Treasury Department Foreclosure Report

Foreclosure and Mortgage Deliquencies

Q4 2009

I finally finished the OCC and OTS Mmortgage Metrics Report for the fourth quarter of 2009 (I know you’re jealous at how much fun I get to have).   The report looks at all first liens held by most of the largest mortgage servicers.  It covers almost 34 million loans totaling almost $6 trillion.  It is the raw data before it gets spun by the press or politicians.  Here are some highlights and lowlights from the report:

Delinquent Mortgages

• Mortgage performance declined for the seventh consecutive quarter.  Delinquent mortgages and mortgages in foreclosure rose to 13.6% of all mortgages (once again, just talking about first mortgages).

• The percentage of mortages 30-59 days late stayed stable, most of the increase was in seriously delinquent mortgages.  This may be a positive as it is showing that the pace of new delinquencies is not picking up, and that loans are staying seriously delinquent longer which is an indication that banks are working longer to modify before moving to foreclosure.

• Option Arms continue to be the worst performing loans with only 662% current.

• There was a large increase in the number of seriously delinquent prime loans as the number jumped fro 838k to 976k in one quarter.  Almost 1 in 25 prime borrowers is more than 60 days late on the mortgage.

• Overall, 7.1% of all mortgages are seriously delinquent (60+ days late) and an additional 3.4% are 30-59 days late.

• Although the Sub-Prime and Alt-A loans have the highest percentage of delinquencies, the Prime loans have the highest number – this is important as if the percentage of prime loans going bad keeps rising it has a real chance of bringing the market down again.  However, these are also the borrowers that have the best chance of recovering if employment and the economy continue to recover after the stimulus expires.

Home Retention Actions

• The number of home retention actions slipped by 19.1% compared to the third quarter.  This is probably likely to the fact that HAMP received so much publicity in the third quarter that most people who were eligible applied then. 
• Discouraging number on the HAMP program was that although 349k people had entered the 3 month trial period in the second and third quarters, only 21k of those received permanent modifications during the fourth quarter.  That’s about a 6% conversion rate (it’s too early to have data to see how many re-default).  If that is an accurate number (it is possible that many were delayed past 3 months by paperwork issues, etc.) then the program is really a failure.  Let’s hope the numbers get better.
• More than 50% of HAMP trial plans and modifications are for prime borrowers
• There were almost twice as many home retentions started as foreclosures (this would also explain the increase in seriously delinquent mortgages as they stay delinquent until fully modified).
• The percentage of loans modified that had principal reductions fell to 6.8%.  Rate reduction and capitalization (adding your late payments back to the loan) were the most common modifications.
• HAMP modifications only included principal reduction 0.1% of the time, but they did utilize principal deferral 26.8% of the time.
• 42% of all modifications decreased payments by 20% or more – this is important to the  borrower being able to keep up with payments on the modified mortgage.
• 82% of HAMP modifications decreased payments by 20% or more.

Modified Loan Performance

•  The performance of modifications continues to improve over time:
  • Only 33.5% of loans done in the second quarter of 2009 were 60+ days late six months later compared to 42.7% of loans in the first quarter.
  • Only 14.7% of loans modified in the third quarter were 60+ days late 90 days later as compared to 30.8% of the loans done in the first quarter of 2009.
• Loans 30+ days late were obviously a higher percentage; 47.5% after 6 months for loans modified in the second quarter and 29.8% after 3 months for loans modified in the third quarter.  Both of these are significantly better than they were prior to the second quarter.
• The highest Re-Default rate is for Government-Guaranteed loans (FHA, VA, etc.)  with 67.8% 60% days late a year after modification (these are obviously reflecting pre-HAMP modifications as none have been modified for a year yet).
• One reason to be a little more positive about HAMP modifications (if more get completed) is that they seem to be reducing payments by 20% or more, and historically loans that have payments reduced by 20% or more have a re-default rate of only 39.8% a year later (as opposed to 67% if the payments are unchanged).

Foreclosures

• Newly initiated foreclosures declined in the 4th quarter as homes are staying in the seriously delinquent phase longer as lenders are working harder on modifications.
• Completed foreclosures increased by 8.6% over the previous quarter and 35.7% higher than a year ago. 
• There are almost 4x as many foreclosures as short sales and Deed-in-Lieu actions, although short sales are up 96.8% over a year ago.
• 7.8% of all subprime mortgages are in foreclosure while only 2.3% of prime mortgages are in foreclosure (however since there are more prime mortgages, there are actually more total prime loans in foreclosure than subprime).

