normally short sale are also off the market as they wait to see if they get bailed out. So we have somewhat low inventory and increased demand due to the low rates and tax credit (despite 10% unemployment).
This would be a perfect market to liquidate inventory into but the banks still aren’t foreclosing at levels implied by the filed NTS and NOD. They keep putting off about 85%-90% of the auctions as they reach auction day. If new inventory doesn’t come on the market soon the market will become illiquid and sales will slow. This might be just what the government wants.
I was tracking Short Sales and REOs / Foreclosures as a percentage of total sales for 2 local markets since January 2008. Note, last year some of the flags designating sales as a REO weren’t there and then it took awhile for people to learn to use them. I would say by May / June of 2008 the numbers represent reality, the growth in REOs in the beginning of 2008 is overstated:
http://effectivedemand.blogspot.com/2009/05/short-sale-foreclosure-for-san-fernando.html
May 5th, 2009 at 11:50 am
Speaking of Sacramento, is it just me or did the MSM bring an abrupt halt to their brief foray into real journalism re the reports on tent cities a while back? I’m assuming they’re still there. Have they been growing? No follow up?
Course I could be wrong. Perhaps in the last two months, all the residents got jobs in our bustling factories and bought a house.
May 5th, 2009 at 12:11 pm
Anecdotally, I am surrounded by friends and co-workers who are buying homes in the area right now. I see this as the last wave before the final drop. I don’t know who will be left to buy after this summer. Nothing fundamentally has changed here. These are the last holdouts thinking this has to be the bottom. It may be, but with a major local economic driver (State) imposing paycuts and layoffs, I fail to see where a sustained recovery will come from.
Also, a headline article in the Bee this morning stated that there are over 24,000 vacant homes and apartments in the area currently. Nice juxtaposition with the Times article on the same day.
May 5th, 2009 at 12:46 pm
Just more examples of the “tom-foggery” intended to obscure and mask objective truths and pump the market.
@cuvo: Thanks for the Denninger link. Corresponds to what I am see here. Front page headlines about how foreclosures were not expected to be an issue here only to discover they are JUST NOW becoming the gorilla in the room.
And yet, the foreclosed houses are not coming to market. What gives? Denninger seems to offer one answer.
And some of the local banks are starting to show signs of deep doo, doo – bad loans. Don’t know whether RE or CRE.
May 5th, 2009 at 12:49 pm
I am guessing that California is at least a year ahead of the Midwest in terms of the housing/mortgage crisis.
But the collapse of the high end is happening all at once because it has more to do with two nationwide trends: 1) rolling layoffs and salary/bonus cuts (on the one hand) and 2) the utter collapse of the jumbo mortgage market on the other.
I am sitting on Chicago’s North Shore, where probably 10% of the entire housing stock is on the market right now. More is in a ghost inventory (the small cadre of powerful realtors knows who tried to sell last year or would sell is they could) so you should double or even triple that for signs of pain. Prices are plummeting but still little moves because of the lack of jumbos. And sorry Mannwich, no one in this administration or Congress will lift a finger to rescue the top end of the market. It is being left out to dry.
I keep saying this but haven’t seen it picked up by the big bloggers yet: if you want to understand what is keeping even those who qualify for jumbos from taking the plunge YOU MUST look at what has happened to property taxes in recent years!!! Last year Cook Co. did its triannual reassessment and people were slammed. And it’s locked in for the next 3 years.
Let me give you an example of how this has crushed the local market: there is a lovely older (but luxury) home on the market in our seriously sought after town. Indoor pool, larger than average lot, etc. Recently dropped the price to 1.5M. Great bargain. Then check out the tax bill: $48K/year. You tell me who in their right mind that could afford at that price point could ever fork over $24K every six months?
May 5th, 2009 at 12:50 pm
This just in, from the NYT this morning:
http://www.nytimes.com/2009/05/05/opinion/05ashcroft.html?th&emc=th
“I CAN imagine the Treasury secretary’s face turning pale as he is told by the attorney general that one of the financial institutions on government life support has been indicted by a grand jury. Worse, I can imagine the attorney general facing not too subtle pressure from the president’s economic team to go easy on such companies.”
Is he saying what I think he’s saying? This is sounding like a prep job. And a really ugly one at that.
May 5th, 2009 at 1:14 pm
@Marie Antoinette: Who do you think these reflationary actions by Ben & co are supposed to benefit? Answer: those who possess hard assets, so it seems to me any reflation effects (if they work) would help those who own higher end homes, as those efforts would keep these asset valuations from deflating, no? That’s what I was getting at in my prior post. I don’t think it will work but my point is they’re doing everything they can to stem this spiral when in reality housing prices NEED to come down a lot in order for this mess to be fixed.
