Saturday, May 31, 2008

Case/Shiller futures for Los Angeles, -43% by 2010

I was perusing Housing Derivatives this morning and they had a chart comparing the high point of the Los Angeles Case/Shiller index against the price people are investing on for November 2010 through CME Housing Futures.

When the article was written on the 27th of May current pricing was suggesting a 43% fall. As of Friday it stands at over 44%. The LA Case/Shiller index topped at 273.94, November 2010 pricing is 152.20.

CAR 2008 updated forecast, then vs now.

It seems like October 27th wasn't that long ago, let's see how the CAR forecast has changed from October to April when they posted the updated forecast.



Sales are projected to be right at the same level. But anyone reading housing news for California has seen that the cheap REO and Short Sales are defining the market. The fact that it is mainly these cheaper houses selling means the median price is dropping as well as depreciation. It is becoming increasingly hard for a homeowner to sell their home and cash out, mainly due to unrealistic expectations of what their house is worth. The REO and Short sales are showing that the credit issues are not a credit crunch. Financing is still available and interest rates are low. Going back to down payments, mortgage insurance and providing income documentation will mean that prices will return to levels supported by how much people can prove they make instead of how much they say they make.

I thought the CAR forecast in the face of the secondary market for Alt-A shutting down in August and subprime in March was an amazingly optimistic call. I bet the agents attending the expo to hear the forecast thought it was exceedingly pessimistic. If I was a CAR economist and this updated forecast proves correct I would be very worried that a 24% drop in price still resulted in a drop in sales.

Thursday, May 29, 2008


Variety of items tonight.

Sunday is the official switch to new underwriting guidelines for Fannie Mae. Their Desktop Underwriter (DU) 7.0 that all the brokers use is starting to see a bit of daylight by the early adopters. It will be interesting to see the affect this will have on the market. Fannie has said they will drop the declining market policy. But the mortgage insurers are not following suit so it makes it a moot point. Most everything else seems to a tightening, less risk layering allowed, higher credit scores required and increased fees at all but the highest levels.

Here is a taste of the complaining that will probably heard on the broker boards the next few weeks:

Why not just make it even HARDER! Just cut everything to 80 LTV 700 SCORE FULL DOC and be DONE WITH IT! All the nipping and tucking is getting on my nerves.

If this is going to have a positive or negative affect on the market it probably won't be seen in the numbers until July (reported in August).

Potentially good website to keep an eye on, Confessions of a Subprime Underwriter. A good post tonight regarding how bad appraisals were towards the end of the boom:

As for the appraisal itself the comparable sales which are the ‘meat’ of the report upon which value is justified, could be up to 12 months old as of the appraisal date. So our 6 month old appraisal could have comparable sales up to 12 months old, giving us a grand total of 18 month old comparable sales, and up to 24 months old for new construction.
So here is the lender in March 2006 for example, giving a borrower with a 580 credit score a loan for 100% of the value of his home (no down payment, and often 6% concession from the seller to pay closing costs), on an adjustable rate loan, up to 50% of his gross income in debt, on a home value that is less certain than the weather in Cleveland tomorrow.

Another note, If you're bored and want to see how a bill that would have required lenders in California to ensure a borrower is able to pay any non-fully amortizing mortgage turn into a toothless, worthless piece of legislation, have a gander at AB1830 and it's amendments. If you want to skip to the stuff that is worth anything just read the stuff that is crossed out.

And finally the Quote of the Day goes to BlackRock money manager Peter Fisher care of the WSJ:

"Lenders need someone to prevent them from competing their way to the bottom,"

Apparently someone forgot to tell Greenspan.


Two articles out highlight some of the issues facing homeowner associations during the housing downturn.

Skipped dues crunch home associations:

We're looking at a very deep hole," says Kent Miller, president of the Los Arbolitos Homeowners Association in Avondale. "I don't know how we're going to get out of it. We've put liens on all the (delinquent) properties, but it doesn't do any good."

It's a scenario being repeated across the country. Delinquent fees at condo and homeowner associations have become an outgrowth of the mortgage crisis. Housing cooperatives, in a squeeze because of unpaid fees from struggling homeowners, are scraping to pay for landscaping, maintenance, pools, recreation centers and other amenities.

