Poway

Inside the Numbers

New Home Sales and Case-Shiller Numbers Easily Misunderstood

This week, two important real estate numbers were reported that had a positive spin put on them that wasn’t really warranted.

First, New Home Sales were announced for the Month of June by the Census Bureau. Last month, the May number was reported at 300,000 homes (on an annualized basis) and the forecast was for the sales rate to be at 310,000 homes (annualized) in June, providing an average for the two months of a 305,000 sales rate. The June number surprised to the high side, coming in at 330,000 which helped spark the market on Monday. The problem? The May number was revised downward to 267,000 to provide an average for the two months of 298,000 homes, LOWER than the forecast. I don’t know why the initial forecast was off by 11% for May. It could be that since new home sales are calculated when the contract is signed and not when the sale closes, many of the sales cancelled. If that’s the case, I would think that the Census Bureau would have allowed for that. It’s a pretty big mistake, and hopefully we don’t see it again next month. I like the fact that the government was able to put a positive spin on a negative number, but surprised that the press didn’t question it at all.

The second number was the Case-Shiller Home Prices Index that was released on Wednesday. The 10 city composite was up 5.4% and the 20 city composite was up 4.6% compared to a year ago. Case-Shiller is a great index and tool for tracking the real estate market and I know a lot of large banks and investors rely on it because it actually looks at sales of the same home over different periods rather than a median which changes as the size and type of home change. This makes it a very reliable number. The weakness is that it is not able to track recent trends. The reason is that it is a 3 month moving average with a 2 month lag. In other words, the numbers that were reported up on July 27th were the months of March, April and May – the end of the tax credit when people were paying more than homes were worth to capture the tax credit. We won’t see the result of the end of the tax credit until the July, August, and September numbers come out in late November.

So, while I welcome the good press for the real estate market, tread carefully; there was more to the story.

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.

Does the Healthcare Push Mean A Market Drop?

Ok, I usually don’t prescribe to conspiracy theories, but…

Back in August, I said I thought the tax credit for first time home buyers and the Fed’s purchase of Mortgage Backed Securities would be extended becuase without them, the economy might slump which would end the chance for Congress and the President to enact healthcare (with a down economy, the people are more likely to resist a reach by the federal government for more control and power). Like clockwork, both were extended to the end of March (April for the tax credit).

Why is this important now? Well, here we are in late March and the President is putting up a huge fight for healthcare ahead of the Spring Recess. Why now? With such a controversial bill that is unpopular in most polls, don’t you think he would want to send the Congress home to stump for it so they can come back with popular support and vote? What could go wrong between now and April 12th that would make the bill less appealing and harder to pass? The only thing I can think of is that the President and Congress believe that when the stimulous ends (especially the Real Estate portion of it), that the economy could start to slide again.

Note that I am not saying healthcare will cause the economy to slow down. I am guessing that healthcare is being pushed NOW because they now the economy is about to slow down and they want to push their pet project before sentiment against it and them turns more negative.

I know. Sounds thin. If it weren’t the fact that Congress is full of politicians, I would dismiss it completely.

Monday Morning Coffee – Conflicting Messages on the Recovery

Monday Morning Coffee

Does the Statistical Recovery Have Legs?

Good Morning!

I hope you had a nice weekend. It was nice to see San Diego weather make a return appearance on Sunday – hope it stays around for awhile. We had a slow weekend, I worked a half day Saturday and Sunday but got to spend some good time with Zach in the mornings and Cori in the evening (fired up the Jacuzzi for the first time in several months on Saturday).

We are still staying busy as we listed two homes last week (details below) and put one buyer into escrow. Countywide, inventory stayed fairly steady last week.

I saw an interesting article (Thoughts from the Frontline by John Mauldin) addressing the economy. It talked about the conflicting signals we are seeing in the economy:

On the positive side:

Corporations are more productive and have more cash on hand than anytime in the last 50 years.
The amount of corporate debt is falling, meaning companies are getting stronger financially.
Capital spending jumped last quarter – a good sign for employment because once you by the capital equipment, you have to hire someone to run it.
We are close to the point where we will stop losing jobs and start adding them (if trends continue)

On the negative side:

More than 5 million homeowners are behind on mortgages.
30% of manufacturing capacity is idle (meaning companies don’t have to buy a lot of new equipment (which creates jobs in making the new equipment), but can just absorb the idle capacity).
19 million homes 15% of the total, are vacant.
1 in 6 Americans is underemployed or unemployed.
Average American worker has lost $100k in wealth over the last 2 years.
Transfer payments (read welfare and unemployment) from the US Government make up 18% of personal income!

