Affordability is like gravity. When house prices rise far beyond what people can afford, rather than being priced out forever -- which is what people fear -- the force of affordability causes prices to fall. Lenders try to cheat this process with affordability products, but as we have all seen, Affordability Mortgage Products Make Prices Unaffordable. When the instability of these products causes high delinquency rates, they are removed from the market, and the gravity of the situation takes over; prices fall.
The housing market, whose collapse pulled the economy into recession in late 2007, is stalling again.
In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans. The expiration of a federal home-buyers tax credit at the end of April is weighing on the market.
Any hopes of property appreciation have stalled for the foreseeable future. The rate of sales is 20% off historic norms and inventory continues to pile up. Buyers are finding the power that sellers enjoyed just a few months ago has reversed. It is quickly becoming a buyers market. When these changes in the market occur, expect to see even lower sales volumes as sellers initially refuse to lower prices and properties stay on the market longer. This fall, sellers will either lower their price to sell or take their properties off the market. The flippers, short sellers and banks with too much REO will lower their prices to clear their inventory. Discretionary sellers with WTF asking prices will be left behind.
On Tuesday, the U.S. Census Bureau said single-family housing starts in June fell by 0.7%, to a seasonally adjusted annual rate of 454,000. The U.S. started 1.47 million homes in 2006, before the housing bubble popped.
Future construction looks even weaker. Permits for single-family starts fell 3% in June, following big declines in both May and April. "We're hovering at post-World War II lows," said Ivy Zelman, president of Zelman & Associates, a research firm.
Economists aren't singling out one reason for the stalling housing market. A variety of factors have led to flagging confidence, they say, including sluggish labor markets, global economic turmoil and falling stock prices.
While the housing downturn dragged the economy into a recession nearly three years ago, now it is the economy that is pulling down housing, says economist Patrick Newport at IHS Global Insight. Without sustained job growth, the housing market likely won't improve. That in turn will ricochet across manufacturing, retail and other trades heavily dependent on home building and consumer spending.
This is something the bulls refuse to acknowledge. The unemployed do not buy homes.
The Wall Street Journal's quarterly survey of housing-market conditions in 28 major metropolitan areas shows that inventory levels have grown in many markets. But inventory fell in some of the weakest ones, including several Florida markets, Atlanta, and Charlotte, N.C.
At the end of June, inventory was up 33% from year-ago levels in San Diego, and by 19% and 15% in Los Angeles and Orange County, Calif., respectively, according to data compiled by John Burns Real Estate Consulting. Rising inventory can lead to price declines later.
We have all been watching the IHB chart of inventory go up very steeply, and it is show no signs of leveling off.
Jeff Gans, a 45-year-old engineer from Baltimore who designs software for car manufacturers, has contemplated buying a house or condo for more than a year. But concerns about job stability have kept him on the sidelines.
Even falling interest rates aren't enough to whet consumer appetites for housing. Last week, the average rate on a 30-year fixed-rate mortgage was quoted at 4.57%, according to Freddie Mac, the lowest since its survey began in 1971. But demand for home-purchase mortgages sits near 14-year lows, according to the Mortgage Bankers Association, down 44% over the past two months.
With mortgage rates at historic lows, isn't it surprising to find demand for mortgage at historic lows as well? That emphasizes how weak demand really is. If record low mortgage interest rates doesn't stimulate demand, what will?
The government last fall extended tax credits worth up to $8,000 to home buyers who signed contracts by April 30, causing sales to surge early this year. Those buyers had until June 30 to close their sales until Congress, concerned that the backlog of sales wouldn't close in time, extended the deadline through September.
Analysts long expected the withdrawal of a federal tax credit, which had juiced sales, to lead to a slower-than-usual summer.
"It's the magnitude that's been the issue,'' says Douglas Duncan, chief economist at Fannie Mae. "The drop-off in activity has surpassed expectations.''
"surpassed expectations?" LOL! That is a nice way to spin it. Will the price decline "deliver superior performance" as well?
Reports should show that completed transactions of home sales held up through June. But newly signed contracts in May and June have plunged.
