June 29, 2012

A Sense Of Blinding Positive Anticipation

It’s Friday desk clearing time for this blogger. “National Association of Realtors Chief Economist Lawrence Yun said he ‘would not be surprised’ if U.S. home prices jumped 10% by June of next year. ‘This time next year, there could be a 10% price appreciation. I would not be surprised to see that,’ Yun said.”

“Nat Bosa, the Vancouver developer responsible for many of San Diego’s downtown condo towers, says his next project will top all those. He’s planning a 41-story, 232-unit tower at the southeast corner of Broadway and Pacific Highway. But it will be the most expensive with a starting price of $750,000. Bosa, who has completed seven downtown condo towers so far and has at least five other sites to come, said he plans to start construction on this newest one next year because it is what he considers his most dramatic to date.”

“‘Why leave great wine in the cellar for someone else to drink?’ he asked. ‘I want to drink it.’”

“After the sluggish post-recession period when trophy homes with eight-figure price tags seemed to linger on the market for years—if they were even listed at all—there’s movement in this rarefied segment. In the last few months, a handful of these pricey properties, which are invariably located on the Upper East or West Sides, have traded hands. Buyers are now nosing around others in the $30 million-plus category with an intensity not seen in years, say brokers, who explain that the renewed interest is due to an uptick in inventory as well as a change in buyers’ attitudes.”

“‘People weren’t listing these types of homes for years because they were worried about dropped value,’ says Bonnie Pfeifer Evans, a salesperson at the Corcoran Group, adding that ‘uncertainty’ about the markets in Europe has made New York real estate seem like a safe long-term investment.”

“Over the next seven months, an 838-meter-high (0.52 mile) skyscraper will be constructed in Changsha, China Business Journal reported. The structure will be 10 meter higher than the Burj Khalifa Tower which is currently still the tallest building in the world. The number of skyscrapers under construction in China now exceeds 200, which equals the total number of all skyscrapers currently standing tall across the U.S.”

“But beware! Research by foreign-funded institutions shows that over the past 140 years, a craze for skyscraper construction is a reliable signal for an impending economic crisis. The latest examples of this theory would be those skyscraping office buildings and hotels in Dubai, including the Burj Khalifa Tower. Soon after these buildings were completed, economic crisis hit the country. ‘The building boom starts with easy credit,’ said Andrew Lawrence, a Hong Kong-based analyst for Barclay’s Capital, ‘But it also comes with a sense of blinding positive anticipation. By the time the building spree has ended, the local economies will already have taken a turn for the worse.’”

“To tap into the growing demand of Malaysians investing in Australian properties, Maybank has expanded its ‘Overseas Mortgage Loan Scheme’ for purchase of residential properties in Melbourne, Australia. The bank first introduced the scheme in ringgit last January to finance the purchase of London properties. As at May 2012, it had successfully approved new loans from this portfolio exceeding RM260 million, it stated.”

“‘The right investment property in Melbourne offers great returns and exceptional growth potential given that the Australian market has not suffered a fall in median house prices, in fact it has grown by an average of 9.1 per cent per annum on average for the past 10 years,’ Maybank deputy president Lim Hong Tat said.”

“There is no danger of a collapse in Australia’s housing market. Indeed, if anything the market is undersupplied, assistant Reserve Bank governor Guy Debelle told a mortgage conference in Adelaide. For the nation as a whole there weren’t enough houses to go around. The Economist magazine recently found Australian home prices among the most overvalued in the world on the basis of mismatch between rent and home prices.”

“Dr Debelle told the conference such claims were more a sign of economists in search of a headline than a reflection of reality.”

“The latest property update from the Real Estate Institute of NSW has found prices for residential properties in Sydney stabilised in the three months to March, and the annual median house price for the 12 months to March dropped by 6.7 per cent to $560,000. REINSW CEO Tim McKibbin said the figures reveal a buyer’s market. ‘If you’re sitting and waiting for the market to ease further I frankly can’t see that happening,’ Mr McKibbin told AAP. ‘Now is an excellent opportunity for purchasers to be coming into the market.’”

