Housing Doom

Today we’ll try and unravel the twisted logic of Realty Times’ Blanche Evans and Lawrence Yun of the National Association of Realtors.  According to Evans:

This latest report should put the notion to bed that the housing boom was largely driven by speculators. The National Association of Realtors annual Investment and Vacation Home Buyers Survey finds that investors and second home buyers snapped up one third of the homes sold in 2007.

While the volume of sales is down along with home sales in general, the market share of investors and second-home or vacation home buyers is 33 percent, close to the historic norms at the height of the housing boom.

Investors bought 21 percent of homes in 2007, down only one percent from 2006. And vacation home buyers dropped from 14 percent in 2006 to 12 percent in 2007.

Wait a minute. I thought there was a credit crunch. That vacation homes were piling up like college student laundry. That investors got out of housing and moved into gold, corn and oil.

So what’s happening? Primary residence sales declined 10.0 percent to 4.34 million in 2007 from 4.82 million in 2006, but vacation sales (-30.6 percent) and investment homes (-18.1 percent) fell much more, possibly due to tighter credit and economic uncertainty.

You were right Blanche about two things- there is a credit crunch and the vacation homes are piling up. That theory about the boom being driven by speculators has not been put to bed- it’s walking around and wide awake, however.

First of all, according to the 2006 report, market share for second homes is down from it’s peak of 40% in 2005.  Yun is reporting current market share as 33% in 2007.  It’s unclear to me how one has a "historic norm" at the height of a boom, but Evans is in error - market share has clearly dropped. Yun indicates in the report Evans references that there has been a serious decline in investment purchases:

Lawrence Yun, NAR chief economist, said the findings suggest different cycles for each of the sectors over the past two years.  “Investment-home sales declined sharply in 2006 as speculators disappeared, leaving the market to serious buyers, with the pattern continuing in 2007,” he said.

Actually market share has probably dropped significantly more than the percentages indicate- clearly sales numbers for vacation and investment homes have dropped.  Because mortgage rates and loan terms are more advantageous for owner-occupiers, many speculators lied to obtain more favorable financing. Also remember that these numbers are resale only, and do not include new home sales. Financing available through homebuilders made purchasing new homes for investment purposes attractive in the boom years, and many of those new homes are now back on the market as resales.

Evans continues:

Twenty-eight percent of vacation-home buyers paid cash for their property, as did 35 percent of investment buyers.

Plus, investors and second home buyers aren’t interested in short-term gains and plan to hold on to their properties from four to ten years (median) respectively.

Investment homes are $150,000, unchanged from 2006, while the price of vacation homes have dropped $5000 to $195,000.

Eight out of ten second home buyers believe it’s a good time to buy real estate, and a majority plan to buy another property in the next two years.

So what does that tell you? People with more money are spending it on real estate.

Looking at the numbers, it’s clear that a lot fewer "people with more money" are spending it on real estate.  That said, agents I know are telling me they do have a significant percentage of buyers that are speculators. Inqueries I receive certainly indicate that there is a lot of interest in buying investment property, particularly short sales and foreclosures.  To a large extent, I believe that is because "wannabe" flippers are thinking that now is the "bottom", and they are going to make a killing snapping up bargains.  Many of those who might ordinarily be shopping for a primary residence however, are unnerved by current market conditions and are sitting tight or are choosing to rent.  Owner-occupiers are more risk averse than investors- It does not necessarily follow that the "smart money" is on real estate.

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From Reuters last Friday:

PHILADELPHIA (Reuters) - Authorities in Philadelphia will suspend foreclosure sales of homes whose owners have fallen behind on adjustable-rate subprime loan payments — potential relief for tens of thousands of struggling debtors.

Sheriff John Green said on Friday he would halt sales of foreclosed properties in April and would seek a court order extending a moratorium for an unspecified period.

The response from this Philadelphian "People will stop paying their mortgages, because they know they will not be foreclosed on."

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"We paid too much, and now we need help!"

