John Wake

The Anticipated Prime Mortgage Problem Has Arrived

Great analysis of the supply side.

Now, let's talk about the demand side or, rather, the quantity demanded. The prices are so low and the number of sales is so high, in Phoenix for example, that markets are clearing. In a several low cost areas of Phoenix, the quantity demanded is so high that they could clear MORE supply.

To give you an idea how crazy the market is in Phoenix, let's look at homes sold within the City of Phoenix, not metro Phoenix. The median sold price was $64,000 in March. That means, of course, that half the homes sold for $64,000 or LESS. By June the median price in the City of Phoenix increased to a whopping $78,000. (Based are Arizona State University data.)

Prices are so low in a several zip codes in the City of Phoenix that the quantity demanded has exceeded supply and prices have increased. At their current price level, those zip codes could likely clear continued high levels of foreclosure supply and, indeed, prices have likely bottomed out in those zip codes already.

Prices, however, haven't fallen to that point in most metropolitan Phoenix zip codes and at current prices the quantity demanded is less than the supply.

What Were Subprime Loans Modeled On?

"CRA rooted for..." and similar to avoid facts. Your argument seems to be that CRA's intentions were good.

High End Home Market Still Has Further to Fall

As an Arizona Realtor I don't know the New York market from Adam. I do know, however, that New York was pretty much the last market to join the falling prices party.

In a falling market you want to sell ASAP. The fact the Geithner barely moved on the list price guarantees that he will chase the market down.

He's not alone, of course. Most home sellers in a declining market are in denial. There is an amazing amount of emotion and self image tied to their home's value and they've already spent the profit in their head many times over.

A price reduction to the average home seller feels like a death in the family. So they don't reduce the price, they don't sell the home but they do ride the market down.

Rationally, he should reduce the price until he finds the highest price at which it will sell.

There is a huge amount of emotion tied to money. When it comes to money, even economic rocket scientists like Geithner make irrational decisions.

(To be fair, he may have decided that if he got his (unrealistic) price he would sell, otherwise, he would hold on to it for when he moves back to New York. Financially, however, he would have almost certainly been better selling sooner rather than later.)

Today's Yellow Shoot: The MBA Mortgage Report

Minor correction on the $8,000. It is indeed a "first-time homebuyer" program, can't have owned a home in previous 36 months.

It turns out that the $8,000 can NOT be used for the down payment, although a HUD official previously announced otherwise. I guess they thought better of the idea.

Nevertheless, last Friday HUD announced it would allow FHA-approved lenders to create bridge loans to buyers who qualify for the $8,000 and the bridge loans can pay for closing costs but can NOT pay for any of the 3.5% minimum down payment required on FHA loans.

Housing on Fire - Can Someone Please Explain?

Tom wrote, "Currently, Phoenix is the worst employment market in the United States. That’s right, dead last, even worse than Detroit."

Misleading. From your comment it's apparent Phoenix had the highest amount of job loses in the country but elsewhere I've read that the Phoenix unemployment rate is still only 7.3 percent while the national average is 8.9 percent.

Next year construction employment will pick up from an extremely low 2009 and even though construction employment will still be way below "normal" everyone will say what wonderful employment gains Phoenix has made in 2010.

The Smoking Gun: Subprime Underwriting and Prepayment

They thought they were making home loans but really they were speculating on home price appreciation.

Subprime loans were much more profitable than prime loans for many years when homes were appreciating. The size of the subprime market exploded until home prices stop appreciating and subprime loan became boat anchors.

The Next Wave of Foreclosures

Dirk writes, "The vast majority of the homeowners with these 'pick a payment' mortgages pay only the minimum payment. When it exceeds a set level, or at a set date in the future (whichever comes first), the mortgage holder has to start paying the fully amortizing payment of the now much larger mortgage."

I think that chart over-estimates the recast problem because, as you say, the vast majority of option ARM borrowers only make the minimum payment. Those who only pay the minimum each month will trigger an early reset on the loan long before the scheduled reset. That would mean a certain percentage, perhaps large percentage, of those in yellow have already been foreclosed upon or are currently in the process of being foreclosed upon.