“While strong economic performance has bolstered residential real estate activity in Alberta to date, recreational markets are still feeling the pinch, says a report released by RE/MAX. The report said Sylvan Lake and Canmore have seen price declines in recreational property. For example, the report said the typical starting price for a three-bedroom, winterized recreational property on a standard-sized waterfront lot in Sylvan Lake has dropped to $750,000 from $800,000 a year ago. In 2010, it was $1.2 million.”

“With just three waterfront sales to date, Sylvan Lake appears to be heading for another year of modest activity, said the report. ‘The market for recreational properties continues to steadily improve after bottoming out in 2010, yet the pace is exceptionally reserved as buyers take time to make their decisions,’ it said.”

“After years of decline, the Treasure Valley housing market has started to echo the pre-2007 boom. Prices have turned upward. Bidding wars have broken out. Builders are rushing to take out permits. And investors are back. Mike Turner, CEO of Front Street Brokers, said the biggest reason so few homes are for sale is because so many people owe more on their mortgages than their houses are worth. That negative equity affected one in four Idaho mortgage holders in the last three months of 2011, according to Core-Logic.”

“‘A lot of us are just stuck in our homes,’ Turner said. ‘The silver lining is it’s actually helping our market improve faster than expected by keeping the supply low.’”

“Stacie Cudmore, an agent with Keller Williams Realty Boise said most of her recent clients have had to pay more than the asking price, especially when buying a home in foreclosure. At least one paid about $37,000 more, she said. ‘If I had more money or more buying power, I’d be buying everything I could to invest,’ she said.”

“House foreclosures are sad for the people losing their homes. But they are also unpleasant for neighbors who find themselves looking at neglected, unmowed lawns of houses that now belong to unresponsive financial institutions. Township Committeewoman Betty Ann Fort said the township’s zoning official, John Barczyk, is ‘getting complaints’ about the appearance of vacant houses. Fort said she emailed the township’s planning consultant, Michael Sullivan, about what she termed the ‘dilemma’ of foreclosed houses. ‘His recommendation was a property maintenance ordinance,’ Fort said. ‘I wonder if there is another way.’”

“The question of who is responsible for the costs associated with foreclosed homes has once again surfaced in Illinois courts. First, and still unresolved, is the dispute centering on whether Fannie Mae and Freddie Mac are required, as the owners of foreclosed properties, to pay fees to register and maintain vacant buildings in Chicago.”

“‘The Federal Housing Finance Agency recognizes the difficulties faced by local officials that are struggling with shrinking tax bases,’ the agency said in a statement. ‘However, FHFA must resist when local governments impose unlawful tax-raising programs on Fannie Mae and Freddie Mac that, in turn, create a cost for taxpayers across the country.’”

“According to the National Conference of State Legislatures, a bipartisan organization serving the legislators of all 50 states, more than 400 foreclosure laws were enacted across the United States in 2011 alone, and most slowed down the process. The Nevada law, passed in October, has led to a dramatic drop in foreclosures.”

“Ricky Beach, a real estate agent in Reno, Nevada, said the new law, AB 284, ‘has pretty much killed the market here.’ The lack of foreclosure activity has led to a dearth of inventory, he said, with the number of homes for sale in the area down to 778 today from more than 1,700 in September. This has triggered a ‘mini-bubble’ in housing prices because the few properties available are receiving multiple bids. The only problem: No one thinks the gains are sustainable.”

“‘The bill did nothing to solve the crisis — it’s just prolonged it,’ Beach said. ‘Sooner or later the banks will work out how to deal with the law. And then foreclosures will hit the market, and prices will crash back down.’”