A couple of key numbers to look at next quarter will be:

• How many of the HAMP trial periods get converted to permanent modifications.
• If the loans that are seriously delinquent transfer into the foreclosed or modified category.
• If loans modified in the third quarter of 2009 and later continue to have a lower re-delinquency rate.

I expect that the data for the first quarter will continue to improve and the real questions will come with the second and third quarter data as that data will reflect the market after the stimulus has expired.

Monday Morning Coffee – How does Greece affect your mortgage?

Monday Morning Coffee

Greece Defaulting Could Ripple into Your Mortgage

February 14, 2010

Good morning,

I hope you had a very nice Valentines Day.  We celebrated a day early and enjoyed a quiet night at the Rancho Bernardo Inn (no 6:00 am wake-up!)  I’ve been reading a lot of various “experts” talk about what direction the market is going to go.  What I have found is the stock analyists in general say we’re going up (they sell stocks, so that makes sense).  People in the bond market say we’re going down (also makes sense as they want to sell bonds).  People selling gold, well they’ve been saying the end is near since just about the begining.  So, I don’t have any answers at this point, but I sure don’t feel very comfortable with rising debt, Greece potentially defaulting and the end of the stimulous around the corner.  My guess is that the Fed steps in and extends (although at about 1/2 the rate) the purchase of mortgages in an effort to provide a soft landing for the real estate market.

I was spending some time trying to write out in easy terms how we got into this mess (mostly hoping it would help me see how we were going to get out of it).  After about 6 hours, a client showed me a very cool web site (if he had come in the day before, I could have saved the 6 hours!).  This is the best description I have seen for how we arrived where we are today, and it is done at about the 8th grade level.

We have a new site up for our listing in the Garden Gate community of 4S Ranch.  We started showing this 4 bedroom, 2300+ sf home yesterday and currently have one offer in.  If you know someone who would be interested, please have them call me!

We also have a great 3 bedroom condo in Pacific Beach for rent.  It is located on Crown Point with a view of the water.

That’s it for this week.  Enjoy the coffee!

Just Five More Minutes
  by: Author Unknown, Source Unknown

While at the park one day, a woman sat down next to a man on a bench near a playground.

“That’s my son over there,” she said, pointing to a little boy in a red sweater who was gliding down the slide.

“He’s a fine looking boy” the man said. “That’s my daughter on the bike in the white dress.”

Then, looking at his watch, he called to his daughter. “What do you say we go, Melissa?”

Melissa pleaded, “Just five more minutes, Dad. Please? Just five more minutes.”

The man nodded and Melissa continued to ride her bike to her heart’s content. Minutes passed and the father stood and called again to his daughter. “Time to go now?”

Again Melissa pleaded, “Five more minutes, Dad. Just five more minutes.”

The man smiled and said, “OK.”

“My, you certainly are a patient father,” the woman responded.

The man smiled and then said, “Her older brother Tommy was killed by a drunk driver last year while he was riding his bike near here. I never spent much time with Tommy and now I’d give anything for just five more minutes with him. I’ve vowed not to make the same mistake with Melissa.

She thinks she has five more minutes to ride her bike. The truth is, I get Five more minutes to watch her play.”

Have a Great Week!

Scott Voak

Monday Morning Coffee – What happens when the Fed stops buying Mortgages?

Monday Morning Coffee

What Happens when the Fed stops buying MSBE’s?

Januray 17, 2010

Good morning,

I hope you had a great weekend.  We were very busy as we had 18 friends over for dinner on Friday night and went to the San Diego Association of Realtors Installation Dinner where our friend Mark Marquez was installed as President on Saturday night.  So now, it is a race for bed!

Updated my blog earlier today with a post on what is going to happen when the Fed stops buying MSBEs in March.  The short version is that the market will slow, interest rates will rise and they will step in again to resume purchases, but on a smaller scale with rates up about 1% over the year.  The long version is here.

We have a new couple of new homes this week, but due to lingering issues with the office move, I do not have single property sites up for them yet.  Both are short sales:

Palomino Plan 3 in 4S – 4550sf 6 bedroom home with a 4 car garage on a very large lot.  It is priced at $900k.  We have offers on this and will probably be off the market early in the week.