May 5th, 2009 at 2:09 pm
@10cc
Saw some news footage a week or so ago, that showed that particular ‘tent city’ being forced out by the local law enforcement.
Seems PG&L didn’t want them ‘camping’ in the right of way.
Just this morning on ABC, Robin Roberts (egad, that lady creeps me out) was showing a ‘tent city’ somewhere, they never showed where, while I was watching.
It was fairly large, as the poor guy they were interviewing had a large 69 ‘street address’ on his tent.
One was even built on top of a nicely constructed wood deck platform. Pretty classy for that joint.
Locally, a ‘tenter’ was ‘camping’ in the woods behind a hobby shop and prevented a robbery, by scaring the little cretin off.
Wrote the license plate number in the dirt and cops busted the little turd a short while later.
Now the hobby shop owner at least lets him use the can.
May 5th, 2009 at 2:57 pm
One of the great features of the CA property tax system is that the tax is computed as a percentage of the actual sales price of the home. And, then, because of proposition 13, cannot increase more than 2% a year. This means that widows, single mothers, and the elderly aren’t taxed out of their homes by a raging speculative market.
May 5th, 2009 at 3:29 pm
Yes. CA has a better approach. Knew some Washington state CA transplants, notably Shelley Taylor, former soap opera actress, that were trying to revamp the onerous property tax laws, with little success. And then there’s Tim (last name?) always adding referenda to the ballot only to have the state Supreme Court throw them out. Tax was based on market value, and the tax burden for the county was shifting quite significantly to her “hotter” real estate area. There was a senior break but it was pretty puny.
Here in Eugene, they have a weird approach. Taxes outside UGAs (Eugene) seem reasonable, and no one in the suburbs chooses annexation, because city taxes are roughly double. If you live inside the UGA and have been paying at the county rate, you continue at that rate. If you make any improvement that requires a permit, you are automatically annexed and begin paying at the city rate. So two houses next door to each other can be paying dramatically different tax.
May 5th, 2009 at 3:46 pm
Forgot to include their link: http://www.predictabletax.com/
May 5th, 2009 at 4:59 pm
Re. taxes, I much prefer the approach of a place like northern VA, where rigorous reappraisals based on real estate sales are made every year, you know the current market valuation of your home (and they’re pretty good) and then you have a clear 1% ish tax rate.
Vulnerable populations like seniors get a substantial break on the tax bill, otherwise most people are paying based on the real value of their home, not four times less if you haven’t moved in 20 years. Your share of services does not go down based on how long you’ve lived somewhere–you still need the same level of fire, police and school service–so why should some pay more and others pay less?
Look, there are enough impediments to the efficient movement of population in this country–giving homeowners the equivalent of rent control is not a solution.
And Mannwich, I get your point about reinflating the bubble but the fact is, except for the handful of people who can pay cash for 1-5 million dollar houses, the unaffordability/lack of availability for jumbos today and for the foreseeable future acts as a price cap on real estate. Yes, you can hold onto it and hope credit flows back into the system, but if you can’t hold on (as many cannot) you will go under and in the process bring down more and more of your neighbors. Fannie and Freddie rule the school. Jumbos are dead and so is the high end.
May 5th, 2009 at 5:18 pm
Marie Antoinette said “Your share of services does not go down based on how long you’ve lived somewhere-you still need the same level of fire, police and school service-so why should some pay more and others pay less?”
Agreed. That’s an excellent point. Prop13 in California has decimated the budgets of every locality, making them turn to sleight of hand and ubiquitous fees to provide service levels that people demand. Furthermore, Prop13 was made to apply to businesses as well as home owners. At a minimum, businesses should have been excluded.
As for Sacramento, how much of that housing market is driven by the state government (Sacramento is the capital city of California)? We have a special election coming up on May 19th to pas the latest legislative attempt to cut the huge budget deficit. But the polls are not trending well in favor of the propositions being passed. Thus, there might be a large number of state employee layoff’s yet to come. I’m not at all certain that now is the time to buy in Sacramento.
May 5th, 2009 at 5:41 pm
The second huge wave of foreclosures and th effect on the banks and the economy are going to catch so much of this country off guard, yet again. With all the “green shoots” headlines and all. And the shallow reporting done on television, which is where most people get their “news.” Hoocoodanode? as CR would say.
A lot of those who’ve been out getting “great deals” on houses are going to be shocked when they realize the market is still falling and their deal doesn’t look so hot anymore.
Denial is not just a river in Egypt.