‘Malik Ahmad, a Las Vegas foreclosure defence lawyer who has spent the last six years trying to help vulnerable borrowers deal with unscrupulous banks, said the law had completely changed his view of the nature of the crisis. ‘This law has become a mockery,’ Ahmad said. ‘I am now turning down clients every day who I know have no intention of ever trying to pay their mortgage. They just want to stay in their homes for free. And that is a bad situation for everyone, lenders and homeowners.’”




RSS feed

65 Comments »

Comment by Truth
2012-06-29 06:56:46

Ahmad said. ‘I am now turning down clients every day who I know have no intention of ever trying to pay their mortgage.

Alex Trebek: One more facet of fraud on a multi-faceted polished turd the public views as a diamond.

Contestant: What is housing?

Alex Trebek: You are correct!

 
Comment by 2banana
2012-06-29 06:57:51

How did this get past the censors???

“‘The bill did nothing to solve the crisis — it’s just prolonged it,’ Beach said. ‘Sooner or later the banks will work out how to deal with the law. And then foreclosures will hit the market, and prices will crash back down.’”

‘Malik Ahmad, a Las Vegas foreclosure defence lawyer who has spent the last six years trying to help vulnerable borrowers deal with unscrupulous banks, said the law had completely changed his view of the nature of the crisis. ‘This law has become a mockery,’ Ahmad said. ‘I am now turning down clients every day who I know have no intention of ever trying to pay their mortgage. They just want to stay in their homes for free. And that is a bad situation for everyone, lenders and homeowners.’”

Comment by Rental Watch
2012-06-29 11:21:27

Nevada still has a 15%+ non-current rate…if this law is changed, the floodgates will open and prices will crash.

The funny thing about Nevada however is that their legislature apparently only meets every two years, and so I think the first opportunity for this law to be changed will be in the latter half of 2013.

What will the market look like at that time? Will prices spike up like Phoenix before then (thereby bringing some underwater owners above water and able to sell?, etc.)?

NV, like FL could still be in for a rough ride if their processes allow foreclosures to occur faster., but unlike FL, the window to make the change only comes around every couple of years…

…if the market looks strong in 2013, there will be a strong temptation for the NV legislature to leave what they consider to be “well enough” alone and kicked the can to at least 2015. Bubble ahoy.

 
 
Comment by Muggy
2012-06-29 07:20:25

“This time next year, there could be a 10% price appreciation. I would not be surprised to see that.”

Me neither, Larry. Since mirror-fogger loans are back and the shadow inventory gets fatter by the day…

Comment by Arizona Slim
2012-06-29 08:20:22

mirror-fogger loans

Another entry for the HBB Hall of Fame!

Comment by Prime_Is_Contained
2012-07-01 10:59:34

:-)

 
 
Comment by In Colorado
2012-06-29 09:06:38

When you think about how Canada and Oz, both sparsely populated countries, are able to keep blowing their bubbles, even after hiccups, it was only a matter of time before our PTB tossed caution to the wind to get ours back on track. Plus people have been conditioned into believing that housing is supposed to be unaffordable, so they will play along, happily as they tell each other how their equity is growing.

Comment by BetterRenter
2012-06-30 01:35:25

In Colorado said: “[P]eople have been conditioned into believing that housing is supposed to be unaffordable.”

Well said, and yet buried in that statement is my understanding of just how deep that conditioning goes. It goes too deep for all this to be over in anything less than generational time. The increasing reliance on lower down payments and more financing, up to the concept of 100% financing, took about a century to run. People expect that level of fiscal incompetence to be normal, but it really was just a part of the unsustainable economic growth of the Petroleum Age. As petroleum depletes and therefore strands First World populations in their massive infrastructures, everything will have to, well, devolve. Downsize. Simplify, as a choice from technical and socio-economic complication.

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 09:32:24

Home prices could drop by 20% by June of next year. You read it first here.

Comment by Muggy
2012-06-29 09:59:01

I believe “cratering” has been said.

 
 
Comment by Al
2012-06-29 10:00:24

“I would not be surprised to see that.”

