Free-Rent Bonanza

From HW:

Although the drop in default rates shows promise, the amount of shadow inventory still creates a dark loom over the future of housing prices, according to latest results from Standard & Poor’s U.S. Residential Performance Index.

The shadow inventory of unresolved distressed properties is currently at an estimated $405 billion, representation four years of housing inventory and one-third of the outstanding U.S. non-agency residential mortgage debt.

The report states that full recovery will only occur once the supply of distressed properties shrinks to less than a quarter of the current volume.

Additionally, the monthly liquidation and cure rates are at about 2.5%. This stems to an overall resolution rate of 5%, where these rates have lingered in the past nine months. (See chart below)

The slowing first default rates seen on the chart allows borrowers to resolve loans and clear out the inventory instead of defaulting and adding more, S&P said in the report.

Del Mar Is Racing

Here are the detached closings for Del Mar, 92014, between Jan 1 and July 22:

Year # of sales Avg $/sf

Last month there were 17 sales, averaging $607/sf.

There are 138 detached homes for sale currently, and those list prices are averaging $1,006/sf:

Rent the REOs?

Hat tip to daytrip for sending this along, from the wsj.com:

The Obama administration is examining ways to pull foreclosed properties off the market and rent them to help stabilize the housing market, according to people familiar with the matter.

While the plans may not advance beyond the concept phase, they are under serious consideration by senior administration officials because rents are rising even as home prices in many hard-hit markets continue to fall due to high foreclosure levels.

Trimming the glut of unsold foreclosed homes on the market is “worth looking at,” said Federal Reserve Chairman Ben Bernanke in testimony to Congress last week.

Nationally, home prices in May were 7.4% lower than a year earlier, but after excluding distressed sales, prices fell just 0.4%, according to CoreLogic Inc. Foreclosures and other distressed sales now account for about 30% of homes sold each month and sales from government-related entities make up about one third of that number.

“Adding more stock simply increases that overhang. If that can be avoided, it should be,” says Jared Bernstein, an economist who left the White House in April and is now a senior fellow at the Center on Budget and Policy Priorities, a liberal think tank in Washington. Because rents are firming up, “this idea could have some legs,” he said.

Renting out homes could cover the costs of holding the properties until they can be resold once markets stabilize, potentially turning a profit for mortgage titans Fannie Mae and Freddie Mac or the Department of Housing and Urban Development, which handles foreclosures on loans backed by the Federal Housing Administration.

But scattered-site rental programs could require the government to become a national landlord, an area where the mortgage firms have little experience. They also pose accounting challenges that could produce big upfront losses.

One proposal winning support among some federal officials would sell thousands of foreclosed federal properties to private investors who agree to rent them.  Investors would rehab homes, run the leasing process, and contract with national property management firms to handle day-to-day tenant demands.

The government could keep a stake in the venture, modeled on loss-share transactions by the Federal Deposit Insurance Corp. Officials have received interest from around a half-dozen private investors, according to people familiar with the matter.

HUD owned about 69,000 homes at the end of April and sold 11,000 homes in that month. Fannie and Freddie held another 218,000 at the end of March.

Analysts at Credit Suisse estimate that reducing Fannie and Freddie’s foreclosed-property sales to around 30,000 each month, from the current rate of 50,000, would cut total distressed sales by one third and avoid a further 3% to 5% decline in home prices.

By flushing foreclosed properties onto markets with few traditional buyers, Fannie and Freddie are “undermining their own recovery,” says John Burns, the head of a homebuilding consulting firm in Irvine, Calif., who backs the public-private rental approach.

San Diego’s Affordable Housing

Our old friend Will Carless has completed an investigative report on building affordable housing in SD.

Click here for the full report, and an excerpt:

In Barrio Logan, in the shadow of the Coronado Bridge and under the watchful eyes of the Chicano Park murals, bright yellow backhoes busily cleave away the soil.