To be sure, some housing markets show signs of healing. Home-sales activity in New York, Washington, D.C., and parts of California continue to improve. But other markets, including Tampa, Fla., and Chicago, face rising foreclosures and weak job growth.
Low mortgage rates and falling prices have made homes more affordable in many markets than at any time in the past decade. But those affordability gains have been offset for many buyers by tighter lending standards, particularly for "jumbo" loans that are too large for government backing. Banks are requiring down payments of 20% and more and strong credit scores because they must hold jumbo loans in their portfolios.
So when banks are risking their own money, they are concerned about getting repaid.... What an interesting idea. They charge higher interest rates too.
More broadly, the housing market faces two big problems: too many homes and falling demand. More than seven million borrowers are 30 days or more past due on their mortgage payments or in some stage of foreclosure. Rising foreclosures will keep pressure on prices as banks put more homes on the market.
Last month, nearly 39,000 borrowers received government-backed loan modifications, but more than 90,000 borrowers fell out of the program, the Obama administration said on Tuesday.
Moreover, the pool of potential buyers remains constrained by the unprecedented number of homeowners who are underwater, or who owe more than their homes are worth.
That's making it particularly hard for traditional "trade up" homeowners like Maria Billis to pull the trigger on a home purchase. Ms. Billis can't sell her townhouse in Boynton Beach, Fla., because its value has fallen by a quarter. That puts it below the $160,000 that she owes the bank.
The 31-year-old human resources consultant, who married last month and wants to start a family, found a half-dozen homes in her price range but doesn't want to sell her current home for less than the amount owed. She has considered buying the new home and renting the townhouse, but concedes, "It's a big risk."
It's not a big risk. If she had purchased a property with a cost of ownership at or below rental parity, it would be no big deal; however, that isn't what she did. And neither did anyone else during the bubble. The most obvious sign of the housing bubble, at least to me, was the fact that you couldn't rent out a property for enough to cover the cost. I remember thinking, "why would anyone do this?" I was so naive, that it never occurred to me that people might do that in order to speculate on appreciation.
The real risk is buying a property that can't be rented for enough to cover the costs. Whenever you buy a property, you have to ask yourself what happens if you can't or don't live in it. If the answer is, you lose lots of money each month, then it probably isn't a good idea to buy it. Its really just common sense.
Mortgage-finance giants Fannie Mae and Freddie Mac also are starting to push more repossessed homes onto the market. The companies owned 164,000 homes at the end of March, up 80% from a year ago.
Another reason inventory is rising: "Unrealistic sellers have flooded the market" after reports of bidding wars and home-price increases earlier in the year, says Steven Thomas, president of Altera Real Estate, a brokerage in Orange County. The amount of time that homes there have sat on the market there has swelled to 3.78 months, up from 2.35 months in April.
Steve Thomas managed to get his made-up numbers into national media. I suppose congratulations are in order. At least he got the trend right.
"The sellers think the market's coming back. They've tacked on an extra 5 to 10 to 15%. The buyers aren't going for it," says Jim Klinge, a real-estate agent in Carlsbad, Calif. Over the next six months, "it's going to feel like a double-dip because sellers are going to have to lower their prices."
Jim the Realtor gets it. And notice I capitalized the R with him.
Not all sellers will take that step. Jerry Anderson has listed his four-bedroom home in Dana Point, Calif., on and off the market for the last two years. He's cut the price to $1.25 million, down from $1.75 million, but hasn't had any offers on the home, which has three fireplaces and ocean views.
Mr. Anderson, who bought the home in 1987, says he'll take it off the market in December if it doesn't sell rather than cut the price.
We will undoubtedly be taking it off the market....
Matt Carney listed his Moreno Valley, Calif., home for $337,000 in February, and lowered the price on Tuesday for the third time, to $297,000. He says he can't go any lower because he owes $274,000 on the home and doesn't want to dip into savings to pay for transaction costs.
In other words, this guy is underwater and in denial.
The High end is going to be crushed
I have consistently maintained my belief that the market for properties needing loans over the $729,750 jumbo-conforming limit are going to suffer tremendous pricing pressure. The common delusion in the mainstream media is that this market has already recovered and it is a safe haven. This market is going to collapse, and the price declines will be breathtaking.