Canyon Ridge Plan 2 in 4S – 3600+ sf 4 bedroom home with an loft and an office over the garage.  This is also a large lot and has a pool (but there is an issue with underground water that needs to be dealt with or at least acknowledged).  There are no showings on this until next weekend when we will have an open house (owners are packing).  It is priced at $800k.

That’s it – I will have single property sites for them next week.

Enjoy the Coffee!

This week I am revisiting a story I posted last year for an update.  It’s the one about the autistic basketball player and hits home for Cori and I as Zach’s Fragile-X puts him on the autistism spectum.  As he is getting older, his issues are becoming more pronounced and we gain more respect every day for both our own son and other families that navigate the world of autism/Fragile-X every day.  He is almost 4, and although I prefer he take up soccer to basketball (due to my own limited skills), any way he can have a moment like this would be worth it.  Videos like this are a great source of hope for parents who have handicapped children.

Have a Great Week!

Scott

Prediction for when the Fed stops buying MBSEs

I was looking at numbers over the last year as they related to sales values to try and figure out what effect that Fed’s purchases of Mortgage Backed Securities has been.  A major problem it getting accurate numbers is that housing prices are reported as an average or median price.  In markets that are consistent, this is a good method to use.  However, when the market changes (as it has recently) the median price especially becomes less and less meaningful.  Here’s a quick explanation:

Let’s say there are 10 houses that sell. 

• 4 are two bedroom homes that sell for $200k.
• 2 are four bedroom homes that sell for $400k.
• 4 are six bedroom homes that sell for $600k. 
• In this case, your median price is $400k (median is the price of the average home, not the average price of homes). 

 Now, let’s say the price for each home increases $50,000.  However, due to a factor such as loans being difficult or no inventory being available on 6 bedroom homes, we sell the following homes:

• 4 two bedroom homes for $250k.
• 2 four bedroom homes for $450k.
• 1 six bedroom home for $650k.
• In this case, your median price is $250k. 

Here is a simplistic example showing that the median price fell even though the price on every home increased.  It is also the reason why current data on housing prices is to be viewed a little skeptically.  My guess is that the data on median prices is under reporting the gain in housing because the shift has been towards more less expensive homes selling which brings the median down. 

So, I looked at my favorite housing micro-economy, 4S Ranch.  Here I can break houses down to similar sizes and ownership (condo vs fee simple) and look at what a slice of homes has done over several years.  In some of the data segments, there are not enough sales to be meaningful,  but in others, there is a large enough sample size to give a relatively clear picture.  A problem does come into play when one segment has several short sales or foreclosures in a quarter as they skew the prices downward.  Going through the home sales for the past year and trying to adjust for foreclosures, etc.  I come to the following conclusions (with reservation as this is not exact by any means and there is a good margin for error):

• Detached homes priced under $650k were up 5-12% (the 12% is a little shaky due to small sample size).  I would feel fairly comfortable saying these homes are up in general about 7% in the last year.
• Homes priced above $800k slumped early in the year, but have made it back to about even. 

I think a large part of the difference here is the fact that loans are much easier to get in the lower price ranges (in fact, all of the homes I have sold over $800k in the last year have been bought by buyers with large downpayments.  There are almost no loans above $700k to be had).  The only reason that loans below $700k are available at current interest rates is that the Fed has been buying them from the banks to the tune of many BBBBillions of dollars a week.  If this ends as scheduled in March, rates are going to have to rise for the following very simple reason – we have to entice someone else to buy the loans.  Here’s a fictional conversation between Bank of America and China:  Remember those BBBBillions of dollars of loans we sold you a couple of years ago?  We know it didn’t turn out real well for you what with all those defaults and foreclosures.  But….how about buying a couple hundred BBBBillion more?  It is not too hard to see that China (or any other buyer of mortgages) is going to want a higher return for taking on the risk.  A higher return for them means higher rates for you and me. 

So, if the Fed stops buying mortgages as planned in March, rates will rise rather quickly.  How high and how fast?  Well they have to rise high enough that the rest of the world will buy the loans, but not high enough that people stop buying houses.  Market “experts” think rates will rise between .75% and 2%.  If they rise 1.5%, it could take someone who qualifies for a $640k loan down to about a $495k loan.  That would take the wind right out of the housing market.  A buyer who has been looking at a $675k house an imagining the four bedrooms is not going to put the same payment into a three bedroom condo.  They will likely sit on the sidelines and we will see the number of transactions slow dramatically until prices fall enough to put our buyer back into a four bedroom house. 