Personally, I won’t be surprised by just about anything this time next year. But I predict something in the range of status quoish to the arrival of the four horsemen.

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 07:45:01

“The Economist magazine recently found Australian home prices among the most overvalued in the world on the basis of mismatch between rent and home prices.

Dr Debelle told the conference such claims were more a sign of economists in search of a headline than a reflection of reality.”

There are too many ridiculous utterances in this thread by real estate ‘experts’ for me to digest. It will be fun a few years from now comparing outcomes to the outrageous statements some of these foolish ‘experts’ made.

Comment by BetterRenter
2012-06-30 02:03:59

CIBT said: “It will be fun a few years from now comparing outcomes to the outrageous statements some of these foolish ‘experts’ made.”

We could do that now. There’s a plethora of self-serving, wrong, and frankly deceitful statements by David Lereah from his heyday.

But there’s no point. We refuse to learn from these things; “we” being the public at large, not you and I. We have a solid decade of provably wrong statements from Bernanke and the rest of his officious ilk. The data is too strong.

But data is irrelevant. We’re starting the False Recovery and once again, even on this forum, from a few posters that I don’t care to name, they have all the bullshit facts and figures that speak of some sort of deceitful and unsustainable run up in prices. Greed can’t be conquered with reason. Greed is by definition unreasonable. Self enrichment has become the new American religion and there’s nothing to be gained by verbosity expended in combating it. After all, through the first part of the housing bubble, right here on this blog among others, how many people were really saved? From the national stats, it’s not even a rounding error, percentage wise. It’s probably tinier by far than the error bar in the sampling method.

I’m not saying we should quit. Not quit the HBB nor quit opening our mouths. But I am saying we’re going to lose again. We can’t beat Generation Greed. We should measure our efforts by quality, since the quantity is such a disappointment.

 
 
Comment by snake charmer
2012-06-29 07:46:53

There is a certain nightmare quality to these stories now. A half-mile high skyscraper in a second-tier Chinese city. An Australian economic leader insisting that there is “no danger.” A Canadian developer who builds condo towers for the sake of his ego. One struggles for figures of speech in the face of mania like this. The world has gone mad.

Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 07:57:55

The only upside I can think of is that anything that cannot go on forever eventually ends*. In the long run, this raging real estate mania will die, too.

Meanwhile, pop some popcorn in the microwave, pull up a chair, and enjoy the spectacle as it unwinds before your eyes.

* Stein’s law.

Comment by snake charmer
2012-06-29 08:25:04

I did, in fact, think about Neil (where did he go?) when I wrote my post. The problem I see is that taking an observer/popcorn position is increasingly difficult. When measures constantly are being taken to shield the guilty and reward recklessness, and to punish the responsible or innocent, we’re all swept up in this whether we like it or not.

That brings me to a weekend topic I’d like the blog to address. My situation is such that I may have to buy next year — my landlord, who has been losing money every month for awhile, has decided that it is time to sell. What is the best hedge against a decline in housing prices?

Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 08:47:35

You might look into CME options on local home prices. This would at least (potentially) offer downside protection against another leg down for your entire area.

In case the CME options are not suitable for individual home buyers, perhaps some insurance company has figured out how to create an insurance product which uses the CME options as a hedge against loss.

(Comments wont nest below this level)
Comment by Rental Watch
2012-06-29 12:10:32

I’m not familiar with CME options–they may very well be the most applicable and best fit.

If I were to make a pure bet against housing generally, I’d look to see where homebuilders are and buy some LEAP puts on some of the weaker homebuilders (as opposed to shorting the stock). I think there is a greater than 70% chance that the puts would expire worthless (ie. that even weak homebuilders do better over the next 2 years than they did over the prior 2), but if there is a crash through the current “bouncing along the bottom” levels we are at today, the puts could give you some protection, as I’m not sure that some of the weaker homebuilders today could survive a big negative move in housing generally.

