billddrummer

California Housing Recovery? Not So Fast

Hi Judy,

According to the CA Association of Realtors, home sales are up 80+% over last year, but prices are down 40+%:

sacramento.bizjournals...

The article also mentions that the average marketing time has dropped under 45 days, from 61, and inventory is down to a 6.9 month supply.

That's statewide, apparently, but it bodes well for reaching the vaunted 'housing bottom.' Distressed sales are still dominating the market, with over 45% either sales out of foreclosure or short sales.

As I posted months ago, these are the kinds of statistcs that suggest the end of the crash is near in CA. What's happened now, in my opinion, is that the contagion has spread to other areas that heretofore hadn't experienced a significant bubble, like TX, WA, and most of the Southeast (save FL).

If CA stabilizes and rates remain low next year (as the Fed implied), the housing market may begin to recover in the 3rd quarter of 2009.

I'm publishing that as my uneducated prediction.

ATB,

Bill

California Housing Recovery? Not So Fast

Hi Judy,

Your point about ARM loans resetting at current rates is an excellent one. If you recall, I was predicting another wave of foreclosures as Alt-A and ARM loans reached their maximum caps, and rate resets would balloon the payments.

With rates 150-200 basis points lower than just a few months ago, there's hope that mortgages resetting will have lower payments than anticipated. But I still believe that there will be additional foreclosures as loans reach their deferred interest caps. Teaser rates on these loans were 1%-1.5%, but the vast majority were written at a spread over either LIBOR or the TCM index. There's no way mortgage rates will fall to the point that the newly reset payments will be as low as the teaser rates, because of the spread.

So in a typical example, where a $175,000 30-year mortgage was written with a 1.25% teaser rate, the initial payment is $583.19. If the mortgage caps at 115% and resets at 3.45% over the current TCM index, the new payment on $201,750 becomes $1,011.08 (functions of the higher balance and shorter term). And the new rate is low, at 3.95%. If the homeowner doesn't have an extra $428/month in his budget, watch out.

This discrepancy gets even worse with higher loan balances.

I believe the biggest risks will be in high-cost areas, like coastal CA, WA state, DC, NY and Boston. Areas with moderate home prices should be spared.

ATB,

Bill

Conference Calls Show Regional Banks Squeezing Homebuilders

To von Murgenthal,

I don't look at it as not trusting the banks, as much as I look at it as not trusting markets to continue to increase forever. After all, the banks made millions on A & D and construction loans, as long as houses kept selling. At the peak, you could buy an undeveloped parcel (financed with an acquisition loan), get approvals in 3-6 months, start developing (with a development loan) the day after your lots were approved, start vertical construction on models within a few weeks (financed with a construction loan), open the sales office (financed), start taking deposits on production homes, and build houses in the new subdivision within a year. At that point, the bank was out of development and vertical financing, because the new mortgage paid off your construction loan within a year.

The frenzy got so bad here that people were bidding on production housing before trailers had been placed at the subdivision sites!

All those loans generated interest and fee income for the banks, and as long as the inventory was turning, there were no problems getting financing even for land.

When the bubble burst, the game changed. Suddenly banks found themselves holding partly developed subdivisions and partially completed houses, while developers couldn't extend financing on projects that had stalled.

So before painting the banks with the broad brush of non-trust, I'd look a bit deeper.

And to Judy,

Thanks again for keeping up with this most historic of times. This truly ranks as a monumental, and perhaps permanent, sea change in the real estate industry.

Conference Calls Show Regional Banks Squeezing Homebuilders

Hi Judy,

Thank you for this resource!

We're seeing the same trends in Northern NV. Homebuilders who have a 20+ year track record in this market are seeing their credit lines frozen, properties seized by banks that formerly 'rode the wave' and extended their construction commitments, and playing hardball by increasing interest rates and fees and asking for additional collateral.

Some builders have been forced into bankruptcy because of the changed climate.

I'm familiar with one builder who had a spec house for sale for more than 2 years ($400,000 asking price). The bank foreclosed, his contractor's license was revoked, and the company filed bankruptcy, directly throwing 50 people out of work.

In response, there are 'hard-money' lenders stepping in with high fees, low LTV requirements, and ruinous interest rates. One lender here has been successful making construction loans at 13% with 4-5 points, and a 65% maximum LTV. But that's the only place that money's available for construction financing.

Until the banks that specialize in construction financing re-enter that market, don't expect a lot of new homes to be built. And that will take years, as the current NPAs are slowing worked out.

All the best,

Bill

Homebuilders: NVR Buys Lots From Beazer [Housing Tracker]

Hi, Judy.

Great compilation, keep up the great work!

An interesting take on the Taylor Wimpey difficulties. A new housing project in Northern NV stalled in mid-2006, and the developer formed a joint venture with one of Taylor Wimpey's US subsidiaries.

The houses still aren't selling. There may be a writedown on this project, but nowhere near the size of the ones you mentioned. And it begs the question--Will Taylor Wimpey review its joint ventures and withdraw from those it feels aren't 'economically viable'? If that applies to the Nevada project, there may be some really good deals on nice homes in a year or two.

I'm waiting.

Homebuilders: Lawsuits, Incentives, Even Some Building [Housing Tracker]

Hi Judy,

Interesting and compelling commentary, thanks for the good work.

The SF article is particularly interesting to me. I lived in SF from 1977 to 1979 before moving to Reno, and I was struck by the paucity of blacks within the city limits back then. The outmigration proceeds from a sense of disconnection from community, and a feeling that there's nothing to 'gain' from living in SF proper. Add the insane cost of living and a perception of limited recreational options, and taking flight to move to the East Bay makes sense.

By the way, I'm black. And I moved from SF to a city with less than 5% African American population. Just as an anectdotal comment, I rarely associate with blacks in my social circle, live in a neighborhood dominated by Hispanics, and have two children who share racially mixed ancestry.

I'm not the only one like this, but I'm definitely a minority within a minority.

Interesting Homebuilder Trends In The Slump [Housing Tracker]

I think housing prices will bottom later this year, but they won't rise as fast as inflation for several years after that. In other words, the largest asset of most Americans (the homeowner's index is still above 65% despite all the owners who've been pushed out due to foreclosure) will see negative appreciation vs. inflation for the next 5-7 years.

And depending on where you are in your life, you may find that a reverse mortgage will be the only way to gain any liquidity at retirement.

Judy,

I responded to another thread with the above comments, as one of the readers suggested housing prices had another 50% to fall.

I for one don't believe that, but as this thread illustrates, the new trend in housing will be higher density, more energy efficient, and lower cost/s.f. homes than were being constructed at the height of the boom. The McMansion phenomenon appears to have run its course. And the most interesting aspect of this? The fact that McMansions are suffering the largest decreases in value when foreclosed. Homes that weren't opulent to begin with are holding their value well, even on the courthouse steps.

Builders who recognize that buyers are looking for value now will be the survivors.

Home Sales Numbers Continue to Weigh on Developers

It's good to see some rational commentary on the inventory overhang in housing. As long as that overhang persists, the housing crisis is in no danger of ending.