Paying home dues painful:
Delinquency rates on monthly fees, which normally hover in the 5 percent range, have jumped to 20 percent in some cases. That has forced associations to make up the loss byadding to the burden on remaining homeowners, already struggling to make the regular payment.
However, he is recommending that they increase - possibly double - the "bad debt" line item in their upcoming budgets, which means monthly assessments will go up, too.

"It spreads the hurt over everybody over a 12-month period," Hoffman said. "It doesn't have the impact it might otherwise have if you have to have special assessments."
All this financial turmoil means that associations won't be able to put money into reserves for pricey projects such as redoing roofs and streets. Eventually that would likely mean increased monthly fees, special assessments or reduced services.

Homeowner associations are there to ensure conformity of the neighborhood and thereby maintaining or increasing values. But because the homeowners are bound by the CC&R's they can be on the hook for additional fees over and above the monthly dues. It is important to factor in HOA dues and special assessments when making the calculations for what to pay for a house. Many of the newer new home communities have HOA fees of $250-$350 dollars, which is the equivalent of up to $60,000 less purchasing power when going to buy a home. The newer home communities are also more likely to have mello-roos and landscaping fees.

So for the joy of having a greenbelt and a community pool you get the higher likelihood of default of your low equity position neighbors and increased exposure to special assessments. I'm actually not as negative as this post would appear towards HOA's, it is just important to factor in the whole picture. I would just make sure to realize the risk, especially in many of the many condos popping up around the SFV and some of the newer home developments from Northridge to Ventura.

Tuesday, May 27, 2008

More about foreclosures leading the market down the road to recovery.

First off, I don't think the market is nearly as strong as some of the Realtor groups are having us believe. That a ton of buyers have leaped off the fences and the boom times are back. The numbers aren't supporting that at all.


We are finally seeing more positive signs across a wider breadth of markets than we were before. With the
Case/Shiller numbers coming out today for March 2008 we again saw record prices drops in many markets. There was a denial of what was happening for so very long, it culminated locally into the worst sales volume on record. The people whose job it is to know and make market in the resale arena were failing miserably. It is only the lenders, following a very simply formula, that are leading the charge and finding market value. The formula is simple, get a few opinions on valuation, set the price, if it doesn't sell after a reasonable period of time, cut the price until it does. They aren't wed to the intial price, their egos aren't wrapped up in the home, they haven't made grandiose plans of what they are gonna do with the windfall when they sell the home. It is just price to sell, sell it and move on. When you have a number of homes to sell into a falling market this will ensure you maximize your money as the market falls. For a resale homeowner, they have only one home to sell and are trying to maximize that one sale and generally come on the market with a "wish" price that an agent has assured them they can get for their home. You are now seeing a bifurcated market with distressed sales and foreclosures making a larger and larger percentage of closed sales.

Price drops are the first step on the road to recovery, we have moved past denial and into acceptance. At least the lenders have.

This brings us to a
Bloomberg article which reinforces the article I highlighted here yesterday from the WSJ.

Karl Case, co-founder of a home-price index that bears his name, said more auctions of foreclosed properties will hasten the reduction of inventories from record levels and may lead to a faster housing recovery.

``I think we're going to see some signs of life in the next few months,'' Case, an economics professor at Wellesley College in Wellesley, Massachusetts, said in an interview with Bloomberg Radio. ``The market is beginning to clear somewhat. There is some good news in this.''
Case said the quickening pace of home-price declines reflected mounting auction sales along with traditional transactions. ``Banks don't wait around,'' he said. ``They put it on the market and get rid of it. That means prices adjust more quickly,'' and it ``clears the inventory out faster.''

We are seeing very similar behavioral patterns across the nations in varying bubble markets. We saw similar patterns develop during the boom. While agents like to say that all real estate is local we clearly see that isn't true. There are national components to real estate that unite markets, interest rates and lending policies for example. The same reason we saw a national housing boom is why we are seeing a housing bust in those same markets. We get tighter underwriting restrictions for loans and mortgage insurance at the same time loan servicers realize they aren't doing themselves any favors holding onto inventory, we then have the environment we are in today.