The other two ways to go, absent buying some external protection are either:

a. Find a place you really like and can live in for a long time, utilize a big down payment, recognize that the value can go down, but that you are consuming shelter and will have a place to live for the foreseeable future; or

b. Find an acceptable place to buy, and try to find the lowest down-payment loan available, and put very little of your own money at risk, and walk away if prices crash.

Path b is reckless, and frankly bankerly–many (including me) would put that in the camp of purposefully privatizing potential gains, socializing the losses…but it is a path, none-the-less.

I took Path a.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 16:54:39

“…buy some LEAP puts on some of the weaker homebuilders…”

I wouldn’t necessarily assume those homebuilder share prices are not artificially propped up. For instance, when the housing crash first ensued, the builder share prices dropped a lot, but then basically stayed in a trading range that was not reflective of the bleeding.

 
Comment by Rental Watch
2012-06-29 17:46:16

I’d only buy the puts on the weakest…some of these builders may go BK if there is a big push down on home prices/demand from here. Not a lot of propping up in that case.

 
 
 
 
Comment by In Colorado
2012-06-29 09:10:10

The world has gone mad.

And we think that things are bad here. While our housing is still pricey, it’s a bargain compared to any other developed nation (and more than a few 3rd world nations too).

Comment by Ben Jones
2012-06-29 09:49:37

‘While our housing is still pricey, it’s a bargain compared to any other developed nation’

If it’s such a bargain, how come so many are being bought with 4% down?

Comment by Truth
2012-06-29 09:56:06

lmao

(Comments wont nest below this level)
 
Comment by In Colorado
2012-06-29 11:19:34

It’s a “bargain” compared to real estate in places like Toronto and Sidney. I did say that it was still pricey for goodness sakes.

Sheesh, Ben, get up on the wrong side of the bed today?

(Comments wont nest below this level)
Comment by Ben Jones
2012-06-29 11:26:13

Just stating a fact. What’s wrong with that? Anyway, how is the cost of a house in Australia or Canada relevant to, say, Arizona? I can’t substitute one for the other.

I’ll give you an example of a bargain I got once in the early 90’s. It was a 1/1 rental on 8 acres in central Texas for $285/month, bills paid. I lived there for 5 years. Nothing better than cheap living.

 
Comment by polly
2012-06-29 12:47:11

A one bed, one bath house? Really? Wow. I don’t think I’ve ever seen one. Though there is a house I once walked past in Bethesda that really couldn’t handle more walls than that. Tiny little thing. I should try to find it again and see if it has been torn down yet.

 
Comment by Ben Jones
2012-06-29 16:34:39

You’ll find just about everything in Texas. In my home town I once went to a home that had 13 polo fields.

 
Comment by Truth
2012-06-29 21:43:17

Just stating a fact.

Handle the truth very carefully…. you might crush the misrepresentations and lies of the Housing Pimps and their apologists.

 
 
 
 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 07:50:17

“‘The right investment property in Melbourne offers great returns and exceptional growth potential given that the Australian market has not suffered a fall in median house prices, in fact it has grown by an average of 9.1 per cent per annum on average for the past 10 years,’ Maybank deputy president Lim Hong Tat said.”

“The latest property update from the Real Estate Institute of NSW has found prices for residential properties in Sydney stabilised in the three months to March, and the annual median house price for the 12 months to March dropped by 6.7 per cent to $560,000.”

Luckily for those Malaysians investing in Melbourne properties, it’s different there than in Sidney. All real estate is local, you know?

 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 07:55:00

“For example, the report said the typical starting price for a three-bedroom, winterized recreational property on a standard-sized waterfront lot in Sylvan Lake has dropped to $750,000 from $800,000 a year ago. In 2010, it was $1.2 million.

With just three waterfront sales to date, Sylvan Lake appears to be heading for another year of modest activity, said the report.”

Here’s are report for the dummies who invested in Sylvan Lake properties back in 2010: Your property value has already dropped by $450,000 (37.5%) so far, with no end in sight, as there is a sudden shortage of greater fools with buckets of money waiting to relieve you of your falling knife investment.