Are Building Permits Really a Leading Indicator?

Interesting that declining permits predict tops. I always say "Builders build." If they aren't building they aren't real men anymore. Builders build until they run out of money. So a slowing of build permits shows that things are so bad that some builders are being cut off by their lenders.

A Quasi-Boom in the Phoenix Housing Market

Tim said, "... you have to wonder what's going to happen in another year or two when long-term interest rates are much higher."

I think you are going to wonder why the hell you didn't buy in 2009 when interest rates were crazy low.

New Government Policy: Tax Credit as Mortgage Down Payment

You're getting carried away.

1) The median home price in Phoenix has fallen 51% from the peak. If you bought around the peak, it doesn't matter if you put 0, 3.5 or 20 percent down, you have a large incentive to default.

2) Money is cheap but hard - the interest rate is great but it's hard to qualify for a loan. The people getting these loans are more qualified than many who got loans during the boom. For example, today there are no no-doc loans and people are not being qualified using the 1 year teaser rate.

Yeah, people who put 0 percent down will default at a higher rate than those who put some money down but that default rate is not going to be in the same ballpark as the default rates we've seen since the peak.

In addition, the median home price may be bottoming out in some areas of Phoenix. Since falling prices were the greatest generator of defaults, it seems to me that you are exaggerating the default rates on these loans that receive the $8,000 tax credit, in metro Phoenix anyway.

Phoenix Home Prices Now Down 51%

For Phoenix, on the other hand, the pending home sales are now off the chart. That supports the belief by some real estate data geeks that the median home price bottomed out, at least temporarily, in April. Now remember, that is the median for the entire metro Phoenix area. Prices in many areas within metro Phoenix still have a long way to fall.

www.arizonarealestaten.../

Haven't First-Time Homebuyers Heard of Roubini?

The housing market will bottom out long before the banking industry.

When housing improves, sure the banks can make some money on new loans but that income will be a drop in the bucket compared to the losses hanging over their heads from those 2005-2007 loans with huge negative equity. Years from now that homeowner will retire or lose his job or get divorced or have a kid and will move out. And when that happens, the banks will end up forgiving tons of debt in a short sale or will foreclose and lose a ton of money that way.

Don't tie the housing industry to the banking industry.

Is This (Finally) the Bottom? Part III

bonderman, that Ritholtz is misleading and needs to be updated. Many of those Option Adjustable Rate loans that the graph shows as resetting in 2010 and 2011 have already been foreclosed on. So the graph underestimates the problem in 2008 and 2009 and overestimates it in 2010 and 2011.

If an Option Adjustable Rate borrower only makes the minimum payment, and many do, the loan will automatically reset long before the scheduled reset date.

Banks Are Unwilling to Solve REO Problems

That would be a great strategy once banks figured prices have bottomed out in an area. Right now, I assume the banks assume prices will continue to fall so they want buyers to have some skin in the game. 100% financing and falling prices is a bad combination.

Another strategy as prices approach bottom would be for banks to become landlords and just rent the properties until market conditions improve. But again it's a strategy that depends on prices leveling off to be successful.

It's all moot however because banks aren't clever enough to use either strategy. Bureaucracy is more important than profits for banks.

Housing Decline Slowing? Wishful Thinking (Case-Shiller)

Edward, A ground zero market like Phoenix has a strong seasonal aspect to it. January is usually the worst month reflecting slow sales during the December holidays. We'll very like see a much smaller decline in the February Case-Shiller Index for Phoenix and we may very well see little or no decline for March.

I assume markets like Phoenix and Las Vegas are boat anchors on the Case-Shiller Composite 20 Index and if those and similar markets indeed flatten out we'll have a whole new ball game. We could see a lot of popular press stories about hitting the bottom in June after those March numbers come out. (It may not be the absolute bottom but if it isn't, at least it will show we are getting close.)