This time the cry isn’t from "bamboozled" subprime borrowers, but from developers who bid too much for state land purchases:

At least three developers who purchased land in northeast Phoenix’s Desert Ridge area when times were good are seeking relief from the terms of their purchase from the Arizona State Land Department.

The first, Meritage Homes, bought a 288-acre parcel between 56th and 64th streets for $92.2million in July 2005. It was reported in December that the company was attempting to change its payments, but no agreement has been reached.

The others seeking help:

• Gray Development Co., which recently missed an infrastructure payment on its 32-acre parcel at 56th Street and Loop 101 that it bought in May 2004 for $33.4million. The company got a 90-day extension last week.

• Toll Brothers, which is seeking relief for the 81-acre parcel it purchased for $19.7million in April 2006.

 L’s comment:

Now lets look at this.  Other bidders were shut out because of a few idiots that ran the price up and got the land.   Now these guys want relief and term modifications?   What happens to the realistic bidders that would have had cash or other financing in place?

How much help is likely here?

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Power Ranch is a nice master-planned community on the far east side of Gilbert, AZ.  The largest homes in Power Ranch were built by Toll Brothers in "The Enclave", the largest model being "The Terraza."  Not everyone in the Enclave has been happy with their home, but it’s a very nice neighborhood. The market slowed as Toll was finishing this neighborhood, and I believe it was late 2006 when Mr. Twist and I spoke with the agent who had listed Toll’s last inventory home.  It was a Terraza with an unfinished pool and carpet on every square inch of floor- including kitchen and bathrooms.

The agent told us that the list price [$850K, or very close to it] was Toll’s lowest number.  He admitted that the house had been sold three times and all had fallen through, but they were staying firm on the price. This was quite a jump in price from the  2004 price for the same model.  Here’s Toll’s descriptions of Enclave homes from November 2004, and the Terraza’s base price was given as $500,975.  I didn’t follow through to see what this Terraza closed at, but M and I have watched prices in this neighborhood for some time.

Here’s another Terraza- now currently in the hands of the bank.  According to the Arizona Republic’s website, this Terraza sold for $400,980 in 2002, then for $825,000 in 2005- then M got this in his email this past week:

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I  (along with many others) believe that the housing crisis was brought on, in large part, by poor policies and planning on the part of Alan Greenspan and the Federal Reserve.  So who does the Treasury Department feel is best qualified to take over crisis management?  You guessed it– the Fed:

WASHINGTON (Reuters) - The U.S. Treasury Department will propose on Monday that the Federal Reserve be given sweeping new powers that would make it chief regulator with authority to take actions to ensure market stability.

The proposals say a "market stability regulator" is needed and the Fed best fits that role, suggesting the central bank could use its control over interest rates as well as its ability to provide market liquidity to fulfill its functions.

It proposes that the Fed be given broad authority to require information from all participants in financial markets and a right to collaborate with other regulators in writing the rules that companies and institutions must follow.

NEW FED POWERS

If the Fed finds that the actions of some market participants pose risks for the overall financial system or the economy, "the Federal Reserve should have authority to require corrective action to address current risks or to constrain future risk-taking," the summary said.

Among other recommendations, Treasury suggests merging the Securities and Exchange Commission, the U.S. markets watchdog, with the Commodity Futures Trading Commission that oversees the activities of the futures market.

It also recommends getting rid of a Depression-era charter for thrifts that was intended to make it easier to obtain mortgage loans, saying it is no longer necessary. That would mean closing up the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency that oversees national banks.

The chairman of the House Financial Services Committee, Democratic Rep. Barney Frank, last week said Congress should seriously consider giving a federal agency the power to monitor all risk in the financial system and act when necessary, regardless of its corporate form.

Frank suggested one possibility would be to empower the fed as "Financial Services Risk Regulator," an idea that Treasury’s proposals appear to broadly embrace.

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It’s Friday, and with all the talk of recession, we have to ask ourselves if the job market will come to this: [Thanks L!]

