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Distressed Housing

[Pending Home Sales] Tax Credit Wild Card? M-O-M Down 16%, Y-O-Y Up 15.5%

January 6, 2010 | 12:43 am | |

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NAR released their November 2009 Pending Home Sales Index which ended a 9 month string of increases.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 16.0 percent to 96.0 from an upwardly revised 114.3 in October, but is 15.5 percent higher than November 2008 when it was 83.1.

NAR attributes the drop as a pullback during November related to the uncertainty surrounding the extension of the first time home buyers tax credit which expired November 30th. However it was subsequently extended and expanded to include existing home buyers who have until the end of this April to sign a bonafide contract. We may trivialize the tax credit’s success in the NYC metro area because of the higher housing costs relative to $8,000 and $6,500 tax credits respectively but from my discussions with real estate agents around the country, it did appear to trigger a large portion of home sales in 2009.

What does the 16% drop suggest? More weakness to come?

Yes, but not in the coming months (remember this is a seasonally adjusted stat).

It signifies that the US Housing market doesn’t yet have its own set of legs. No credit = drop in sales.

The credit extension ends in April, the Fed begins their pullout from the purchasing of Fannie Mae mortgage paper, perhaps influencing mortgage rates higher.

The combination of high unemployment, rising mortgage rates and the expiring tax credit in the spring, combined with the elixir of rising foreclosures causes by sustained unemployment at high levels suggests housing sales will fall in second half 2009.

Housing in 2010: Stability in the first half, with more concern for the second half.

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[Housing Bubble Golden Rule -> 3 R’s] Regulating, Rates and Recession

January 6, 2010 | 12:24 am | |

In Bernanke’s speech to the American Economic Association on Sunday he suggested that it was regulatory failure, not keeping rates too low for too long, which caused the housing bubble.

Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.

This seems to be splitting hairs, doesn’t it?

Low rates triggered the housing bubble as money became cheap and easy to get. If the Fed hadn’t kept rates too low for too long, the bubble would not have happened. The regulatory system was ill prepared for the insanity that followed. House prices rose so fast that underwriting had to evaporate to keep the mortgage pipeline full. Regulators hadn’t seen this before and with the removal of Glass-Steagal and Laissez-Faire mindset, everyone in DC, including Congress and regulators, drank the Kool-aid.

Actions Taken Too late

Mr. Bernanke has pointed to the Fed’s extraordinary efforts to stem the crisis, including the creation of new lending vehicles to banks and a reduction of bank-to-bank interest rates to virtually zero, as evidence that the Fed has a firm grasp of what the economy needs. The Fed’s handling of the crisis has been widely praised by economists.

The Treasury and other government agencies already have supervisory power over parts of the financial system, but so, too, does the Federal Reserve.

In his talk on Sunday, Mr. Bernanke acknowledged as much, rattling off a list of regulatory efforts the bank made to address nontraditional mortgages and poor underwriting practices.

But, he said, “these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

All regulators are human and subject to mob mentality just like politicians and consumers were. Everyone is awake now. That’s why I think a “bubble czar” type position is silly. I’m not blaming the Fed or Bernanke. Now about Greenspan….

In fact I think the Fed has done an excellent job keeping our financial system from the brink. Lets recognize Bernanke’s comments for what they are – dodging the minefield of Congressional approval. God help us if Congress is able to audit the Fed. Its not the audit I object to – its the politicalization of it. We need to keep the Fed neutral (in theory).

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[Not Really Counted] 1.7M Units In Shadow Housing Inventory

December 22, 2009 | 1:04 am | |

[click to open full report]

One of the by-products of the credit crunch has been the rise in shadow inventory. Within my own market stats, I consider shadow inventory all units that are complete or under construction but not yet offered for sale as condos (sometimes as cond-ops or co-ops). In many cases the developer was unable to sell the initial block of units offered and is therefore unable to release the units behind them.

The development stalls because the lender behind the developer usually prevents the units to be converted to rentals because the value of the project would fall considerably as a rental on their balance sheet, causing stress to their capitalization ratio.

The lender’s reluctance to make such a decision is referred to as:

  • pretend and extend
  • pray and delay
  • kick the can down the road
  • a rolling loan gathers no loss

First American CoreLogic tracks shadow inventory. They define shadow inventory as real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. They put the amount of shadow inventory at $1.7M in 3Q 09, up 54.5% from $1.1M a year ago.

Visible inventory, like the amount estimated NAR and Census every month, is estimated at $3.8M, down 19.1% from $4.7M last year.

The total unsold inventory (which combines the visible and pending supply) was 5.5 million units in September 2009, down from 5.7 million a year ago. The total months’ supply was 11.1 months, down from 12.7 a year earlier. This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit.

In other words, even with the surge in activity over the past several months, total inventory hasn’t changed all that much (I agree with Bob).

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[RealtyTrac] Pushing 4M in 2009, November Foreclosure Filings Remain High, Pace Eases

December 10, 2009 | 2:45 pm | |

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RealtyTrac has released their monthly US Foreclosure Market Report today and its a mixed bag of results. In other words, its like unemployment. Its at a high level but the pace of increase seems to be abating. In other words, with 3.9 million notices sent to homeowners in default, it is going to take a while for this inventory to clear out.