So, do I think prices are neccessarily going to drop 20%?  No.  For the same reason I predicted in August that the Home Buyer Tax Credit would be extended – politicians are running the show.  I am not an economist, but I have at least a basic understanding of the markets.  However, I think it is fairly easy to predict what is going to happen – so, here it goes:

• Rates will start to rise in mid-late February (loans that start in mid February will be completed in mid March and have to be sold in late March, when the Fed is scheduled to stop buying them).
• By the end of March it will be pretty clear that rising rates have slowed down the housing market and talk will start fresh about a housing led double-dip recession.
• Democrats who control the entire political engine in Washington will very quickly realize that a summer recession with ever increasing unemployment and vacant foreclosed homes will translate into a lot of lost seats in the House of Representatives in the November election.
• By mid-April (if not sooner) the Fed will announce that they will resume buying MBSEs although on a smaller scale (this will be an attempt to create a soft landing).
• The market will stabilize again although we are not likely to see the same enthusiasm for real estate as we are seeing right now.  This is because the Fed eventually has to get out of buying all the mortgages the banks can write (don’t they?), and as they do, rates will slowly creep up.

Since I am making the prediction, it is sure to not happen, but I think we will end the year with mortgage rates about .75-1% higher than they are today and prices within 3-5% of where they are although they may bounce around a lot before settling down.

When the Music Stops – Tax Credit

Another important component when considering the real estate market for 2010 is the tax credit that runs through the first quarter of next year.  According to the National Association of Realtors, over 40% of home purchases in the third quarter of 2009 were motivated by the tax credit.  The tax credit combined with the artificially low interest rates (see my last post on interest rates) are encouraging people who might otherwise buy in the next two years to buy now.  These buyers have been responsible for the surging demand that has helped the market recover some of its lost ground at the entry level (I am writing generally about California and specifically about San Diego County).

This has been fantastic for a number of reasons:

1. The rising real estate market has helped the emotional state of economy and provided hope that things are getting better – with that hope, people may spend a little more which will help the economy further.
2. The rising prices at the low end of the market may allow some people to re-finance their homes when their rates adjust in the next few months as increased prices mean an incease in equity.
3. The increase in transactions has helped those of us (like yours truly) who sell real estate be able earn an income and not have to get a real job (since my last job as a busboy in high school didn’t work out so well, this is by far the most important result of the rising market).

However, there is a downside.  If buyers who would normally make their first home purchase over the next two years are buying now, who is going to buy in the next two years?  I think that when the tax credit expires, we are going to find that the demand is going to slow down and be lower than expected for one to two years (for a parallel example, look at the car industry which did great with Cash for Clunker when people who might have bought a car over the next year and an incentive to do it earlier – however the following months have disappointing as the people who would normally be buying now have already purchased).

Will this in and of itself be a disaster?  I don’t think so.  However, combined with tighter financing and higher interest rates I think that it will be a serious drag on the market.

By now you are saying, “This guy isn’t too bright.  He needs to sell houses because he can’t bus tables and yet he’s saying the market could be in for a downturn.”  Well, you’re right.  But those of you who know me are aware that I am comfortable losing a sale if it means I am honestly letting you know what I think the market is doing.  I lost a lot of buyers in 2005-2007 because I was honest about where I thought the market was going.  That doesn’t mean you shouldn’t buy (and for many people who bought in 2005-2007 it was the right move).  I am still saying the same thing now I was then:  If you are buying a home to put down roots and raise a family, you should do so.  If you are buying a home for two years, think carefully.

I think the combination of currently low interest rates and easy financing make it a great time to buy a home.  Just be sure you get yourself in a 30-fixed loan and get the best interest rate you can.  Also, buy a home that will work for 7-10 years.  Although I would love you to buy another in 2 years, that is not a smart plan of action right now.  If you are newly married and planning a family in 2 years, buy a 3 bedroom so you can grow into it.  Maybe you won’t need to stay in the home for 7 years.  Maybe I’m wrong and the market will keep shooting up.  Great – turn it into a rental if that happens.  Think conservatively at this point as the market direction for the next two years is murky at best.