 
Comment by Beer and Cigar Guy
2012-06-29 08:36:13

“…The lack of foreclosure activity has led to a dearth of inventory, he said, with the number of homes for sale in the area down to 778 today from more than 1,700 in September. This has triggered a ‘mini-bubble’ in housing prices because the few properties available are receiving multiple bids. The only problem: No one thinks the gains are sustainable.”

“‘The bill did nothing to solve the crisis — it’s just prolonged it,’ Beach said. ‘Sooner or later the banks will work out how to deal with the law. And then foreclosures will hit the market, and prices will crash back down.’”

I completely agree with this assessment. By mishandling (getting involved at all) the entire foreclosure debacle, the government has taken a situation that would have once made the economy ill and created something that may well be fatal. They have effectively ‘weaponized’ foreclosures. Nice.

Comment by Truth
2012-06-29 09:07:35

They have effectively ‘weaponized’ foreclosures.

Exactly.

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 08:38:12

“‘The bill did nothing to solve the crisis — it’s just prolonged it,’ Beach said. ‘Sooner or later the banks will work out how to deal with the law. And then foreclosures will hit the market, and prices will crash back down.’”

Would any of the resident real estate boosters care to offer comment? (I mean you, Slitherin, Mad Max, etc…)

Comment by Rental Watch
2012-06-29 12:17:39

I commented up above…I’ve said consistently that NV and FL improvements are unstable–specifically because those states aren’t allowing their foreclosures to clear. If the law is changed in either state to allow more foreclosures to hit the market, there is a major risk of another leg down. These risks are also inherent in other judicial states.

AZ and CA improvements however, are a different story…based on the fact that those two bubble states have consistently been working through their inventory of distress over the prior couple of years.

By simple math based on the non-current loan rates in excess of a normal baseline, if the amount of shadow inventory in CA and AZ is “x”, then the shadow inventory in FL is 4x, and shadow inventory in NV is 3x. For perspective, many other judicial states are 2-2.5x.

The only thing keeping that shadow inventory from effecting prices is the system in those states disallowing that shadow inventory from coming to market.

Comment by Muggy
2012-06-29 14:28:02

“If the law is changed in either state to allow more foreclosures to hit the market, there is a major risk of another leg down.”

And if no law is changed in FL, will I be priced out forever, or how do you see that playing out?

Comment by Rental Watch
2012-06-29 15:59:44

Candidly, I have no idea how it will play out in Florida–places with high shadow inventory, high vacancy, increasing construction and rising prices is a conundrum that doesn’t make any sense to me.

Based on those poor fundamentals, it seems like prices are solely being driven by perception in FL/NV, which can be a significant factor. Without the underlying fundamentals to support the market, if perception changes, the values could fall, and fall quickly.

What does seem apparent based on the FL and NV examples is that if they eek out foreclosures over a period of a LONG time rather than more quickly, that weak supply of distress won’t be a major contributor to any prices falling.

One thing that struck me recently is that prices are not determined by the aggregation of homes vs. the aggregation of incomes in an area. Prices are set by the buyers and sellers in the market:

If you have 1 home for sale, and 100 buyers trying to buy it, the price is determined by the most aggressive of the 100 buyers–that price is the comp by which the value of the non-sold home is determined.

If you have 25 homes for sale, and the same 100 buyers, the average sale price will be determined by the most aggressive 25 of 100…ie. the average price would be lower than in the first case and therefore the value of the non-sold homes would not be assumed to be as high as the case above.

In other words, what drives the trajectory of price changes (in both directions) is the imbalance between buyers and sellers in a particular market, as well as the particular composition and attitude of the buyers in terms of their financial capabilities and perception of the market.

If you want prices to rise less quickly, you should be rooting for either a) lots of new homes to be added to supply–either by them being built, or foreclosure/REO resales; or b) perception to change such that demand from buyers shrinks considerably.