May 5th, 2009 at 6:22 pm
Onlooker,
You’re right, and here’s the scary part: the rolling wave nature of the foreclosure cycle means that there is no chance to build up public sentiment either FOR or AGAINST effective government action to backstop the housing market. I mean, people are still debating this like it’s a high school club and millions of lives have been uprooted already! But no one sees it until it happens to them or their neighbor or their best friend. It’s not like Katrina. People suffer one at a time, alone.
Now, I can see both sides of the fence on government intervention, philosophically and politically (which, believe me, is not easy since I will likely lose my own house within the year). What I can’t abide is the halting, ineffective government action we’ve had to date, which hasn’t actually helped anyone but has kept all parties on the sidelines waiting for the waiter to come back to the table with “new and improved” specials if we just wait long enough!
By the time enough people are faced with the prospects of being underwater/un or underemployed and ready to find a solution, so many people will have already lost their homes that options will be limited politically. And if, a year from now, I sit with my family in a crummy rental and read that Obama is finally prepared to push back against foreclosures–well, I’ll forget about my royal blood and wheel out the guillotine myself.
It’ll be right about that time that cram-downs will look, in retrospect, like a great stopgap measure that could’ve prevented a humanitarian, economic and political catastrophe at relatively low cost. And neither political party would stand up to the mortgage brokers and the banksters to save it. A pox on both their houses.
May 5th, 2009 at 7:10 pm
Ca approach to property tax is one of the huge issues facing the state. CA prices would not have reached their levels without capping prop taxes. I lived in Il. for 25 years and heard of nobody that wasa forced to sell their home because of high propety taxes. Maybe it’s a Ca affliction.
USphoenix- Re Ashcroft’s op ed in the Times- isn’t taking advice on upholding the law from
Ashcroft sort of like taking marriage counseling from Bill Clinton?
May 5th, 2009 at 7:19 pm
But ahab you are actually dead wrong, and sounds like a tape-recorder of all the failed GOP talking points. Should franklin stop pointing that out to you just because you think all that Obama does is wrong?
The thing that “slop up” all the time is market forces left to take their own inefficient and destructive path. What works is, when you have an active government that stop and redirect market forces whenever they take a path that is not in the interest of “we the people”. Classic example is the European taxation of oil and gas. They are so much better set for dealing with peak oil than the US.
May 5th, 2009 at 7:41 pm
@larster: god analogy.
I was simply fascinated that Ashcroft went to the trouble to write that editorial and which side it took. It’s more of the blackmail/don’t rock the boat BS.
Actually, it’s a better analogy, BO, WS and GS are all in the same bed together.
SO who’s going to call who a whore and call the police in.
May 5th, 2009 at 7:47 pm
Just called the cops and they said FU.
There is a crack dealer on the corner of MLK and they are assembling the SWAT team to take him DOWN HARD.
May 5th, 2009 at 7:53 pm
Aw crap
Forgot the obligatory theme music
What cha gonna do
watch cha gonna do
when they come for you
Bad boys
Bad boys
May 5th, 2009 at 8:12 pm
” They are so much better set for dealing with peak oil than the US.”–DeD
DeD,
you should wonder about that. the EU is still a massive Importer of NatGas, from Russia, no less.
the US, on the other hand, could, if we so desired, run the very vasy majority of our Economy on Home-Grown NattyGas. We have that stuff, in Spades. To say nothing of Oil.
and, with this: “But ahab you are actually dead wrong, and sounds like a tape-recorder of all the failed GOP talking points.” could you, you know, provide an example, or three?
Thanks, in advance~
May 5th, 2009 at 9:19 pm
The market is up 35% while basically 99% of economic blogs posters and, worse, most of the economic journalists, remain bearish. In all honesty, this is the bulliest signal.
Regarding housing.
Why you keep thinking of houses as if they where stocks. People are buying at 50% discount the houses they where dreaming about, at 30 year unheard fixed interest rates while some inflation is in the air. Why should they care if the price will be going down another 20% before coming up, its their home, it’s not a derivative or a leveraged ETF.
May 5th, 2009 at 10:04 pm
“Why should they care if the price will be going down another 20% before coming up, its their home, it’s not a derivative or a leveraged ETF.”
cix: So you say. Since housing WON’T be going up for years, those people WILL certainly care that they’re upside down or have lost a good chunk of equity when they go to sell in 3-4 years. Or when their neighbor gets essentially the same house in the neighborhood for 20% less. You can ignore that all you want, but it’s a reality. It’s already happening. And some of them may just walk away early instead of staying around. Why not, moral hazard is in the air. Everybody will be doing it.
May 5th, 2009 at 10:06 pm
By the way cix, your observation is just bull. Just because the cheerleaders are out in force and the all knowing market is frothy, doesn’t mean the smart money is buying. Time will tell. But if that’s all you basing your decision on, then good luck with that.