Stop and read that last one again. 1 of every 5 dollars that an American puts into his account is coming from the rest of the taxpayers through the government as unemployment or welfare. Ouch.

The point of the article was that some of the signals are pointing to a recover and the Fed may be watchful for inflation, but that there are a lot of indicators (mainly employment the level of federal subsidies) that indicate the economy is still very fragile. It did not draw any conclusions or make any predictions, but did note that this seems to be a very “statistical recover” and not really a recovery that is helping the people – therefore when the stimulus ends, so could the recovery. It will be interesting to see – but I am tired of interesting, let’s just turn this thing around already.

As I mentioned above, we did take two listings last week. Prep and photos are this week and next, but if anyone is interested, here are the details:

Tierrasanta – 3 beds, 2.5 baths about 1500 sf with open space behind. This one will go out at about $450k.

4S Ranch – 3 beds, 2.5 baths about 2344 sf on a corner lot. This will be about $600k.

If you are interested, let me know and I will try and get you in during the photos.

Well, the kitchen faucet just broke, so time to wrap it up and head to Home Depot. Enjoy the Coffee!

Crabby Old Man

When an old man died in the geriatric ward of a nursing home in North Platte , Nebraska , it was believed that he had nothing left of any value. Later, when the nurses were going through his meager possessions, they found this poem. Its quality and content so impressed the staff that copies were made and distributed to every nurse in the hospital. One nurse took her copy to Missouri.

The old man’s sole bequest to posterity has since appeared in the Christmas edition of the News Magazine of the St. Louis Association for Mental Health. A slide presentation has also been made based on his simple, but eloquent, poem. And this little old man, with nothing left to give to the world, is now the author of this ‘anonymous’ poem winging across the Internet.

Crabby Old Man

What do you see nurses? . . . .. . What do you see?
What are you thinking . . . . . When you’re looking at me?
A crabby old man . . . . . Not very wise,
Uncertain of habit . . . . . With faraway eyes?

Who dribbles his food . . . . . And makes no reply.
When you say in a loud voice . . . . . ‘I do wish you’d try!’
Who seems not to notice . . . . . The things that you do.
And forever is losing . . . . . A sock or shoe?

Who, resisting or not . . . . . Lets you do as you will,
With bathing and feeding . . . . . The long day to fill?
Is that what you’re thinking? . . . . . Is that what you see?
Then open your eyes, nurse . . . . . You’re not looking at me.

I’ll tell you who I am. . . . . . As I sit here so still,
As I do at your bidding, . . . . . As I eat at your will.
I’m a small child of Ten . . . . . With a father and mother,
Brothers and sisters . . . . . Who love one another.

A young boy of Sixteen . . . . With wings on his feet.
Dreaming that soon now . . . . . A lover he’ll meet.
A groom soon at Twenty . . . . . My heart gives a leap.
Remembering, the vows . . . . . That I promised to keep.

At Twenty-Five, now . . . . . I have young of my own.
Who need me to guide . . . . . And a secure happy home.
A man of Thirty . . . . . My young now grown fast,
Bound to each other . . . . . With ties that should last.

At Forty, my young sons . . . . . Have grown and are gone,
But my woman’s beside me . . . . . To see I don’t mourn.
At Fifty, once more, babies play ’round my knee,
Again, we know children . . . . . My loved one and me.

Dark days are upon me . . . . . My wife is now dead.
I look at the future . . . . . Shudder with dread.
For my young are all rearing . . . . . Young of their own.
And I think of the years . . . . . And the love that I’ve known.

I’m now an old man . . . . . And nature is cruel.
Tis jest to make old age . . . .. . Look like a fool.
The body, it crumbles . . . . . Grace and vigor, depart.
There is now a stone . .. . . Where I once had a heart.

But inside this old carcass . . . . . A young guy still dwells,
And now and again . . . . . My battered heart swells.
I remember the joys . . . . . I remember the pain.
And I’m loving and living . . . . . Life over again.

I think of the years, all too few . . . . . Gone too fast.
And accept the stark fact . . . . That nothing can last.
So open your eyes, people . . . . . Open and see.
Not a crabby old man . . . Look closer . . . See ME!!

Remember this poem when you next meet an older person who you might brush aside without looking at the young soul within.

We will all, one day, be there, too!