Coming Loan Mods and Foreclosures

This is a re-print of a Monday Morning Coffee from 3 weeks ago.  Someone asked me to post it on the blog, so here it is.

I spent a lot of time going through data this week with the goal being to look at all types of mortgages that are currently out there and see what the delinquency rate is and when they are due for interest rate adjustments.  We know from historical data that the following has been true:

• Once a loan is 60 days late, there is a 98% chance that it will be liquidated through a foreclosure, short sale or a loan modification will take place.
• Over the past 2 years, it appears that for every 1 foreclosure or short sale there have been 3 loan modifications.
• Within one year, 58% of all loan modification are 90 days late and since the banks do not do 2 loan modifications on the same loan, at least 58% of the 75% delinquents that were modified the first time around will be liquidated within between 12 and 24 months of first going delinquent.
• Taking those together, once a loan is 60 days late, about 25% of the homes will be liquidated within a year (that’s the longest they are generally taking to process) and 44% (58% x 75%) will be liquidated in the second year.  (I could not find data on the second year after loan modification, most likely because there isn’t enough yet).
• This means that the effects of the mortgage defaults are felt over an extended period.
• These numbers will likely improve over the next couple of years as the Home Affordable modifications do more to reduce principle and payment that previous modifications.  However, there are many that don’t think it will make much difference.  The Home Affordable modifications allow for 5 years before the new loan adjusts towards market interest rates.

With the above track record, I was hoping to look at all loans that are out there and overlay loan types with when they are adjusting and the forecasted foreclosure/modification rates to get an idea how long until we work through the distressed inventory of homes (and who said I’m not a fun guy to hang out with on a Friday night.)

Unfortunately, I cannot get my hands on all the data.  Those who have it are not giving it up without a lot of dollars and frankly, I think we can get a rough idea with what I did find. 

What I found is available on the Federal Reserve Bank of New York’s Web site (if you want to get really depressed, they have a map showing every county in the country with mortgage, auto, credit and student loan delinquencies).  I was able to download the data for Sub-Prime and Alt-A loans as of June 30 of this year.

Quick note – Alt-A borrowers have better credit scores than Sub-Prime borrowers and typically longer time periods before adjustable loans re-set which is why you see lower delinquencies.  

So, the first wave of foreclosures that started last year was in the sub-prime market and the next (possibly this summer) is the Alt-A market.  But look at the number in bottom that is bolded – even after the loan mods and foreclosures of the past year 50% of the people in the country with sub-prime loans are delinquent!

I know this is getting long, but a couple more pieces of information on both types of loans, focusing on CA:

Sub-Prime:

• Of the 326,521 sub-prime loans in existence, about 208,000 are adjustable.
• 172,359 of those have already re-set (the introductory interest rate is over).
• There are only about 36,000 homes left to re-set.

Alt-A:

• Of the 613,650 Alt-A loans in existence, about 428,000 are adjustable.
• 181,898 of those have already re-set.
• There are 246,000 homes left to re-set (most of them more than 2 years out)
• Because of better credit scores, more Alt-A homeowners were offered negative ammortization loans which will be harder to modify because they have no equity.

At least in California there is likely to be more damage in the second wave as the Sub-prime loans that were modified the first time default again combined with a larger pool of Alt-A loans that are re-setting over the next 3 years.

However, I don’t think this means a 20% drop in market prices.  I think we are likely to see another drop during 2010 and an extended period of up and down (the Alt-A loans will re-set through the next 3-4 years and then we will have the Home Affordable loans re-setting starting in year 5 which should be a smaller number (if the market stabilizes) but will still be a negative influence). I think we are mostly through the painful devaluation phase and moving into what I can best call (someone else’s term) an extended “muddle through” period.

In summary as I have said before, we have oversold housing as an investment over the past 10 years and undersold it as “home”.  We don’t have a choice anymore but to look at our homes as places we raise our families and with the help of 30 year fixed mortgages, slowly pay off so that our true  “investments” don’t have to pay for our mortgage when we retire.

First Time Buyer's Tax Credit Extension – The Good and the Bad

Now that the tax credit has been extended and the details of the extension are out (I know, I should have posted this last week, but hey, I have to work too) I think there are a couple of things about the extension that are worth noting both for the short term and the long term.