Whether that will happen in FL/NV absent a change in the foreclosure process is an open question, and not one that I could even to venture I guess on. All I would say is that IMHO, FL/NV are not markets where strong fundamentals can protect against downside risks.

(Comments wont nest below this level)
 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 16:57:50

“AZ and CA improvements however, are a different story…based on the fact that those two bubble states have consistently been working through their inventory of distress over the prior couple of years.”

I just saw an article (within the past 24 hours) suggesting California has something like 700,000 delinquent borrowers on whom foreclosure proceedings have yet to begin. Not sure how accurate that figure is, or how long rent-free California borrowers are likely to enjoy forbearance…

Comment by Rental Watch
2012-06-29 17:39:06

Where did you see that article? I’d be interested in how they come up with that number.

LPS notes about 9.1% non-current rate (which includes foreclosures).

Total housing units in California are about 14 million, of which 54% are owner occupied (home ownership rate), or about 7.5 million.

Not all have a mortgage on them, but let’s say that without digging through the numbers, the owner occupied with no mortgage are offset by those owned by landlords who have debt on them.

9.1% of 7.5 million would be approximately 700,000. Check.

However, per LPS, 2.7% are already in the foreclosure process (approximately 200,000), the 700,000 is knocked down to 500,000.

Add on top of that that a significant portion of the 500,000 non-current loans (6.4% of loans) include people who have missed one payment, and won’t ever be foreclosed (Fannie estimates 2.24% of their CA loans are severely delinquent, so perhaps 1/3 of the 500,000 will end up in Foreclosure, the others will be cured).

I get a number of not more than 200,000 of current delinquencies that will enter the foreclosure process (new delinquencies are a different story, but that’s crystal ball gazing).

Not coincidentally, LPS estimates that the number of loans that are severely delinquent (90+ days) is approximately equal to the number in the foreclosure process.

Without seeing the rationale behind the 700,000 number, it appears to me to be not credible. What is the source?

(Comments wont nest below this level)
Comment by Rental Watch
2012-06-29 17:45:09

http://californiawatch.org/dailyreport/risk-foreclosure-looms-over-700000-californians-16842

” Paul Leonard, the center’s California director, said his organization timed the report’s release to coincide with last-minute lobbying efforts aimed at legislation that Attorney General Kamala Harris calls the “Homeowners Bill of Rights.”"

Cool. Nothing like a politically motivated report to get to the truth.

I’ll need to read the report to be sure, but the article notes his 700,000 are at 30+ days, and doesn’t explicitly exclude those homes already in the foreclosure process. Nor does it note that even in “normal” times, this number in CA would be something like 350,000 (about 5% of all mortgages).

 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 18:24:27

I was just about to post the article, but see you already found the story. I have to point out that whether the report is politically motivated, the 700,000 figure sounds like it came from actual data.

‘Nor does it note that even in “normal” times, this number in CA would be something like 350,000 (about 5% of all mortgages).’

Reference, please?

 
Comment by Rental Watch
2012-06-29 18:42:06

I think this is the report (I couldn’t find anything more recent):

http://www.responsiblelending.org/california/ca-mortgage/research-analysis/California-Foreclosure-Stats-April-2012.pdf

Their 700k was rounded up from their calculation of 671,000, and includes 217,000 that are already in the foreclosure process. The data is as of Q4 2011. Per LPS, this number has shrunk since then–at 12/31/11, LPS non-current rate for CA was 10.1%, as of 4/30/12, it was 9.1% (a 10% reduction).

And again, there is no mention of the fact that ~5% of all mortgages being delinquent/in foreclosure is the norm.

Based on their math, it looks like 5% of mortgages is closer to 300k (down from my 350k guesstimate above), so that’s the baseline “normal” level.