It’s here, in one of San Diego’s poorest neighborhoods, that the city will get its newest government-sponsored housing project: the Estrella del Mercado, a 92-unit apartment building that will sit above shops and restaurants and adjacent to a Latino-themed supermarket, all part of the Mercado del Barrio development.

The project has been a long time coming. The community waited for more than two decades while local government agencies put together one deal after another, only to watch those projects fall apart without a single hole being dug or nail being nailed.

The $44 million apartment project will cost an average of $477,743 per unit, 90 percent of which will be paid by taxpayers. That’s twice what private developers say they’re spending to develop high-end apartments in the city today.

A few miles away, in Mission Valley, a private developer said he’s building top-shelf apartments for $225 a square foot. Another developer currently building upscale apartments downtown said his total cost is $275 a square foot.

The Estrella del Mercado apartments will cost $542 a square foot.

Taxpayers have poured almost $600 million into two dozen housing projects in the city of San Diego since 2007. A three-month voiceofsandiego.org investigation showed that, again and again, these projects are wildly more expensive than private developments.


More Tyvek

Remember the guy who bought the new-home foreclosure in Leucadia for $810,000 in January, 2010?

He found out later that the house he bought was tied up with the Barratt bankruptcy, due to the low-income housing required by the City of Encinitas.  The City wouldn’t issue any notices of competion on the remaining lots/houses without an answer for the low-income housing.  Enter Shea Homes, who paid $3,975,000 for the the corner we call Tyvek Estates, and then made a deal on the low-income housing lot.

Now things are moving again – for everyone:

Mortgage Rates Holding

Remember how some thought that rates would skyrocket after QE2 ended in June?  From the AP:

WASHINGTON (AP) — Fixed mortgage rates were mostly unchanged this week, inching up from their yearly lows.

The average rate on the 30-year fixed loan ticked up to 4.52 percent from 4.51 percent a week ago, Freddie Mac said Thursday. It reached its yearly low of 4.49 percent a month ago.

The average rate on the 15-year fixed loan, popular for refinancing, nudged up to 3.66 percent from 3.65 percent, its low point for the year.

Mortgage rates typically track the yield on the 10-year Treasury note. Yields fall when prices rise. In the past week, yields have been stable even though Congress and the Obama administration are less than two weeks away from a possible default on the government’s debt.

Negotiations to raise the government’s $14.3 trillion borrowing limit have yet to produce a deal that can pass both chambers of Congress, although a bipartisan Senate plan has drawn support from President Obama.

Low mortgage rates and depressed home prices have done little to revive the struggling housing market. Many people simply can’t take advantage of the historically low rates because of tighter lending standards and bigger required down payments.

Other potential homebuyers are holding off, concerned that housing prices will continue to fall.

Few economists expect the housing market to rebound before 2013.

Housing Demand

This guy has experience in the mortgage industry, so that makes him an expert about housing demand.

Here’s the link:


My takeaways:

1. He ignores the fact that tough underwriting today has much to do with the lenders’ paranoia about buying back mortgages from Fannie/Freddie.  As we transition to private lending, the underwriting will make more sense.  You can already get a seven-year interest-only mortgage in the mid-4% range up to $2,000,000 with 20% down payment (and up to $1,000,000 with 15% down).

2.  He makes his whole down-payment case based on people saving the money from scratch.  What about the buyers who are using money from previous home sales, bonuses, inheritances, gifts, businesses, and sales of other assests?

3.  He notes that the average student borrows $23,118 to get their bachelor’s degree, to only then make $27,000 per year (the median salary for college graduates in 2010).  At that pace, college will stop being seen as the holy grail before long.  Thankfully there are plenty of folks who already have degrees and well-paying jobs who want to buy.

4.  Looming retirement will take older folks out of the buying pool, and/or cause downsizing.  I agree that downsizing is a major trend currently, and likely to dominate the landscape for the next 10 years.

5.  New regulatory hurdles could further impair the mortgage market, and in particular, the securitization of loans.  The banks who are willing to keep their loans will be in a great position.  Higher rates may result.