In the short term, I think we will see an increase in activity in the $650k – $800k price range.  Prior to the extension, a couple became ineligible for the credit if their joint income was over $150k or if they had owned a home in the last two years.  The extension removes the limitation on not owning a home within the past 2 years, but more important (speaking in terms of the San Diego market where prices are higher than they are on a national level) is the increase in income levels.  Over the past six months, we have seen prices of homes (focusing on North County) that are under $600k increase about 4-5% while homes above that level have come down 2-3%.  I believe that this is a result of the tax credit and that the gains will now also be seen in homes from $600k to $800k.  This will help move some of that inventory over the first quarter and hopefully stabilize prices.

In the long term, I think that the program is similar to most of what the government is doing – pushing today’s problems into tomorrow.  NAR estimated that 40% of all home purchases have taken advantage of the tax credit.  That most likely means that people who are on the fence or who have to stretch to qualify, are doing what they can to buy now rather than wait a year.  The problem with that is that in a year we are expecting more foreclosures to hit the market as the Pay Option Arms (Pik-A-Payment Loans) reset in large numbers and we start to see the fallout of failed loan mods done over the last year.  So right as we are seeing an increase in inventory, we will have a shortage of buyers because a large number of them took advantage of the tax credit and purchased early.

So what?  Who cares if the price moves up now or later?  Well, I think it would be better for the market to have it be level to slightly down for two years and build a stable base rather than go up 5-6% to create a feeling that we are recovering only to have it fall back again a year later.  The first helps build stability (although not a happy stability) while the second shakes people’s confidence further.   It’s like the Cash for Clunkers program.  It produced great 2nd quarter numbers for the auto industry.  It was a short term fix that politicians could point to and say, “See, we know what to do.  Trust us to …”  Problem is, auto industry numbers going forward are going to be worse because the people who traded in their clunkers in the second quarter won’t be purchasing again.

So although the tax credit makes things look better and makes us feel better short term, it’s more like a drug fix than a solution.  There’s nothing in the bill that will help build a healthy economy and help with the housing recovery unless Congress continues to extend it indefinitely.

Monday Morning Coffee – Links to Foreclosure Data

Monday Morning Coffee – A Lot of Interesting Research

November 9, 2009

A busy weekend saw me asleep very early last night, but feeling a lot better and trying to catch up this morning.   I will try and be very quick because the work is piling up.  I have been working on a prospectus for a bulk foreclosure deal and while I can’t share the details, I can share a lot of the research and what I have found.   I will summarize the findings, but a couple of interesting articles to read if you are interested are: 

http://www.occ.gov/ftp/release/2009-118a.pdf

and 

http://matrix.millersamuel.com/wp-content/3q09/Amherst%20Mortgage%20Insight%2009232009.pdf

The main points of the first report are as of the end of Q2:

• 11.4% of all first mortgages covered are non-performing.
• Loans in foreclosure were 2.9% of all first mortgages, a 10.5% increase from the previous quarter.
• 3% of all Prime loans are 60 days or more delinquent – Prime loans are made to the most credit worthy borrowers.
• The Pay Option ARMs (also known as Pick-A-Payment loans) have a foreclosure rate of 10% plus a 60-day delinquency rate of 15.2%
• Driven by the Making Home Affordable program, homes that newly entered loan modification or payment plans totaled 439,574 for the quarter.  Up 74.8% from a year ago.

The report also called into question the viability of moan modifications noting that more than 56% of all loans modified in the second quarter of 2008 were back in default a year later.  Even more troublesome was that more than 1/4 of all loans modified in the first quarter of this year were back in default in the second quarter – owners never made another payment, they just re-started the foreclosure clock.  The report also noted that foreclosure completions are ramping up as the national, state and local moratoria have expired.

The second report looks at the the amount of inventory that is on the market and compares it to the amount that the banks are will have to put on in the near future.  This report, from Amherst Securities contends that once an owner is 60 days late on a payment, there is a 95.6% chance that the home will be taken back by the bank.  Using that number along with the number of homes that are 60 days late, they conclude that there is approximately 16 months of inventory that the banks will be putting on the market based only on homes that are delinquent today. 

The reports both also noted that another wave of loans is about to reset which will cause a similar number of defaults as we have seen already. 

