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Distressed Housing

Bloomberg View Column: Hedge-Fund Guys Have Foreclosure Fatigue

November 7, 2014 | 4:28 pm | BloombergViewlogoGray | Charts |

BVlogo

Read my latest Bloomberg View column Hedge-Fund Guys Have Foreclosure Fatigue. Please join the conversation over at Bloomberg View. Here’s an excerpt…

One of the most important ways to strengthen the U.S. housing recovery is to get distressed properties into financially stronger hands. Shortly after the financial crisis began, institutional investors started snapping up foreclosed homes. These buyers, according to RealtyTrac, are entities that buy more than 10 properties in a calendar year. Blackstone Group has been among the most active, acquiring more than $20 billion of foreclosed properties, then making necessary repairs and renting them out…

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Trends in Home Size and Home Ownership React to Economic Conditions, Not Taste

June 9, 2014 | 11:42 am | Charts |

With big swings in housing related trends over the past decade, long term patterns are called into question. When a long term trend seemingly changes direction, it is reasonable to point it out. As I opined previously, the housing industry often defaults to linear thinking. It’s not enough to point out a trend, it is better to proclaim that the trend will run indefinitely because consumer tastes have changed.

Here are a few examples of trends in the US housing market that are not trends:

Average New Home Sale Size

matrixSQFT-6-9-14

[click to expand]

When the housing bubble popped in 2006, shortly after it was pronounced that the multi-decades long trend would reverse it self. Yet the change was a purely short term economic shift as the entry level surged with the sharp decline in mortgage rates. After a few years, the trend of expanding sizes resumed. I’m not saying that the trend will run indefinitely larger, but it is important to look at why the average square foot began to fall in the first place. A harsh economic condition with a rapid rise in affordability prompted in a shift in the mix. And remember, this highly referenced metric reflects new homes which is only about 15% of normalized housing sales.

Here is the housing conversation on home sizes from 2007-2011.

Home Ownership matrixHO-6-9-14

[click to expand]

Perhaps one of the largest misinterpretations of consumer trends has been on the subject of homeownership. As is evident in the chart, the heavily documented push to higher homeownership played was a sudden burst rather than a long term gradual change. The surge in the trend was artificial, based on fraud and unsustainably loose credit conditions that where based on NOTHING. With the multiyear decline, we are beating ourselves up over the decline in the homeownership rate yet we are reverting to the mean since credit is unusually tight. In fact the median homeownership rate of 64.8 over the past 49 years is exactly where we are right now in 1Q14. Will the market overcorrect towards rental? Yes I believe it will until tight credit conditions resume to more historic norms.

Here’s terrific takedown of the homeownership metric by Jed Kolko, Chief Economist at Trulia.

Will the US become a nation of renters and micro-houses? If one makes those arguments out over the long term, I don’t know what compelling information those trends would be based on.

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[Vox Video] Housing Crash Fix Explained From Geithner’s Perspective

May 13, 2014 | 11:03 am | fedny |

Former US Treasury Secretary Timothy Geithner is promoting his book chronicling the financial crisis Stress Test: Reflections on Financial Crises. Great book name, btw.

He sits down with Vox Media’s Ezra Klein to talk about what happened. I highly recommend watching this entire interview. Once you get past Ezra Klein’s sock selection, he touches on all the key points that would help us better understand what went wrong. It reconfirms why I enjoy reading anything Ezra writes.

I also have to say that Geithner has a great engaging conversational style that I enjoyed and helped me gain additional insights. However the problem with the Geithner’s responses – that I can’t seem to get past – is that Geithner was head of the New York Fed, surrounded by Wall Street, during the housing bubble run up. You walk away from this conversation feeling like his actions were the only appropriate responses to the crisis – ie focus only on the banks (and grow moral hazard significantly). Of course it has to be a nightmare to get anything done in Washington. However, I also got that same feeling when I read Andrew Ross Sorkin’s well written “access journalism” book, “Too Big To Fail” – that saving the banks was all that mattered to him.

It doesn’t help that I read previously Neil Barofsky’s terrific book “Bailout” which provides a lot of insights into how the sausage was made – identifying the US Treasury’s exclusive focus on the banking system when there were opportunities to help main street at the same time. Apparently Geithner takes Barofsky to task in the book, probably because Barofsky did the same.

I’m not sure if I’m going to pick up a copy.

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Miami Hype Machine: “Sales Pace Slows Dramatically”

January 27, 2013 | 2:47 pm |

Since housing bust began, Condo Vultures has led the way with distressed new development information on Miami, a housing market that became branded for foreclosures and stalled new development activity after the mid-decade crash. Their name suggests someone who is picking over the dead carcasses of stalled condos built during the boom and no one has marketed themselves more thoroughly in this segment.