Lenders are facing delinquency rates on big mortgages at much higher rates than for smaller mortgages. Think about that -- if the rich pretenders were doing well and recovering from the recession, wouldn't they be paying their mortgage? Shouldn't the delinquency rates on jumbo mortgages be much lower than on conforming?
But Orange County is diffferent, right? So we know that the high end is delinquent on their loans at a greater rate than the low end. Wouldn't it stand to reason that the high end would also have more distressed properties? Nope. The distressed inventory is being withheld from the market. So far this year, only 202 properties with estimated values of over $1,000,000 have been sold at auction. It really is a squatters paradise.
Lenders will not give away these homes even though the result of their inaction is essentially that. The jumbo market is denial on a massive scale. Lenders are somehow hoping that all these people are going to find work at a pay rate capable of making payments on these million dollar mortgages. It's not going to happen. At some point, lenders are going to realize this, and they are going to want their money back. The Ponzis, the system gamers, and other delusional loan owners are going to get wiped out, and this market will be cleared. When it happens, the carnage will be epic.
I don't know when this will happen. It should have happened already. I never thought lenders would allow so much squatting to go on for so long. They can't allow multi-year squatting in these properties without more and more borrowers opting to do the same. The lenders who wise up first and liquidate these properties will obtain the best pricing. Those that hold out with hopes the cartel will sustain unsustainable pricing will lose the most money. Let the liquidation begin.
Countrywide was really stupid
This property was originally purchased on 11/22/2004 for $1,002,500. The owner used a $750,000 first mortgage and a $257,500 down payment.
On 10/27/2005 they obtained a $172,500 HELOC.
On 7/26/2006 Countrywide gave this family a $1,240,000 first mortgage.
Total mortgage equity withdrawal is 490,000 including their down payment.
Total squatting time was about 1 year.
Foreclosure Record Recording Date: 10/27/2009 Document Type: Notice of Sale
Foreclosure Record Recording Date: 07/14/2009 Document Type: Notice of Default
I don't know how Wells Fargo ended up with this loan, but they bought the property as foreclosure auction for $1,049,700. Apparently, dropping the bid $200,000 wasn't enough. They have the property listed at the price their realtor thought they could get. I bet they don't.
Home Purchase Price … $1,049,700 Home Purchase Date .... 3/25/2010
Net Gain (Loss) .......... $31,206 Percent Change .......... 3.0% Annual Appreciation … 27.7%
Cost of Ownership ------------------------------------------------- $1,149,900 .......... Asking Price $229,980 .......... 20% Down Conventional 4.62% ............... Mortgage Interest Rate $919,920 .......... 30-Year Mortgage $227,905 .......... Income Requirement
$4,727 .......... Monthly Mortgage Payment
$997 .......... Property Tax $250 .......... Special Taxes and Levies (Mello Roos) $96 .......... Homeowners Insurance $252 .......... Homeowners Association Fees ============================================ $6,321 .......... Monthly Cash Outlays
-$1271 .......... Tax Savings (% of Interest and Property Tax) -$1185 .......... Equity Hidden in Payment $399 .......... Lost Income to Down Payment (net of taxes) $144 .......... Maintenance and Replacement Reserves ============================================ $4,408 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $11,499 .......... Furnishing and Move In @1% $11,499 .......... Closing Costs @1% $9,199 ............ Interest Points @1% of Loan $229,980 .......... Down Payment ============================================ $262,177 .......... Total Cash Costs $67,500 ............ Emergency Cash Reserves ============================================ $329,677 .......... Total Savings Needed
Property Details for 148 TAPESTRY Irvine, CA 92603 ------------------------------------------------------------------------------ Beds: 4 Baths: 3 full 1 part baths Home size: 3,050 sq ft ($377 / sq ft) Lot Size: 4,995 sq ft Year Built: 2004 Days on Market: 9 Listing Updated: 40380 MLS Number: U10003116 Property Type: Single Family, Residential Community: Quail Hill Tract: Tape ------------------------------------------------------------------------------ According to the listing agent, this listing is a bank owned (foreclosed) property.
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