May 5th, 2009 at 10:38 pm
“those people WILL certainly care that they’re upside down or have lost a good chunk of equity when they go to sell in 3-4 years.”
This is what I do not understand. Why should they be selling in 3-4 years. They’re buying a house, not a car, let’s all forget the last 10 years of finance bullshit. IT IS A HOUSE, not an ATM.
Did your father know month by month how much his house was worth, no, it was his home.
The combination of 50% down price and low fixed interest rates makes for a great affordability compared to the last 30 years.
Yes, it may still go down, but you think rates will be staying low for a long time? The monthly payment will be the same.
His anybody in this blog married? How you say when your wife has found the house of her dreams at an affordable monthly payments?
May 6th, 2009 at 6:01 am
[...] the article here: A Foreclosure-Driven Housing Bottom? Leave a comment | [...]
May 6th, 2009 at 12:00 pm
cix,
tell her to bank the P+I+T+I+E every month, for the next six months.
then, tell her she’ll have to do it 360 more times, with the T&E, for sure, at higher #’s..
two things, I understand that you’ll no longer be -Rent on the HH income statement, but if she can’t ‘save’, the above, you should wonder how ‘affordable’ those payments really are..
and, as you know, Residential RE is highly illiquid, remember there are a lot of houses for Rent, as well..
past that, you may want to buy a pair of handcuffs, ‘home-debtorship’ can be a Trial, in more ways than one..
May 6th, 2009 at 1:59 pm
Mark; You are exactly right that US given its natural resources could have been a lot better set for dealing with peak oil than EU. Problem is that we have not developed all that NattyGas and it would take about a decade to make a significant switch, whereas in EU the gaslines and infrastructure is already there. As we have already seen the oilprices can easily flip by more than a factor two in less than a year. Waiting for market forces to induce the switch is not a practical way to deal with a problem that can develop much faster than the market forces can respond with a solution. It is double tragic that the activist governments in Europe have positioned their countries to be better capable of dealing with peak oil and the associated draconian prices than our “let-the-market-forces-destroy-it-all” GOP idealogogs, considering that our natural access to solar, wind, and natural gas should have made it a lot easier for us to reduce dependency on oil. Similarly, our stronger and better run public research enterprise should have been way ahead of the EU in developing and implementing energy preservation. However that takes a government that understand how febile, selfish, inefficient, and shortsighted market forces are, and that they have to be harnessed, controlled and directed so they can serve all the people, not just the rich.
So when ahab write: “when governments get involved in market fundamentals they only “slop it up” and the market correction will not work as efficiently as it might otherwise”, that is a clear example of repeating failed GOP talking points. Government actually has to get involved in market fundamentals to prevent them from sloping society up. Gread and selfishness are very powerful forces and they can be used as productive engines, however “we the people” have to take control and crack the whip to ensure that the engine brings us where we want to go rather than over the nearest cliff (and CEO’s safely dangeling in their golden parachutes). The GOP talking points of getting government out of the way (of banksters and other criminals), have been completely discredited by the reality of the last decade.
May 6th, 2009 at 5:35 pm
DeD,
I appreciate your reply, though, I think you need to Factor this into your analysis:
“History of the PetroDollar
The petrodollar is an interesting historical, economic, phenomena not likely to ever be repeated.
A petrodollar (a term coined in 1973) is an American dollar earned by a foreign nation from the sale of its own oil.
The significance of the petrodollar revolves around the concept of “what is money?”
Money is any marketable good or token used by a society as a store of value, a medium of exchange, and a unit of account. Since the needs arise naturally, societies organically create a money object when none exists.
Through almost all of human history, and through all of American history until 1971, money was based on a precious metal. In other words, if someone asked you what a dollar was your answer would be “1/44th of an ounce of gold”.
You see, before 1971 money wasn’t a piece of paper that only held value because the government said it did. Paper money was something backed by a tangible asset. It’s the gold (or silver) backing that gave the paper money its value (and after WWII America held 80% of the gold in the world). If it wasn’t for some sort of commodity backing America’s paper dollars wouldn’t have any more real value than Weimar Reichmarchs…”
is a snip of the post:
http://www.dailykos.com/storyonly/2007/10/28/151959/01
this: ““we the people” have to take control and crack the whip to ensure that the engine brings us where we want to go” is, no doubt true..
anyway, cogitate some on that Petro$ influence, remember, there wouldn’t be one w/o the US as massive Net Importer of Oil & Gas..
The EU may have the ‘pipes’, but they’ll always be net Importers of Oil & Gas..
but that’s not really important..