They seem to perform a lot of analysis through public record and have the inside track on data from developers not in public record. Good for them. It’s a niche they own. But with that dominance comes responsibility.

Their regular email press releases are chocked full of information hyperbole (as most newsletters are) but there is often a disconnect between the headline and the content (just like we see with the monthly NAR releases). Recently I observed that they stopped the dated approach of marketing properties as a percentage discount from original pricing. I do find the releases interesting to read but I worry about the accuracy of the messaging for the uninitiated. I found the latest one grating so I thought I’d break it down because it symbolizes the challenges and responsibilities of analyzing a market segment with limited transparency.

Here’s the headline:

600 New South Beach Condos Unsold As Sales Slow Dramatically In Q4 2012

That’s sounds quite dire, right?

Not really. In a pool of 600 units, 10 sold in 4Q12, down from 20 sales in 4Q11. Let’s delve into the rules of market trends:

Misuse of percentages – The results suggest a 50% drop in sales. And to use my favorite example of this technique, a market whose sales rise from 1 to 2 experienced a 100% increase in sales. Better to say 10 fewer sales or 1 more sale than last year when the numbers are so small.

Number generalization – There are no precise numbers being provided anywhere in this release yet the results are numbers-based …less than 10 sold in 4Q12 and more than 20 sales sold in 4Q11. If you are burning calories on providing approximate metrics worthy of a screaming headline, why not provide the actual numbers? If it was 9 and 21 or 1 and 29, the same logic would apply so why omit it?

Data set size – Based on the release, there were “about 600″ unsold from boom, new development condo listings in 4Q12, the same size as the prior quarter. However the release doesn’t provide the year ago quarter total. What if it was 1,200?…then the drop was proportional. Why not be transparent and just provide the actual numbers – they must have them to provide such “precise estimating.” The 10 sales or less total represents 1.7% of the inventory or even less depending on how many sales there actually were.

When I first read through this release I did some quick math – I took the 10 sales (or less) which represented 1.7% of the 600 unit market and wild guessed, based on general market activity, that this shadow inventory was at least 700 last year. So at this level, the 20 sales (or more) in 4Q11 would indicate a 2.9% share. With this logic, the sales market share of the shadow inventory fell from 2.9% to 1.7% over the year, a 1.2% drop in market share.

Should a 1.2% decline be described as a dramatic slow down? No, based on the info presented, the decline was more like a rounding error.

C’mon.

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Bank Forgives $1M+ on Short Sale But Lawn Looks Good

December 14, 2012 | 7:00 am |


[click to read article]

This 16-room house on the far western edge of Naperville sold in November for $1.05 million. That’s 38 percent of what it cost to build. In approving the short sale—where a property is sold for less than the outstanding mortgage amount—the lender, IndyMac, accepted a loss of over $1 million.

Here’s some local feedback from someone I know in the area – remember this is an 11,000 square foot house built in a neighborhood with homes no larger than 5,000 square feet.

I’m paraphrasing here:

This area was the last big subdivision left in land-locked Naperville which has 140,000+ people. It started in 2005, and the real estate recession hit hard in 2006 and there was a high school boundary change that put this neighborhood out of the favorable high school.

In the listing “Peterson Elementary’ is a short walking distance to this home. That school was built mid-decade and the school district never opened it because the subdivision stalled. It still sits empty 6 or so years later.

When I graduated from college my first job was very close to Naperville and in fact my boss lived there. It was called the fastest growing town in America. My boss used to tell me how she would run her lawn sprinklers at night because there were watering restrictions because of the rapid growth. It was still risky because they had full time patrols looking out for illegal lawn waterers.

Those were the days.

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Ignore The False Positives, Foreclosure Sales Are Rising Again Now

December 6, 2012 | 12:16 pm | nytlogo |

,br> [click to open RealtyTrac Report]

RealtyTrac released their Q3 2012 U.S. Foreclosure & Short Sales Report which shows a pretty clear recent trend:

A timeline that counters the national “recovery” discussion over the past year. Record low mortgage rates and held back distressed activity goosed housing sales and price up using year over year comparisons.

I feel like I have to qualify myself as NOT being a housing bear (a distressed housing apologist) but I still can’t figure out the math: flat to falling incomes, high unemployment, rising taxes and tight credit = housing recovery? What’s missing? (memories of my contrarian sentiment feels the same as 2006, just not nearly so dire).