After reading the articles, you might come to a different conclusion, but it looks to me like the data is pointing not necessarily to another large drop  in prices (although that could still happen), but definitely to a much longer time period for real estate to be depressed.    I will try find the numbers and put together a quick report for next week, but it seems to me that the following is likely to happen:

• We will be through the first wave of foreclosures about 3 – 3 1/2 years after the first loans reset.
• Then have to work through the defaults of all those loans that were modified which could extend the fallout from the re-sets to 5 years. 
• Add on top of that a second wave of resets that is supposed to hit next summer and assume that takes another 5 years to work through which extends things until 2015. 
• At the end of that period will be any fallout from the Making Home Affordable Program which is another type of loan modification program, but with loans that don’t reset for 5 years.  So, if people are not able to increase their incomes in 5 years to a point where they can make their payments when they adjust, we will start another wave just as the second wave ends. 
• Longest case scenario is we are still working through foreclosures from the Real Estate Bubble in 2019. 

Not that’s that that is the worst case.  I think we avoided the worst case.  By doing loan modifications now, the banks have lowered the amount of inventory on the market and created some stabilization that we would not have had if all the homes had hit the market at the same time, and although that extends the length of the recovery  I look at it as slowing the bleeding so we can figure out how to save the patient.  The overall effect is likely to be that the drop is less than it could have been, but depressed values will hang around for a lot longer than they would have.  On the bright side, that will give everyone a good opportunity to take advantage of the lower prices.

Speaking of taking advantage of good opportunities.  Take a look at the new short sale we have listed in 4S Ranch.

That’s it – time to get to work – Enjoy the Coffee!

Ghandi

Mahatma Gandhi went from city to city, village to village collecting funds for the Charkha Sangh. During one of his tours he addressed a meeting in Orissa. After his speech a poor old woman got up. She was bent with age, her hair was grey and her clothes were in tatters. The volunteers tried to stop her, but she fought her way to the place where Gandhiji was sitting. “I must see him,” she insisted and going up to Gandhiji touched his feet. Then from the folds of her sari she brought out a copper coin and placed it at his feet. Gandhiji picked up the copper coin and put it away carefully. The Charkha Sangh funds were under the charge of Jamnalal Bajaj. He asked Gandhiji for the coin but Gandhiji refused. “I keep cheques worth thousands of rupees for the Charkha Sangh,” Jamnalal Bajaj said laughingly “yet you won’t trust me with a copper coin.” “This copper coin is worth much more than those thousands,” Gandhiji said. “If a man has several lakhs and he gives away a thousand or two, it doesn’t mean much. But this coin was perhaps all that the poor woman possessed. She gave me all she had. That was very generous of her. What a great sacrifice she made. That is why I value this copper coin more than a crore of rupees.”

Have a great week!

Scott

A look at the Market – the Value of the tax credit.

I like to look at the 4S Ranch market every quarter or so (sometimes I cover it hear and sometimes just in Monday Morning Coffee).   I think that 4S is very representative of the San Diego County market as a whole and actually serves as a forecastor of the market.  The reasons are that 4S has homes that range from 1 bedroom condos that go for around $200k to 5,000 sf estate homes in the $1.5M range.  There are also an abundance of the Alt-A and Sub-prime loans that threaten to send a lot of homes into foreclosure.  Yet, it is a very successful master planned community near places of hi-tech employment with good freeway access and great schools.  So, while 4S has lead the drop in the market along with other areas of new construction (Eastlake, Downtown, San Elijo Hills, etc.), it is likely to rebound earlier than the others due to the factors listed above.  Also, since I live in 4S and sell a lot of homes here, if the data is questionable, I have a chance of figuring out why.   So, with that explanation, what does the market tell us?

First of all, for those of you who are familiar with the area, I am including all of 4S Ranch plus Bernardo Springs and  Bernardo Point as they were part of the 4S Master Plan and have housing very similar to 4S.  I am not including Santa Fe Valley’s three communities of Bel Etage, Salviatti nor Savannah as they are distinct and would warrant their own analysis.