If demand dwindles, and sellers don’t want to lower their prices, then sales will drop further, and everyone will stay put.  Some will live for free for years, others will struggle to keep up, and most will forget about this crazy housing talk and go to the races!

June Home Sales

Instead of checking every MLS system in the country (or perhaps just monitoring their own realtor.com), the NAR approximates the annual sales pace every month.

From the AP:

WASHINGTON (AP) — Fewer people bought previously occupied homes in June, putting this year on pace to be the worst for sales since the housing bust.

Home sales fell 0.8 percent last month to a seasonally adjusted annual rate of 4.77 million homes, the National Association of Realtors said Wednesday. That’s far below the 6 million homes per year that economists say represents a healthy housing market.

June’s decrease was the third straight monthly decline in sales. Through the first six months of this year, the sales pace is behind last year’s 4.91 million homes sold _ the weakest sales in 13 years. Sales have fallen in four of the past five years.

The Realtors’ group said a record number of people who signed contracts canceled deals last month. And first-time buyers fell to a smaller share of the market.

Single-family home sales held steady in June. But condo sales plunged 7 percent.

The median sales price jumped nearly 9 percent in June from May, to $184,300. It was mainly because of seasonal factors that led to a big increase in prices in the Northeast and West.

Sales were uneven across the country. In May, sales rose 0.5 percent in the West and 1 percent in the Midwest and fell 1.7 percent in the South and 5.2 percent in the Northeast.

Let’s keep it local, shall we?

San Diego County closings:

Month Detached Sales & Avg $/sf Det. and Att. Sales & Avg $/sf
June, 2010
2,100 / $255
3,270 / $246
May, 2011
1,864 / $241
2,836 / $236
June, 2011
2,019 / $236
2,995 / $235

North San Diego County Coastal closings:

Month Detached Sales & Avg $/sf Det. and Att. Sales & Avg $/sf
June, 2010
256 / $385
388 / $370
May, 2011
243 / $383
371 / $357
June, 2011
248 / $375
377 / $363

There have been 114 detached closings in NSDCC with 8 days to go in July. Include the usual 10% who are late-reporting and we might get to 200 – but fewer sales appear to be in our future.

Should Home Buyers Wait?

Mozart has staked his reputation on North SD County Coastal home prices going up 10% in two years.

If there were rumblings of increased pricing, would buyers get off the fence? 

Yes, I think they would, but being off the fence and actively looking for a home, is different than buying.  Can you imagine the environment?  If the media started bottom-talking, there would be MORE over-priced turkeys than today because sellers would be quick to tack on an extra 5-10% on top of their already-inflated sense of what their house is worth.

Here’s an example of how San Diego sellers reacted lately – note how quickly the list pricing goes up:

Rising mortgage rates might cause prices to come down, making the wait worth it for buyers. But they’d have to go way up to tank the market – probably above 6% and closer to 7% – and Helicopter Ben has said that he has more tricks up his sleeve.  Because sellers would be slow to react to higher rates, and most would probably just cancel and wait, there would be a limited number of sales at drastically-reduced prices.

How much would sellers have to come down to compensate for rising rates?

For illustration, here are the loan amounts that have roughly a $2,684 per month payment, P&I:

5% = $500,000

6% = $446,000

7% = $405,000

8% = $366,000

If rates went to 7%, how many sellers would cut $95,000 off their price to compensate? 

Those that did probably wouldn’t be selling premium properties, they’d be giving away their junk.

Prices around NSDCC have been fairly stable the last two years, what else besides higher rates might cause them to drop?  Natural disasters, wars, terrorist attacks, country going bankrupt, and other major negative events would cause sellers to cancel their listing, not dump.  About the only thing imaginable would be banks ramping up the foreclosure machine and then giving them away on the open market – and we’ve seen lately how adept they are at kicking the can down the road.

Things that could help improve the market (but all look very unlikely):  Better unemployment, tax revolution, creative financing, additional well-priced inventory, etc.

An improving market might cause buyers to heighten their efforts, but in the end, almost all will be patient until they find the right house, at the right price.

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