Distressed sales have been held out of the mix as RealtyTrac’s report shows in my distressed housing timeline:

  • 2008-2010 – Heavy foreclosure volume as a result of the fallout from the tanking economy and housing market
  • 2010 (fall) – Robo-signing scandal combined with huge backlogs in judicial states causes a sharp decline in distressed sales entering the market in 2011.
  • 2012 (1Q) Major servicer agreement with state attorneys general as distressed volume drops to its lowest crisis level.
  • 2012 Calculated Risk and other respected sources call the bottom (and they may be right) but doesn’t factor in the distressed sale phenomenon. “Bottom” does not equal “recovery” but rather it’s a step on the way to recovery.
  • 2012 (2Q) Distressed sales begin to rise again. By adding lower priced distressed sales in the mix, housing prices stabilize or slip next year nationally (I see Manhattan rising with low distressed exposure and limited inventory).

Foreclosure levels need to resume their elevated levels or we simply don’t create a real, sustainable housing market recovery. We won’t see a tsunami like 2010 as short sales continue at their high levels and the courts are still backlogged, but I believe we will see a more distressed activity in the next few years than we did during the 2012 lull and that will offset rising prices .

Call me crazy.



Q3 2012 U.S. Foreclosure & Short Sales Report [RealtyTrac]

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[In The Media] BeastTV – The Number with Dan Gross 10-4-12

October 4, 2012 | 3:45 pm | delogo | Public |

Starting to be a regular (monthly) guest with Dan for a quick segment on “The Number”.

Today we talked about: Presidential Debates, pro cyclical, Manhattan housing, “sticky on the downside” “being a real estate pornographer”, “housing is back, baby”, single family foreclosure investors and a lot of words like: “kind of”, sort of”, “almost.”




“The Number” with Dan Gross [BeastTV]
The Elliman Report: 3Q 2012 Manhattan Sales [Miller Samuel]
The Elliman Report: 3Q 2012 Manhattan Sales [Prudential Douglas Elliman]

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Low Housing Inventory Is NOT A Sign of Housing Recovery

July 9, 2012 | 10:49 am | wsjlogo |

I wrote “The Decline In Inventory Right Now is NOT a Good Sign” back in February, but there has been a more refined discussion about low inventory recently. Back then my orientation was more about the “robo-signing” scandal causing a drop in distressed listings as servicers held back supply – as well as the lack of confidence by sellers over whether they can achieve their price.

Stan Humphries, chief economist of Zillow has been a guest on my podcast and penned a great piece about it a few weeks ago called “The Connection Between Negative Equity, Inventory Shortage and Increasing Home Values: Why the Bottom Won’t Be as Boring as We Expected” tackling the impact of negative equity on inventory.

CoreLogic reported (via Nick Timiraos/WSJ) that the supply of homes for sale declines as negative equity increases.

David Rosenberg, chief economist as Gluskin-Sheff, and whom I had the pleasure of meeting with for dinner a few months ago, presented a great series of charts in his newsletter (via ZeroHedge).

It basically presents the idea that “upside-downers” ie those with negative equity, can’t list their homes for sale because they don’t have equity (or enough equity) for the next one.

Here’s the most compelling excerpt:

According to data cited by the USA Today, the supply backlog where over half of homeowners are “upside down” on their mortgage is at 4.7 months’; in areas where “upside down” borrowers make up less than 10% of the market, the listed inventory is closer to 8.3 months’ supply.

In other words, in markets with unusually tight inventory, prices are being “goosed” higher, not because the housing market is improving, but because there are fewer houses in the game. Low mortgage rates are artificially creating excess demand, with those buyers fighting over the slim pickings of sellers who can actually sell.

That, my friends, is NOT a housing recovery.

More visuals:



The Decline In Inventory Right Now is NOT a Good Sign [Matrix]
David Rosenberg Explains The Housing “Recovery” [Zero Hedge]
The Connection Between Negative Equity, Inventory Shortage and Increasing Home Values: Why the Bottom Won’t Be as Boring as We Expected [Zillow Real Estate Research]
Why Aren’t There More Homes for Sale? [WSJ Developments Blog/Nick Timiraos]

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Visualizing US Distressed Sales – Katrina Edition

June 7, 2012 | 2:28 pm | wsjlogo |

The WSJ presented a series of charts on US distressed properties based on information from the St. Louis Fed (most proficient data generators of all Fed banks) and LPS.

Here are the first and last maps of the series. To see all of them, go to the post over at Real Time Economics Blog at WSJ.

A few thoughts:

  • The distress radiates out from New Orleans 7 months after Hurricane Katrina hit. There was relatively tame distressed sales activity in the US in 2006, the peak of the US housing boom.
  • The article makes the observation that distressed activity is seeing some improvement in 2010. However the “robo-signing” scandal hit (late summer 2010) and distressed activity entering the market fell for the next 18 months as servicers restrained foreclosure activity until the servicer settlement agreement was reached in early 2012. This is likely why the distressed heat maps show some improvement.
  • The music stopped when people couldn’t make their payments en mass circa 2006, the US national housing market peak. It’s quite astounding how quickly credit-fueled conditions collapsed across the US.