One of the things I try to do is break the homes into categories so I can watch the change in each category over several quarters.  I think this is much more accurate than the standard “Median Price” as the median price changes as the average house gets larger or smaller.  The median house for the county might have been a 1900 sf home last year, but might be a 2100 sf home this year – the difference in the sizes of homes people are buying can affect the median price as much as the actual price per square foot, and it gives us an incomplete look at the market.  It tells us only if the average person is spending more or less, not if they are getting more or less for their money.  The main categories I look at in 4S are:  Attached condos, detached condos, and detached single family (fee simple ownership).  I further break these down in to square footage ranges (a 4,000 sf home is going to sell at a much lower price per square foot than a 2,000 sf home).  Over the years, I have picked one range out of each category that has consistently had the most sales and has also been the best indicator of how the overall market for that type of homes is doing.  The homes I focus on are:

Attached Condos – 1,351sf – 1,700sf
Detached Condos – 1,751sf – 2,000sf
Detached Single Family – 2,751 – 3,500sf

The Detached condos give the least realiable data as there are only about 500 units total, so a high or low sale can skew the numbers.  The others are fairly stable and easier to understand.

First, let’s look at price per square foot:

Historical 4S Ranch Market Prices

Ok, so right off the bat, let’s explain away the large jump in prices in Q1 of 2007 for the Attached homes.  Prior to this point, the only attached housing was in Sitella (Bernardo Springs).  When condos were first sold in 4S by the builders, they did not put them on the multiple listing service (mls).  As the market slowed, the builders put their inventory through the mls. These units used to sell for about 15-20% more than the Sitella (it has fallen to about 5-10% as the lower Mello-Roos in Sitella makes up for the 6 year difference in age).  That taken care of, the most interesting thing in this chart occurs in Q1 of this year.  This was an inflection point for both the Attached and Detached Condos as their prices hit bottom and turned back up.   On the other hand, the detached homes stayed about the same before drifting down again last quarter.

This is very easily explainable by the First Time Homebuyers Tax Credit.  The credit provides for up to $8k in tax relief for those who have not owned a home in 2 years.  It phases out with an income over $150k.  One-third of all homes being purchased are being bought by people taking advantage of the tax credit.  To qualify for one of the single family homes in the graph, your income would have to be close to the $150k that would nulify the advantages of the tax credit.

If my theory is valid, the difference between the 2% drop in the detached homes and the 2-4% rise in the condos is the effect of the tax credit (4-6%).

Other numbers in the data were not near as interesting.  Sales are up, but you knew that.  Days on market has pushed out a bit, but that is largely due to how the MLS is tracking short sales that are awaiting bank approval.  The percentage of listings sold (vs cancelled or expired) was also up slightly which I believe is the result of the banks getting better at approving short sales and getting them closed.

Why the Tax Credit will be Extended – It's about Health Care

Why the Tax Credit will be Extended

There is a lot of speculation in the market is to whether or not the $8,000 tax credit for first time home buyers will be extended or not.  I think this is a “no-brainer”.  It is going to be extended, and the reason is Healthcare.  Ok, I lost you there.  It’s really pretty simple – if politics can be simple.

• The Democrats are in power with a super majority.  The Republicans are reduced to the little brother who can only tell on an older sibling who beat them up while mom and dad were gone – the problem is, mom and dad think you deserved it so there really is nothing they can do.
• The Democrats have badly wanted to bring health care into the government fold since Bill & Hillary missed on it back in the old days.
• President Obama and Congress are starting to run into increasing opposition to the “public option” as people are raising a little noise against the policy.
• President Obama’s popularity has also started to erode a bit (this was pretty unavoidable consdering how pupular he started out).
• If the economy starts to stall again, the Democrats will start to be concerned about re-election and will not want to risk angering their constituents by radically altering the current exensive, yet mostly effective system.
• 1/3 of all home buyers are taking advantage of the tax credit.  It is not an exageration to say that the tax credit is driving the current recovery (where there is a recovery).  If the tax credit disappears, a lot of energy in the housing market goes with it.  With a lot of foreclosures being processed through the banks, taking away the largest buying incentive could leave a lot of neighborhoods with a lot of vacant homes – not a good sign for the economy.
• The tax credit is VERY expensive.  It is a large drain on revenues.  But, it is a drain that our kids kids will have to pay. Government’s are great at borrowing money that doesn’t have to be repaid until after a future election if it helps them survive the next election.
• So, by keeping the tax credit going, the Democrats have a better chance of keeping the economy going which is a translates into a better chance for the public option health care program.  And that means the tax credit will be extended.

Ok, the next question is why haven’t they extended it yet then.  The simple answer is that as soon as they do, it takes the urgency out of the current market.  So, expect it to be extended around the first of November.