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The following ad was in M’s junk mail yesterday:

Note this is a "Realtor communication" - not intended for general consumption.  Coincidentally once more ARMLS reiterated their policy on listings yesterday- no talking about bonuses:

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A friend forwarded me a copy of a report "The Bell Curve of Doom?  - The Case - Shiller Price Index."  I thought the following paragraph from this report did a great job of putting price declines in perspective:

According to the Case-Shiller Composite 20 (metro areas) index, the price of an existing home peaked in July 2006. From the July 2006 peak through January 2008, the price of a representative home has fallen 12.5%. To put this in perspective, if someone had purchased an existing home in July 2006 for $1 million with a downpayment of $125 thousand (12.5% of the purchase price), that someone’s equity in the house as of January 2008 would be approximately zero. Unless there was a radical reversal in the direction of home price changes in February, that July 2006 home purchaser was upside down – i.e., had negative equity in his or her home. The Case-Shiller home price index represents a bell curve of doom for recent home purchasers and home lenders.

Note, you don’t have to be a hoodwinked, no equity down subprime borrower to be in trouble.  All that has to happen for a borrower to be in trouble is to have purchased a home at the wrong time and paid more than historic fundamentals warranted. Why does this make a difference? Look at this claim from a recent Businessweek article:

Standard & Poor’s Ratings Services believes that the bulk of the writedowns of subprime securities may be behind the banks and brokers that have already announced their results for full-year 2007. There may be some additional marks to market as market indicators have shown deterioration in the first quarter. However, when we dissect the percentage of writedowns taken against various types of exposures, in our opinion the magnitude of some writedowns is greater than any reasonable estimate of ultimate losses.

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It’s spring in Phoenix- that time of year when we celebrate an "improvement" in the housing market, whether the market is showing real improvement or not.  According to Catherine Reagor in the Arizona Republic yesterday:  [Hat tip CC!]

Existing-home sales climbed unexpectedly in February, as home buyers took advantage of low interest rates, falling home prices and foreclosure bargains.

The uptick in resales ended multiple-month losing streaks both nationally and in metro Phoenix and is prompting speculation that the housing market is close to hitting bottom.

If you want to see how close a market is to the "bottom" check out supply vs. demand.  Several months [not merely a single data point] of lowering supply and rising demand would be the best possible indicator of a market that is improving.  We need to be careful when evaluating a fall in inventory in the winter months, as homes are often taken off the market during the holidays, only to reappear in the spring.  Cancelled and expired listings are likely to reappear, and therefore do not represent a diminished supply.  Here’s what supply vs. demand looks like in Phoenix these days. [This is for single family and condo sales per ARMLS]

There is currently over 16 months of inventory on the market at the current rate of sales.  With over 16 homes for sale per buyer, it is going to only be the aggressive seller that makes the sale–putting downward pressure on prices.  It is highly unlikely, then, that prices are anywhere near the "bottom"

Reagor continues:

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There are times when foreclosures make sense.  It can get an underwater borrower out of a difficult economic situation;  it can readjust the market price of a property  so that it can be purchased by someone who can afford it.  I have to question the sense of this scenario though:

In western New York, the city of Buffalo filed a lawsuit on Feb. 21 against 36 lenders — including big names like JPMorgan Chase and Countrywide Financial Countrywide Corp who were involved in 57 foreclosures that led to properties being abandoned and ultimately demolished by authorities.

The struggling Rust Belt city, plagued by about 10,000 vacant homes and commercial buildings, estimated the 57 foreclosures cost Buffalo $1 million in demolition work and another $1 million in nuisance costs — from police patrols to boarding up buildings, to the social toll on communities.

"We have found homicide victims in these structures," Buffalo Mayor Byron Brown said in a telephone interview.

"Dog fighting has taken place in these structures. Drug dealing has been conducted. Last year one of our fire fighters was critically injured, losing one of his legs from the knee down, fighting a fire at a vacant structure," he said.

Alisa Lukasiewicz, who runs the city’s law department, said Buffalo drew inspiration from similar lawsuits in Cleveland and Baltimore. "These properties are in a state of legal limbo," she said. "Banks walk away. The homeowners are gone, and the property is still there."

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