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[The BBQ Interview] Rick Sharga of Carrington Mortgage Holdings – “Why is REO Volume Down?”

May 30, 2012 | 3:24 pm | nytlogo |

I was looking for guidance/insight on the issue of future REO volume because I had anticipated a faster pickup in REO volume once the state AG agreement was signed with the major servicers (ie being held back after robo signing scandal) but that is yet the case.

One of the most knowledgeable people in the business and a good friend (as well as an expert in the field of the BBQ) is Rick Sharga, Executive Vice President of Carrington Mortgage Holdings so I traded emails with him, compiled it and received a great overview of the topic:


Miller: Most pundits are looking at all the price metrics saying things are improving and inventory is low. To me it feels like there is an essential component not being factored in and that is foreclosure shadow. Am I overly concerned about it? I thought we were looking at several years of heavy volume. In fact S&P says 48 months of heavy REO volume.

Sharga: I break REO into two distinct phases: activity and inventory. Both have been falling. Inventory levels have been falling largely because of an unexpected drop-off in activity levels. That drop-off has slowed down the pipeline of new REO inventory, and the market has gradually been whittling away at the existing inventory. We seem to have reached a plateau of about 500,000 REO sales a year, and the question of how long it will take to clear the market is a good one. I don’t think we’ve peaked yet in terms of inventory (LPS believes that REO inventory levels will peak in 2015, and they may be right, based on how many seriously delinquent loans there are, and how long it takes to execute a foreclosure).


Miller: But why is volume down?

Sharga: The activity levels being down is a bit of a surprise, but in hindsight probably shouldn’t be. There are several factors at play here. First, from a positive perspective, we’re seeing dramatic increases in short sales. That’s a good trend for everybody – lenders lose less, buyers get a good deal, borrowers take less of a credit hit, properties don’t deteriorate as much and prices don’t drop as far. Every short sale essentially means one less REO, so they’re definitely a factor to consider.

Second, we’re (finally) starting to see some sales of non-performing loans (NPLs) by the major lenders; we’ve purchased two portfolios worth between $150-250 million in the last few months. Those sales at the very least delay REO actions while the notes are being transferred. Then, in cases such as ours where our mortgage servicing unit starts contacting the delinquent borrowers, a lot of loans are modified and taken out of foreclosure. Those that can’t be modified are typically offered the option of a short sale. So foreclosure actions actually are reduced by NPL sales.

Third, the long-awaited AG settlement has had a bit of an unintended consequence in this area. While we anticipated – and have seen – the return of foreclosure processing in some of the judicial states where the engines had seized up during the AG negotiations, we’ve also seen an unexpected drop in activity in the non-judicial states. Part of this is due to the terms of the settlement. The five largest servicers have agreed to write off about $20 billion in principal balance on their delinquent loans. A high percentage of these loans are in the Southwest, in non-judicial states like CA and NV. These states also had some of the largest price declines from peak to trough. The servicers have financial incentives to meet their $20 billion amount as quickly as possible (one servicer, for example, is believed to have a “dollar for dollar” incentive on anything it writes down this year). So, the quickest way to meet the write down requirement is to target delinquent loans in the Western non-judicial states. “Dual tracking” is now illegal. Therefore, it makes sense for the servicers to halt foreclosure actions on these properties and see if the borrowers qualify for the write downs. How big is this? BofA announced that it had already made offers to 200,000 borrowers. The huge drop off in REO activity in these states won’t be offset by increases in the judicial states; even though they’re starting to execute foreclosures again, it will take time to unclog the system in those states and get through the processes.

Finally, some of this is localized (Nevada has some new laws that make it difficult to execute a foreclosure without the original mortgage note); and some of it is due to pending Federal programs (HAMP Tier 2 is scheduled to launch next month, which will require servicers to see which of their previously un-modified loans will qualify for the latest government program).


Miller: What about that shadow inventory we’ve all been hearing about, and the several million seriously delinquent loans not yet in foreclosure?

Sharga: It probably means that fewer of them will make it through to REO status, and that the ones that do will get there in a very measured, controlled manner. This makes the LPS scenario believable: all those delinquent loans gradually working their way through the foreclosure process over the next 2-3 years but not creating a flood of REO inventory; peaking sometime in 2015, and falling pretty dramatically after that.


Miller: This is very helpful, thanks. Another important topic of the day is BBQing. Any sage advice for a novice?

Sharga: Always remember my “never fails,” three step grilling mantra:
1. Buy the best food you can find
2. Use 100% hardwood chunk coal
3. Stay out of the way and try your best not to screw anything up

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