Here is the National, 10 city composite and 20 city composite of the Case/Shiller chart:

Here is the Los Angeles area chart:

One of the issues that I have with any price index is that it is telling you what is happening with what has sold, not showing you what is happening with what hasn't sold. As we were seeing mid-2006 through 2007 as sales slowed the low end slowed dramatically and the higher end homes still did ok. We weren't given an indication of the stress building in that sub-market by looking at price. Now we are seeing an uptick in sales on the low end with the higher end home sales stalling. The higher end markets may feel comforted by the fact that they haven't seen big price declines in volume, but the truth is we don't know what the market value really is for those homes. It is somewhere below where they are at now. Just how much further down is the billion dollar question. I still firmly believe that sales volume is a much more accurate indicator of market conditions.

Monday, May 26, 2008

Home Sales Rise in Hard-Hit Areas - WSJ

The Wall Street Journal highlights that some of the few positives uptick in sales areas are those hardest hits by foreclosure. When you have a seller willing to cut price until they find a buyer it has a positive impact on sales.

Though Americans remain wary of further drops in housing prices, the data from these areas show that some buyers are trolling for bargains. Sellers "have moved into the acceptance mode" and are pricing homes more realistically, says Thomas Lawler, a housing economist in Leesburg, Va. "I think it is the first stage of good news for the market."

Lenders' inventory of foreclosed homes has steadily increased in the past couple of years and is believed to total around half a million homes. Many lenders initially were slow to slash prices, partly because they hoped to avoid huge losses. But more lenders have been capitulating as it becomes clear that delays often merely result in lower proceeds and higher costs for taxes, insurance and upkeep.

Today's homeowner has to compete with the distressed sales and foreclosures. Some are choosing not to hoping for better times ahead, either pulling their home off the market and seeing how things look next year or renting out their home. With the lending standards returning back to normal it seems pretty clear that better times might mean that sales volume will pick up but I think it will be several years before we see anything that looks like appreciation in our local market.

Even though the WSJ article doesn't specifically talk about our local area there are some tentative signs in the latest sale reports in the hardest local hit areas that the low priced foreclosures are the ones accounting for the pickup in sales.

Upcoming foreclosure auctions.

The foreclosure auctions you see advertised on television are vastly different than the foreclosure auction held on the county courthouse steps. These advertised auctions are just marketing gimmicks to try to generate time urgency and try to get bidders to bid close to market value for a home. These auctions are not absolute auctions, the lender defines a reserve and depending on various factors the auctioneer can either bid up to the reserve with no other bidders (though it seems like there are bidders the way they conduct the auction) or just let the auction flow and see what bids they get. After the final bids are in the lenders will then decide whether or not they want to accept the bids they received or counter offer to the highest bidder. It is basically a starting point for negotiations unless the bidding gets in the ballpark of market value.

Here are the coming auctions for Ventura and Los Angeles county:

There are smaller auctioneers, like Kennedy-Wilson and Catalist Homes doing small auctions but nothing of note in the local area. You may want to keep an eye on them in the future.

Sunday, May 25, 2008

Ventura County April 2008 Sales

As we move through the year I hear words like "recovery" and "bottom" from agents I meet and interviewed in the press in regards to April 2008. If things are feeling better it should start showing up in the numbers. Here are the historic trends for Ventura County as a both yearly and just for the month of April as reported by Dataquick. So far I see nothing but a seasonal uptick in the numbers with April still looking weak historically. For the real estate industry volume matters more than pricing. And as prices continue to fall things will start feeling better for the real estate agents because sales volume will pick up.

I do think that this last winter marked a low point as far as sales volume and just based on simple supply and demand that as prices continue to fall sales will continue to pick up. Due to economic headwinds, such as government spending cuts and the situations with Countrywide and Amgen, I don't think the sales volume recovery will be very sharp but it should be better. This is little comfort to the average homeowner as prices will continue to fall to match incomes and available financing in the marketplace.

