Jawbone: Whither Foreclosures? 16 comments
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The Independent: Oldest Jawbone Found In Spain
Jawbone: To urge voluntary compliance with official wishes or guidelines (dictionary.com).
Thursday’s RealtyTrac® press release said a mouthful:
04-16-09: RealtyTrac’s US Foreclosure Market Report™ for 2009Q1, … shows that foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 803,489 properties in the first quarter, a 9% increase from the previous quarter and an increase of nearly 24% from 2008Q1. One in every 159 U.S. housing units received a foreclosure filing during the quarter.
Foreclosure filings were reported on 341,180 properties in March, a 17% increase from the previous month and a 46% increase from Mar 2008. The March and 2009Q1 totals were the highest monthly and quarterly totals since … [the first] report in Jan 2005…
“In …March we saw a record level of foreclosure activity — the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record. [This] … suggests that many lenders and servicers were holding off on … foreclosures due to industry moratoria and legislative delays,” said [the] …chief executive officer of RealtyTrac. “… It’s very likely that we’ll see the number of REOs increase again now that most of the moratoria have been lifted.
I’m chewing this over because an astute reader of Greed, Fear, and Loathing asked the following question:
What would the model [developed in Greed, Fear, and Loathing] suggest for the annual change in RPX if foreclosures were reduced to their long-term level, and everything else - including unemployment - was unchanged?
Here’s my answer.
The long-term average foreclosure start rate, using MBA data ranging from 1979 – 2008, is about 0.35%.
YE2008 MBA foreclosure starts, at about 1.10%, were more than three times the long-term average. This figure is low. (See Figure 1, below, red line.)
It is “low” because it is inconsistent with historical delinquency rates, and transition factors, or “roll rates” derived from the relationship between delinquency “buckets” in each month with delinquency rates observed in subsequent months. Example: 60 days past due in February, relative to 90 days past due in March.
It is “low” due to a combination of legislative & regulatory pressure, and executive jawboning.
In the absence of jawboning & legislative pressure, foreclosure starts would have been about 1.65%. (See Figure 1, below, blue line.)
This can be seen in the following chart:
click to enlarge
Figure 1: Actual & ‘Predicted’ (From Roll Rates) Foreclosure Starts, Actual 90 Day Delinquencies
So – what IF foreclosures were reduced to their long-term average, and everything else (affordability and unemployment) was unchanged – what would happen to home prices?
- If foreclosure starts were reduced to 0.35%, then the model "says" that the decline in RPX Comp would drop from -23+% to -2%.
But, and here’s an important observation – the requested scenario is a simplified version (more or less) of what you would expect to see if you had:
- Foreclosure jawboning (or “moratoria”); and
- Otherwise generally ineffective or misdirected macro or monetary policies. Example – policies that were inordinately concerned with “saving the banks, rather than the economy” (Paraphrasing Nobel Laureate Joseph Stiglitz, interviewed today on Bloomberg Radio.)
Sound familiar? So let’s say we had jawboning, and little else that really mattered. What happens next?
Let’s suppose that non-jawboned delinquency doesn’t get any worse from YE2008, and that we modify ALL of the increase in foreclosures from their non-jawboned expectation of 1.65%, and the long-term average of 0.35%. This fantastically optimistic assumption means we would modify 1.30% of all loans, = 1.65% - 0.35%.
Then, within 9 months (remember, ineffective other policies assumption/ Professor Stiglitz is right) about 60% of these modified loans will redefault (see Barclays’ analysis discussed in my Why Bother?)
Then the "steady state" foreclosure figure will become:
Total Foreclosure Starts
= (0.35% [Long Term Average]) + (60% x 1.30% from redefaults);
= 0.35% + 0.78% = 1.13%.
This is not that different from "jawboned" foreclosure start rate of about 1.10% at YE ‘08; and model would produce continued –20+% drops in home prices.
To put it another way - while waiting for the federal mod programs to be announced, servicers held off on foreclosures. This is reflected in the relatively low foreclosure start rate of about 1.10% seen at YE ‘08.
If one assumes that the economy and unemployment do NOT recover, and that foreclosures are "addressed" by mod programs (and little else), then the long-term foreclosure rate (taking into account redefaults of the mods, see above) will quickly re-approach the recently unprecedented YE ‘08 levels. This will place continued pressure on home prices.
Since we are (as noted in Greed, Fear, and Loathing) more or less at point where prices are "fair" relative to income, it is hard to conceive that there might be continued downward price pressure, making real estate REALLY cheap. But given how high things went on the way up, it’s hard to rule out a similar over-correction on down side.
Is that a kick in the teeth, or what?
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I've been pondering property valuations and what to offer for them. Every scenario starts off with my assumed purchase price and then quickly follows to any expected rents.
What is the correlation between foreclosure rates and rent? Is there one?
Now, with unemployment rising we can expect foreclosures to continue but if they actually rise significantly that is in doubt.
This country can go either of two ways at this point- continue it's negative feed back loop cycle or pull out of the dive and track up. It might not track up on a straight line but just as long as it trends up. The data right now is conflicted- we get good numbers we get bad numbers. So what can we do look ahead. With respects to foreclosures, they won't hit 3% they will continue to trend between 1-1.5%. Remember 50% of the people in this country, home owners, don;t have a mortgage. Of the other 50%- 75% have been in their home for 10 years or more. 91.5% of the people in this country are working. CPI is dropping (perhaps scary but a short term stimulis for the consumer). Re-fi's are through the roof (another tax cut). M2/M3 money supply is silly high- remmeber the American Consumer who couldn't save (they are saving 5% a month right now and it is annualized at 20%).