Here are the foreclosure metrics by state.

And a news recap:

foreclosure filings — default notices, scheduled foreclosure auctions and bank repossessions — were reported on 306,627 U.S. properties during the month, a decrease of nearly 8 percent from the previous month but still up 18 percent from November 2008. The report also shows one in every 417 U.S. housing units received a foreclosure filing in November.

Phyllis Furman over at The Daily News does a nice NYC-centric analysis of the results.

While foreclosure activity is rising, the percentage of homes at risk here – one in every 1,706 – is small relative to the rest of the country. In November, 306,627 U.S. homes – one in every 417 – received a foreclosure filing. That was up 18.4% from last year, but down 7.7% from October.

And Dan Levy at Bloomberg does a nice US foreclosure recap

Dec. 10 (Bloomberg) — Foreclosure filings in the U.S. will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc. said.

This year’s filings will surpass 2008’s total of 3.2 million as record unemployment and price erosion batter the housing market, the Irvine, California-based company said.

“We are a long way from a recovery,” John Quigley, economics professor at the University of California, Berkeley, said in an interview. “You can’t start to see improvement in the housing market until after unemployment peaks.”:

Statistical nirvana by default (sorry for the pun)

  • One in every 417 U.S. housing units received a foreclosure filing in November
  • Default notices nationwide were down 8 percent from the previous month but still up 22 percent from November 2008
  • Nevada, Florida, California post top state foreclosure rates
  • Nevada foreclosure activity – one in every 119 housing units receiving a foreclosure filing in November — 3.5 times the national average.
  • Four states account for more than 50 percent of national total: For the second month in a row, the same four states accounted for 52 percent of the nation’s total foreclosure activity: California, Florida, Illinois and Michigan
  • Las Vegas drops out of top spot among 10 highest metro foreclosure rates. After four straight months with the nation’s top foreclosure rate among metropolitan areas with a population of at least 200,000, Las Vegas dropped to No. 5 thanks to a 33 percent decrease in foreclosure activity from the previous month. One in every 102 Las Vegas housing units received a foreclosure filing in November — still more than four times the national average.

Did US Bankruptcy Law Changes Make The Housing Crisis Worse?

December 1, 2009 | 1:35 am |

Source: VOX

There is a fascinating article by economists Wenli Li and Michelle J. White called Bankruptcy, mortgage default, and foreclosure which discusses how the change in US bankruptcy law (which occurred right in the middle of the period where banks were lowering their lending standards) caused more problems related to housing mortgage defaults.

In 2005, major reform of US bankruptcy law sharply increased debtors’ cost of filing for bankruptcy. This caused a sharp reduction in the number of filings. Because credit card debts and other types of unsecured debt are discharged in bankruptcy, filing for bankruptcy loosens homeowners’ budget constraints and makes paying the mortgage easier. Thus the 2005 reform set the stage for an increase in mortgage defaults by making bankruptcy less readily available.

In other words, reducing the ability to file for bankruptcy increases the probability of mortgage default and as a result:

We estimate that the reform caused about 800,000 additional mortgage defaults and 250,000 additional foreclosures to occur in each of the past several years – thus contributing to the severity of the financial crisis.


This makes the effort to create fair loan modification programs and prod lenders to work with borrowers that much more important.

[Over Coffee] Quote: inequitable, unconscionable, vexatious and opprobrious and harsh, repugnant, shocking and repulsive

December 1, 2009 | 12:27 am |

There has been a widely followed case reported last week where a Suffolk County Judge, Jeffrey Spinner, erased a $525,000 mortgage by the same California bank that bought IndyMac from FDIC after it went under.

Its also about pushing literacy to the limit so I’ll provide the definitions of two of the words in the headline I had never heard of before and had no idea what they meant:


Apparently the judge grew tired of the bank’s tactics and wiped out the mortgage – the bank is

involved in a similar case in California, where it’s trying to foreclose on an 89-year-old woman, despite two court orders telling it to stop.

I think its a bit early to get overly excited for the homeowner if you did when reading about this case since there is an appeal process. The stakes are huge and I would think a full court press by the lender will be in order.

Plus, I assume this ruling simply disconnects the debt with from the property so it can’t be foreclosed, but the liability still exists, but without the house as collateral. Not sure about this legal point though.

Ali Rogers over at CBS MoneyWatch in her must-read “Ask The Agent” column does a nice job on this ruling and provides more background about the bank.


[Over Coffee] Quote: Our man Jonathan Miller drops the truth bomb

November 15, 2009 | 11:25 pm | |

In reference to my New York Times quote this weekend by Vivian Toy – Bidding Wars Resume:

Jonathan J. Miller, the president of the appraisal firm Miller Samuel, estimated that two-thirds of the roughly 4,000 [8,389] apartments for sale in Manhattan are priced too high for the current market.

“So,” Mr. Miller said, “you have this weird situation right now where you have above-average inventory, but people are fighting over the ones that are priced correctly.”

