Where are we now?

1. The Good News – we’ve wrung a lot of inflation out of the housing bubble. Looking at the Case-Shiller index, Los Angeles house prices dropped about 30% in the 1990’s recession and we see a similar drop today. In the 1990’s it took 10 years for LA prices to recover to their peak. How could this be good news? It may mean prices are in sight of a bottom, and we’re in for a long period of low but stable growth. Not a V, W or U shaped recovery, but a tilted L. I don’t see how a quick recovery in housing prices could be a good thing anyway – we don’t want another crisis in confidence.

2. The Good News Within the Bad News – although at record highs, the monthly rate of change in the newly unemployed has been stabilizing, the rate of change of mortgage delinquencies and foreclosures are decreasing, while the number of loan modifications is increasing.

Some of the housing delinquencies may be voluntary, as some homeowners appear to be withholding payment in order to gain lower interest rates. Also, many foreclosed owners are now free of a burdensome debt and are rebuilding their financial lives.

Foreclosed home prices, at least at the low end, appear to have stabilized, and thanks either to the banks’ inability to work as fast as a real estate agent, or a conscious effort to limit supply and keep prices up, supply is not matching demand, resulting in bidding wars.

Local home prices in some price ranges have dropped to around 2002-2003 levels which is good for buyers who hadn’t bought before the bubble. If we are at the bottom, prices will gradually increase (on average – there will be seasonal bumps). It is bad news for Sellers who bought during the bubble, but at least there will be buyers at the right price.

Obtaining mortgages is more difficult – we now allow 45 days on a financed closing, but Jumbo loans are back, and the feds will subsidize certain mortgages through the first quarter of next year.

3. The Bad News – there is another round of foreclosures coming from Pay-Option or Negative Amortization loans. These are beginning to reset, and will continue for about two years. These will more affect higher end homes than did the sub-prime, low credit score loans.

Conclusions

Higher end sellers should carefully consider offers as we won’t go back to high prices for a long time, and there could be more declines. Also, high-end inventory that has been held off the market will return when there are clear signs of recovery, resulting in more competition, keeping prices down.

Buyers can wait, but they may be risking price increases arising from a market recovery, inflation, higher interest rates, or a weak dollar bringing in more foreign buyers .

Case-Shiller

We don’t have a C-S index for our area, but a close look at LA’s is revealing, particularly the size of the bubble for lower cost homes, and the fact everything has converged back to the same levels around 2003. This could indicate stabilization.

From Real Estate to Broadband

Real Estate has been slow, so to keep busy in my spare time, I’ve been following the FCC public inquiry on Broadband. I have some background in the use of the radio spectrum, and like all of you, I want faster and cheaper internet access. I submitted comments that I hope will be taken into account – primarliy that every home should have fiber optic access, and there be competition within that delivery mode. If you are interested you can read my comments at
http://fjallfoss.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=7019807819

New 180 Day Delay Before Trustee Sale

Today California has added another 90 days to the foreclosure period if a Lender does not have a comprehensive loan modification program that is approved by the California Department of Corporations. This bill was passed last February, so I would think most Lenders have already created programs and we shouldn’t see any great drop in REO’s coming into the market. Details here http://www.corp.ca.gov/FSD/CFP/default.asp

Housing – Quo Vadis?

Our local housing market seems to be bouncing along the bottom, with the median price staying about the same for the last five months. In the Valley, we have a declining supply of bank-owned properties that could result in an increase in median prices, as that low end price supply dwindles. There has also been a recent increase in high end sales, and the rate of all sales last month reached the number of sales at the peak of the 2006 market.

Counter to that are the swelling ranks of the unemployed, some of whom, in time, will lose their homes. In California, the budget crisis must result in lay-offs, and we still have a group of bad loans to work through, some of which will default.

Counter to the bad news are the federal bailout plans. Generally, we should see improvements in unemployment as the stimulus funds deploy. I also suspect a good number of mortgage defaults have been spurred by the offer of much better terms. If I thought I couldn’t pay my mortgage in the near future, I would miss a payment to get the lender’s attention.

An unknown is the prospect of inflation. This could occur quickly if the feds need to finance their newly-found debt through the printing press rather than bond sales. Inflation will make home buying more expensive, but it could decrease the cost of home ownership for those who have already bought

Feds Formalize Short Sales and Deed in Lieu

Secteray Geithner formally announced the changes I reported in an earlier blog. The announcement can be seen here. A problem is that some, if not most Banks are unhelpful by being hard to contact and so slow to respond. That shows me they are not really behind this. These workouts are becoming fairly complex, so if you know of someone who needs help, tell them to try the FICO approach shown in my last blog, and hook into experts who are on their, the homeowner’s side.

Free help with those pesky lenders and avoiding frauds

People having trouble with their mortgages are finding it difficult to get their lender’s full attention. A free new service by FICO and others is helping borrowers document their financials. Using FICO credit information and professional counsellors, they can intially approach the lender with a complete assessment of their situation, including if they meet one of the federal government mortgage remediation programs. This is also a no-cost way to avoid the many fraudulent mortgage relief scams out there now. You can see how this works here

HUD Secretary Donovan on C-Span May 3

Secretary Donovan outlined the Obama government approach to reduce foreclosures. In addition to measures already passed, we can look forward to legislation to prevent foreclosures by enabling homeowners to make short sales by making the lender accept a lower value, or return the property to the lender by “deed in lieu”. I hope this doesn’t go the same way as “cramdown”. Measures to deal with second mortgages should also be included. He said at some time in the future we may see a plan to deal with negative equity. The full 26 minute interview can be seen on C-SPAN.

Why No Cramdown Law?

Banking isn’t my business, nor is politics, but I am in Real Estate, and I see things. So Bankers – explain why you book repossessed properties at an AVERAGE of 60% of what you wanted at a Trustee Sale. Is that what the actual value of the property is – YES. Is that why only 5% of them sell at Trustee sale – YES. Did you offer that deal to the foreclosed homeowner – NO. Did you take their downpayment and lure them into risky loans – YES.

Unless someone can prove me wrong about the above, the banks are sweating the last dollar out of the foreclosed homeowner, then and only then they price the property at its real value.

Should the cramdown provision be brought back in reconciliation – YES. It’s the least Congress should do.

Bad News and Good News

I’ve found a website, Mr. Mortgage, that has access to and analyses California mortgage default information. There’s a lot of information there, but you can generally conclude that we are seeing another increase in defaults that will result in more REO homes for sale.

More of these mortgage defaults will be of the deferred-interest payment kind, popular for higher priced homes, meaning higher priced homes will become a larger fraction of the distressed property market.

That was the bad news, the good news is the $75 billion federal homeowners assistance program is being improved and implemented, so the proportion of properties that foreclose in this second default wave should be less we saw in the first foreclosure wave.

So will housing prices continue to fall? If the number of foreclosures is smaller than the first wave, they will cycle through the market faster than the first wave. Although the second wave will have a larger number of higher end properties, the proportion of that market that forecloses will be smaller (than the proportion of the overall low end market that foreclosed in the first wave) so there will be less downward price pressure on the higher end market.

Buyers are showing strong interest in foreclosed properties and mortgage rates are low. I expect foreclosures to continue. I also expect buyers will be paying more for them as time goes on. There is a backlog of waiting buyers who will be competing for fewer and higher priced properties. By this time next year we could be at a market not driven by foreclosures.

If you are waiting for the bottom, it may be already here.