All this creates fuel to pull the plane out of it's spiral.
The only fuel I see with 15% unemployment rate is former homeowners pulling up their hardwood flooring and burning it in tent cities for cooking & warmth...
The reason I say it will rend where it is is quite simple, and keeping in mind the unenployment possibly going to 10%, is the fact that we have had forelosures at elevated levels going back to 2006. That's three years. OK. now there are qualified buyers coming in the market seeping up those homes. These buyers are getting full doc FHA loans- no B.S. IF Unemplyemnet goes to 10% then 90% of the country is still working. What are the odds of the new home buyers with FHA loans and full docs info are apart of that 10% I don't know but it will be fractional.
You have to look at the statistics:
50% of home owners in this country don't ahve a mortage
of the other 50%, 75% have been in their home 10 years or more
So, you are talking about fractions of fractions that's why I think that foreclosures will remain around 1-1.5%.
Jimmy K. go outside is the world still spinning? This is like Y2K. Stoip believing the hype- look at the facts and look at the future. Look at history to gauge what the vision of the future looks like- we have been through unprecidented times (past tense). The recession started in late 2007. The housing crisis started in 2006.
It's time people started to realize where we are in time. Just liek on the run up people were too bullish on housing and on the way down they will over shoot too. It's human nature.
Hardwood suggested:
>>"With respect to foreclosures, they won't hit 3% they will
>>continue to trend between 1-1.5%"
Interesting conclusion.
If the banks had NOT responded to jawboning and held off on foreclosures in response to jawboning, foreclosure starts would already be at 1.65%, as noted above. And you say that they won't get higher than 1.5%? I hope you're correct.
Just look at it demographically for a second:
If unemployment goes up to 10% that's what- 8MM. That's 4MM housholds. Let's say that 2/3 of those people are homeowners. Let's say that all of those people (the 2/3rds) are in go to foreclosure that will be 2.4 MM. There are still 120MM housholds not in foreclosure. Now even if all of those people hit forclosure at the same time (not going to happen) you still wouldn't be at 3%. Keep in mind that there are always about 5% of the poulation that are out of work.
I'm no economist but fractions of fractions make it hard to move the needle...
Excellent discussion guys.
It's intriguing to me that housing starts are up in the Midwest. That must mean that home prices are at least near building costs.
Nothing like volume to help you lose money. I don't need the practice.
(Yes, prices have dropped so much that some new folks have come into the pool. But unemployment still rising drains that same pool. On the other side, with ANY housing starts, and foreclosures again rising, it is not like supply will be falling to any reasonable level soon).
You keep hearing that mortgage APPLICATIONS are rising. So what! Most are re-fis, and most of those are not modifications, just folks already OK getting more OK. How many applications have been APPROVED? How many of those are for purchase?
Meanwhile, there are folks who HAVE been in their homes 10+ years, who have equity, who have fallen on hard times, that are not being refinanced because of tougher underwriting standards. (I know that Wells Fargo with their surprise "profit" is just a fancy mortgage broker -- mostly writing safe re-fis and loans to FNM, FRE and FHA standards -- thus passing the time bomb back to the taxpayers.) Conspiracy for banks to foreclose when profitable? Forcing those homeowners to super high rates for re-fi? "Just" imcompetence?
It doesn't matter. If some folks are still getting 97% LTV loans when folks with 50% equity can't get the same rate, the system is still broken and risk-filled.
Now add another gorilla: General Growth Properties said they had good cash flow, but had to file for bankruptcy because no refinancing was available.
At some point, the Fed must stop printing money for fear of being accused of creating a Ponzi scheme. The Chinese have already fired a warning shot.
I am not saying that we are looking at a Great Depression. But this is much more than a standard recession. There was a convergence of events and fraud -- any one of which was serious.
All the bailouts are just delaying the inevitable. Constantly changing the rules in mid-game only creates more uncertainty (and delay of the inevitable).
Returning to a system where downpayments are the key driver to loan approval might be painful. Prices might drop one last time. But then they could be believed, and real estate would return to the stable investment it used to be.
This will all be resolved through price and time.
On Apr 18 04:36 PM Mike4911 wrote:
> Who is available to buy real estate? Anyone who could buy, did buy,
> using the relaxed standards of the last few years-- that absorbed
> several years worth of marginal buyers out of the picture.
>
1. Given the trend of boomers retiring being knocked off the track- does that portend an immediate delay in southward/westward movement as people have to stay up north working longer that may start to clear up when the market recovers?
2. Given the poor economy, does that portend a delay in the echo boomers moving into their own dwellings?
3. Given that in addition to honest unemployed workers there are also reckless speculators and divorced people with no chance of ever making their payments, wouldn't that make it very unreasonable for an across-the-board long term moratorium on foreclosures?
4. Once the banks start to get their feet back under them (the benefit of near zero overnight rates and government backstops) won't they want to more aggressively work down their inventory?
Meanwhile, banks are modifying loans and interest rates are low, and inflation and dollar devaluing will hopefully resume by the end of the year as the economy starts to recover.
It seems to me this all adds up to a depressed market this year (with prices still falling as less bank foreclosures are transferred at jingle-mail-higher-tha... artificially raising priceds) but a recovery starting next year as the prospect of the world returning to normal begins to get discounted in. I'm thinking most home values will be back to 85% or so of their 2006 levels by 2011.
Hopefully the Fed won't invert the yield curve again in 2012 or 2013.