(I’m not sure where the 4,000 number came from because Manhattan 3Q 09 showed 8,389 but the specific amount is irrelevant.)

The difference between a bidding war of two years ago and the current market is the irrational nature of bidding wars back then – it was all about “winning.” The market today is about obtaining value – with prices having fallen an average of 25% since pre-Lehman.

Also, there is a larger disconnect between buyers and sellers than a few years ago as measured by the lower pace of sales. There was a reprieve this summer when sales surged, but listing inventory is still above average levels and a higher level of listings are priced above market level leaving purchasers fighting over a smaller selection.

Although this is anecdotal, I do believe that there are fewer bidding wars that occur above list price than we saw a few years ago.

When my friend and bigger than macro Big Picture blogger Barry Ritholtz refers to me as “Our man Jonathan Miller drops the truth bomb” I am confident I nailed the current state of bidding wars.

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[Central Park v. Detroit] $363,538,692,000 v. $4,500,000

October 26, 2009 | 11:57 pm | |

Source: Google Earth

Back in 2005, I did a fun exercise for New York Magazine – I was asked to value Central Park (just for fun) in about 3 minutes. It was within an article that ranked the reasons to love New York and was item number 3.

The New York Observer recently asked me to update this calculation using the same methodology (in 3 minutes and just for fun) and I came up with $363,538,692,000 which is a far cry from $528,783,552,000. The same disclaimers apply as the original effort, seriously.

To put this in perspective, about 9,000 Detroit properties were auctioned (hat tip WalletPop) with opening bids of $500. Only 20% received bids. The total land area of these properties was equivalent to Central Park. If all 9,000 properties received a bid of $500 (which is probably not far off if you assume the 20% that received bids were over $500 and the rest $0), that represents a total value of $4,500,000.

Thats’s not much of a value and these properties also pull down values around them – plus they are off the tax roll placing more financial burden on existing properties.

Not a good sign
Most of the bidders were investors and vacant land in Detroit equals the entire footprint of Boston.

As much as I love my time spent in Michigan and my relatives there, I believe this is called an economic failure spiral.

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[Amherst Securities] 7 Million More Foreclosures To Pressure Housing Market

September 25, 2009 | 11:22 am | |

In a decidedly bleek report on the state of foreclosures, Amherst Securities Group LP issued a report that concluded:

The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales. We look at the impact on a number of local markets, then look to the causes of the overhang: (1) transition rates are high, (2) cure rates are low and (3) loans are taking longer to liquidate. We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary.

The key issue is the fact that the number of housing units going into foreclosure is much higher than the amount being disposed. Of course all real estate is local and the report creates a compelling case study using listing data from and the Case-Shiller 20 City Index coordinated with the foreclosure process.

Amherst was the key source for the informative “Mortgage Meltdown” story back in December on 60 Minutes. They teamed up with investment fund manager Whitney Tilson. The 60 Minutes segment is in my earlier post but I also inserted it below.

Watch CBS Videos Online


[The Stamford Review] Ten Commandments for 21st Century Real Estate Finance

September 17, 2009 | 5:38 pm |

This was taken from the just released issue of The Stamford Review: Housing & The Credit Crisis, a terrific 2x annual publication by Lawrence Sicular. I wrote two articles for the publication three years ago.

One of the pages had a fun list of the Ten Commandments for 21st Century Real Estate Finance sourced to the Counselors of Real Estate Ethics Committee Panelists in October 2008.

Ten Commandments for 21st Century Real Estate Finance

I. Write upon thy heart the law that ‘reward’ and ‘risk’ shalt always appear in the same sentence.

II. Make neither markets nor regulators into idols, and follow not false prophets of simplistic bias.

III. Be sober and watchful, lest the enemy of massive loss approach like a thief in the night.

IV. Honor thy father and thy mother’s ancient counsel; keep it simple, stupid!

V. If thou wilt not do thy own credit analysis, then vow to invest not at all.

VI. Thou shalt not adulterate thy portfolio with excessive leverage.

VII. Thou shalt not bear the false witness of hidden assumptions in thy investment underwriting.

VIII. Thou shalt not covet for the short term, yea, but shalt lay up thy treasures for length of days.

IX. In all things, yield not to the tempter’s snare of panic.

X. Remember that, after thy exile in the wilderness, if thou heedest these commandments, thou shalt once again return to the land of milk and honey.

[Interview] Rick Sharga, Senior Vice President, RealtyTrac

September 10, 2009 | 8:42 pm | | Podcasts |

Read More

[The Housing Helix Podcast] Rick Sharga, Senior Vice President, RealtyTrac

September 10, 2009 | 5:30 pm | | Podcasts |

I really enjoyed my interview with Rick Sharga, Senior Vice President of RealtyTrac who was very gracious in accommodating me despite a packed schedule during his New York stay.

Rick is the foremost expert on the state of the US foreclosure market. I have been a long time reader of their blog ForeclosurePulse.

He was able to keep on topic despite the din of jackhammers outside our building and a few digital squelches. I hope you enjoy the conversation.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.

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