Saturday, May 24, 2008

Southern California Mortgage payments

This is simply a chart of the typical mortgage payment a Southern California borrower agreed to pay since October 2000. The red line is the mortgage payment reported in the press release, the green line is the 1989 peak, which started being inflation adjusted in 2004, as reported in the press release. For some reason the inflation adjusted peak varies but it gives a simple guide to the previous boom. The typical mortgage payment reflects what mortgage people are willing and able to pay during a period of time. While the psychology, the willingness to take on debt, is an extremely important part of any bubble, it is hard to quantify. The money people are able to get from the bank defines their purchasing power. With down payments coming back en vogue and America having a negative savings rate it will be an interesting chart to watch in the future. We are already 33% down from the inflation adjusted peak mortgage payment. This reflects cheaper houses selling and buyers unable to take on as much debt. In the last Dataquick press release median prices didn't fall 33%, this may be a reflection of the inflation adjustment and interest rate difference from a year ago. Unfortunately Dataquick doesn't explain their methodology.

This is yearly mortgage payments for So. Cal. divided by median income for Los Angeles County as reported by the N.A.H.B.. The right scale is the percentage of gross income it took to buy a home. In other words prices were rising not due to low interest rates (monthly and yearly payments remove interest rate variablity) or incomes rising. This is just a rough graph since I don't have the individual county data for mortgage payments but gives an idea of how much debt people were willing to take on and how much the banks didn't worry about getting the money back.

Thursday, May 22, 2008

April 2008 San Fernando Valley Condo sales not having a spring bounce.

The Southland Regional Association of REALTORS® April 2008 report had some significantly upward trending Single Family Home (SFH) sales. Looking at condo inventory, pendings, sales and prices it is clear the condo market is not enjoying the same spring bounce and is might possibly set for a record worst year for condo sales. The simple reality is that on the lower end home prices have fallen far enough to start competing and taking sales from the condo market and the condo market hasn't adjusted enough. This will be an even bigger story in a few years as life events (marriage, divorce, births, deaths, jobs loss and job movements) start affecting the 2004-2007 vintage buyer and they are stuck underwater.
Sales and prices dropped both from March '08 and April '07. April '08 sales were 146 compared to 151 the previous month and 175 last year. Median price for April '08 was $300,000 compared to $315,000 last month and $395,000 last year.

Wednesday, May 21, 2008

Senate version of the FHA "bailout" bill anything but a bailout.

The "Federal Housing Finance Regulatory Reform Act of 2008" was passed by the Senate banking committee today. I'll review a few technical details and explain why I think this bill, if passed with the revisions added today, will be a significant win for those wanting a market driven solution to the housing crisis over those wishing government intervention.

The basic idea is that the FHA will insure a mortgage if the lenders will take a voluntary cut to principal and the borrower will be able to pay the newly written down mortgage. People characterized this as a bailout of lenders because the amount they would get on a refinance would be more than the amount they could sell the mortgage for on the open market. Borrowers get the benefit of taking on a mortgage they couldn't afford with little to no down payment, thus fueling the housing boom, and getting a significant amount of money written off so they can stay in the home.

Let's take a hypothetical $600,000 mortgage taken by a couple making $80,000 a year. Under the plan the lender must write down the mortgage to 90% of current appraised value. If we say the house currently appraises for $500,000 dollars then the borrower is qualified and paying off a $450,000 remaining balance. The lender will also pay a one time premium payment of 3% of the insured amount to FHA plus, presumably, other fees and origination costs on the loan because the borrower would have no money. So the lender at the end of the gets around 85% of current appraised value for a house. Considering foreclosure, carrying and selling costs, not a bad deal in the current marketplace.

Now onto the borrower, he gets all junior mortgage lines forgiven and any prepayment penalties and late fees waived. The borrower cannot own another home, cannot be defaulting on his house intentionally (could luck enforcing that), must be living in the home and have verified income. The exact wording for verified income was :

INCOME.—In complying with the FHA underwriting
requirements under the HOPE for Homeowners pro
gram under this section, the mortgagee under the
mortgage shall document and verify the income of
the mortgagor by procuring an Internal Revenue
Service transcript of the income tax returns of the
mortgagor for the 2 most recent years for which the
filing deadline for such years has passed and by any
other method, in accordance with procedures and
standards that the Board or the Secretary shall establish.

