Not Enough Ado About Real Estate Lately

Last year we had an unprecedented number of foreclosures. Since then, loan defaults have only increased. And yet inventory is down, not up. Sales are up, but only compared to last year. They in no way account for these record defaults.

The recent increase in real estate prices has been focused on lower end homes only. Higher end homes are in a flat out stand still. Meantime, the volume on the lower end is anemic. The inventory is at about 10% of where it would normally be and about 1/500 of where it should be.

All this talk about the "real estate bottom" really only pertains to the lower end market, whose technical signs of improvement are being taken grossly out of context.

As far as the technical improvement is concerned, real estate isn't as seasonal as people think. Folks buy homes when they're ready financially, not when the kids are out of school. The $8k stimulus is helping a bit, but the real help is coming from artificially low rates, and even more artificially low inventory. This is creating a temporary buying surge and it can only last so long.

From a fundamental perspective, there is simply no answer for the tens of thousands of loan defaults that sheepishly exist as non performing assets on the phantom balance sheets of the bankernment.

And there is virtually no mortgage market for homes above $800k. The prime market is not comprised of folks who are "better insulated". It is comprised of folks who haven’t been tested yet. The 5 year rate resets are just starting to come online now, and people are starting to default again in droves. If a borrower's rate reset stays effectively close to the same rate they originally locked, then the P&I payment shock (from I/O) increases about $1,000/mo on an $800k mortgage. If rates tick up, look out below.

If people think $300 shopping mall coupons have a stimulus effect, just wait for its reverse (times too many) - when the real drivers of our economy start to lose their homes to foreclosure.

The prime reset bucket is about three times the magnitude of the suprime reset bucket, which, contrary to popular opinion, has not been dealt with at all. It's been swept under the rug via mark to market switcheroo and shadow inventory holdback.

By the way, the prime reset wave is not limited to the higher-end market, but also encompasses the lower end market too, which folks mistakenly discount as being baked into the subprime collapse. Many lower end homeowners had 5yr i/o’s too.

Also, by "prime"... I do not mean option arms. I mean option arms, alt A, and yes, prime too. Remember Fannie (FNM) and Freddie (FRE)? They were rated AA the week before they crashed.

And what about the derivative situation? I remember thinking that the stock market didn’t bake them into the equation until the subprime loans actually defaulted. Since the market didn’t predict this and it nearly collapsed the entire world financial system. Is the market so smart that it already factored in the prime defaults?

I know a guy who left his home two years ago because he thought it was going to be foreclosed upon. He just got a call from the lender who apparently has been trying to track him down. He still owns the home and didn’t even know it. He assumed it was re-sold, because he noticed that someone else is LIVING there.

This scenario is more commonplace than the public realizes. This is the wake of the supbrime. Prime has not even started yet.

As Dow approaches 10,000, all I can think about are VIX calls.

Disclosure: long VIX calls.

Comments

[zorro6204:]

In the real world things are unbelievable at the high end. Next door to me my neighbor just walked on a home he bought for $769K in 2006 for a $540K mortgage. This is three miles from Bill Gates' front door. The other next door neighbors are raccoons, living in a 6K ft McMansion, half built, with roofing felt peeling off in the wind.

Sep 24 08:09 AM

[JAMES CARLINI:]

REAL ESTATE sales dropped again today. So much for the "experts' saying we hit bottom already. The bottom isn't made of concrete, it seems to be made of quick sand. Maybe we should get a better definition of what the bottom is.

Sep 24 11:14 AM

[Mark in San...:]

Talk about timely - your paragraph on an 800K mortgage was our lunch conversation yesterday with a friend who has an 800K option ARM here on a San Diego condo. . .he is in a panic with less investment income these days. . .another "walk away" candidate. Another couple last week sent me an email about trying to refinance their 430K 100% option ARM. . .(by the way - both properties are well underwater). . .when two friends in a week have the same problem, I know things are getting bad.

Sep 24 11:42 AM

[conceptwizard:]

August housing sales dropped 2.9% with $8000 rebates and 100% financing available. Median prices dropped 12%. I and others have been saying consistantly that the bottom is nowhere close to being in on the housing market. Even when the Fed reports BS come out on recovery the real numbers cant lie.
Transportation tonnage and the BDI are still declining, these are true economic indicators. We are still declining, the GDP numbers are wholly to do with Government stimulus and other program intervention. Its not based on a true recovery due to consumer spending.

Sep 24 11:58 AM

[Steven R. S...:]

There are many who try to spin real estate data to make things look good, rather than simply report on what is happening.

The classic example is the Economists from NAR or BIA, or MBAA. Any positive spin they can give data, helps their members do more business.

All who report, only report on Prices, not Values. The low end pricing is being propped up by the Stilts of Concessions.

Low end buyers that have not saved a down payment, can be packed into deals at Prices beyond their Value. The classic example of this is the FHA buyer.

The only party that has any real concern for Market Value in the sales transaction is the Appraiser. And, god forbid they miss the Sales Price. If they do, do you think the other players will tell the Buyer the home is not worth the Sales Price?

Or, will the Appraiser be pressured to inflate the Value to make the deal work?

Sep 24 12:01 PM

[TeresaE:]

From today's NAR report, Lawrence Yun, Chief Economist/ Best Spin Doctor in the World, states that more foreclosures are set to come online in the next year than already have. Amazing he sees that forest at all.

But, continuing his streak (in my mind) of proving he is an absolute idiot, he also states that many buyers have been on the sidelines for years.

Really Mr. Yun? You actually believe that crap? You actually believe that people were just waiting for higher interest rates and bigger required down payments? Really?

I would also like to ask Mr. Yun if he believed in 2006 his report that stated the housing downturn was a "blip"? He did and the media helped him lie to us.

For the life of me, I still cannot reconcile the fact that foreclosures are ACCELERATING, and even though according to the government the banking problem was caused by "unprecedented" foreclosures, somehow now, more of them is not a problem.

Now, when we realize that at least 30% of all home sales are currently 100% financed by the government, added to the 30% "distressed" and the fact that we are still selling homes to people with no skin in the game. Just how can anyone think we have reached bottom?

Green shoots my arse.

Sep 24 12:14 PM

[Mark Bern:]

With the banks holding off on foreclosures to help reduce inventory on the market...
With the banks holding foreclosed inventory off the market to help reduce inventory...
With 100% financing available from the USDA in many areas...
With near 100% financing on FHA homes (only 3.5% down)...
With federal subsidies of $8,000 on home purchases...
With sellers very willing to pay closing costs...

How can real estates sales and values be going down?

All I can say is that the green shoots were weeds and the season is changing. I don't expect to see anything green sprouting out of this economy again until at least next spring. Even then, I don't think we'll need to get out the lawn mower for the entire summer. It is probably, IMHO, that we won't see much growth in our real estate value lawns for a couple more years.

The only thing I can see on the horizon that could possibly help home prices rise would be a significant dose of inflation. But even then, I don't expect it will be of much help to real estate because when commodity prices rise due to a falling dollar, without wage inflation, people won't be able to bid prices higher on homes. We'll be too busy paying $5 or $6 for a gallon of gasoline. We'll also be paying way more for food, heating/cooling, etc. But until employment picks up we won't see much positive movement in wages. Shoot! I suppose that means we're all going to get even poorer since our dollars will buy less and we won't get any raises. Ah, Shucks!

One thing that's going to go up some more (and you can take this one to the bank): banking fees. The other one that has to go up at some point: taxes.

Now don't ya'll feel better about the terrific job our elected leaders are doing for us? I think I'm going to be sick!

Sep 25 06:29 PM