The remaining mortgage must be "affordable" to the borrower. And while no rule is given in this section as to affordability they do talk about affordability in two places. For FHA secure a loan can be refinanced to 35% debt-to-income (DTI) and for this program only loans above 31% original DTI qualify to be refinanced. So the DTI number is either 31% or 35%.

If we look at a $450,000 loan with a 30 year fixed at 6% we get the following numbers:
  • $2,697.98 for a fully amortized payment.
  • $468.75 in property taxes (California ~1.25% of purchase price, we will adjust it down to reflect the declining market)
  • Homeowners insurance @ $75 a month

This initial total is $3,241, then we have to add in the FHA mortgage insurance premium. For this program it is a 1.5% of the original mortgage balance a year for 5 years. This adds another $625 a month to the payment. Under a 31% max DTI the borrowers income must be $149,679. Under a 35% max DTI the borrowers income must be $132,573. These debt to income restrictions combined with high mortgage insurance premiums ensures that anyone entering the program will either have a significantly lowered mortgage or just be on the edge of affordability and get a hand up into keeping the home.

If you consider other portions of the bill, particularly the GSE regulator, I think the bill would not be a bailout for anyone and could in fact help ensure a safer more sound marketplace sooner rather than later. Frank & Dodd may let the bill pass in its current toothless form in the hopes of changing it after next January.

Tuesday, May 20, 2008

2008 First Quarter housing affordability for Ventura and Los Angeles

Click charts for larger version

Here is the National Association of Home Builders/Wells Fargo Home Opportunity index charted with Median prices and Median Incomes for as long as the NAHB has had available (unfortunately not that long for Ventura). Affordability improved for Ventura due to both Median income rising by 5.5% and Median prices falling. It is odd in the face of rising unemployment for Ventura county that incomes are rising.
Los Angeles still maintains it rank as most unaffordable region in the nation 223rd out of 223 of the largest MSA. Ventura clocks in at 211th.

San Fernando Valley 2008 SRAR April Sales Report

The Southland Regional Association of REALTORS® has reported the first yearly increase in Single Family Home sales since September 2005. This months report of 547 SFH sales beat last years sales by 100 homes sold, a 22.3% increase. A more important statistic as far as a measure of future home sales is the large increase in pending activity which increased to 876 opened escrows from 655 the month before, clearly May sales will be higher than Aprils. Deals opened in March 2007 were affected greatly by the subprime explosion which occured during February and March and caused sales to drop very fast. The market recovered quickly as other lenders stepped into the subprime space but by August/September with the Alt-A blowup and the secondary mortgage market shutting down we have seen sales drop low and stay low for a historically long time. With foreclosures mounting and inventory rising pricing started to give significantly and we see the effect on the median price. Prices were falling before this point but due to vagaries of median prices it didn't show itself until all levels of the market were affected by the rise in lending standards.

The median Single Family Home stood at $637,000 in April 2007. For April 2008 the median price for a Single Family Home stood at $465,000. A staggering $172,000 drop. But in reality this was a combination of factors. Compositional shift in the homes that sold, smaller cheaper homes selling bringing the median down. A similar composition shift was in effect last year at this time with only the bigger more expensive houses selling while the low end of the housing market stagnated. The high end inventory is not moving well and what is moving is realistic sellers willing to negotiate under the terms offered by the buyers. Many of these sellers are dragged into this reality kicking and screaming, it is either a distressed sale (short sales) or a lender selling their foreclosures into the marketplace. It takes a very brave buyer to make a large financial purchase in a very fast falling market but the buyers are clearly out there making offers.

So while the San Fernando Valley was one of the few bright spots in Los Angeles County for April 2008 as far as sales volume it came at quite a cost. Even with the price drops sales are still abnormally low. Prices will go lower still as the market struggles to find an equilibrium point. I will attempt to break down the amount of "stress" in the marketplace later this month but I wanted to get a short report up on the local market while the data was fresh.