So, 671k at 12/31/11, minus 10% gets you to 600k +/- at the end of April, back out the “normal” level of ~300k at some stage of delinquency/foreclosure, and you have 300k homes in excess of the normal level that are non-current–a large number of which are already in the foreclosure process…about 200k.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 18:56:09

Mercury News interview: Paul Leonard, Center for Responsible Lending
By Pete Carey
Posted: 05/11/2012 11:43:15 AM PDT
Updated: 05/11/2012 09:21:40 PM PDT

When Paul Leonard opened the Center for Responsible Lending’s California office in Oakland six years ago, the nation’s housing bubble had just reached its peak.

A few months later, the nonprofit published “Losing Ground” — a paper derided by the mortgage industry — predicting a widespread and dangerous meltdown in subprime home loans. Leonard said the extent of the collapse was a surprise even to him.

A longtime policy expert in matters affecting low-income people, he’s been spending a lot of time in Sacramento lately as the Legislature takes up Attorney General Kamala Harris’ Homeowner Bill of Rights. The legislation would protect homeowners from unfair practices by banks and mortgage companies and help consumers and communities cope with the mortgage and foreclosure crisis, according to the attorney general’s office.

Leonard spoke recently with this newspaper about the housing crisis and related issues.

Q When you opened the California office in spring 2006, did you have any idea the housing crash would be followed by the collapse of the U.S. economy?

A No. I was the first person hired by our national parent organization in fall 2005, and at that point and for the first year plus, we were firmly committed to trying to rid the subprime market of the most egregious lending practices. We published a report in December 2006, “Losing Ground,” which predicted a storm of foreclosures. But if anything, the report didn’t fully anticipate the scale of the storm that we were about to face. Ironically, our report at the time was met with an industry response that accused us of being Chicken Littles, that we were using worst-case assumptions to exaggerate the potential damage that could be caused. Actually, we just didn’t have the foresight to see how broad the connection would be between the subprime market and the scope of underwriting problems in other parts of the mortgage market.

Q If you had to rank those responsible, in what order would they be? The Federal Reserve? Congress? The White House? Fannie and Freddie? Mortgage brokers, underwriters and others?

A It’s hard to rank them. There were systemic shortcomings. Clearly, regulators were asleep at the switch; credit rating agencies didn’t do their job and still today face conflicts of interest. I would not say that the primary culprits were Fannie Mae and Freddie Mac and the Community Reinvestment Act. They are all too commonly stated bogey men, and the facts don’t bear out that they caused the crisis we are in today.

Q How effective have the federal government’s housing rescue programs been?

A By and large the federal government’s responses have been disappointing for several reasons. One is that the designers of the programs failed to appreciate the complexity involved in undoing the mess we’re in, particularly conflicts with second liens. Second, I don’t think government institutions were aggressive in enforcing and requiring the kind of loan modifications that are needed.

Q How far have we to go before we’re done with this crisis?

A You asked the right question — not, have we reached bottom in terms of prices, or reached the top in terms of foreclosures, but how much further do we have to go? The center put out a report in December called “Lost Ground,” which found we were about halfway through the foreclosure crisis.

 
Comment by Rental Watch
2012-06-29 18:58:33

http://www.lpsvcs.com/LPSCorporateInformation/CommunicationCenter/DataReports/MortgageMonitor/201204MortgageMonitor/MortgageMonitorApril2012.pdf

Page 3 tracks the delinquent and foreclosure data going back to 1995. You’ll see that the numbers hover around 0.5% for foreclosures, and 4.5% for delinquencies pretty much the whole time except the spike after the bubble burst.

Page 4 shows the non-current rates by state, where even the most robust housing states have non-current rates of 4-5% (North Dakota–shale boom, true housing shortage with “man camps” and all is at 4%).

This also shows the current non-current rate of 9.1% for CA (including breakdown between delinquent and foreclosure). You’ll need to sift through the LPS historic reports to see the trend…you may not trust me on the numbers, but the 12/31/11 number was 10.1%.

 
Comment by Rental Watch
2012-06-29 19:40:13

BTW, the guy says we were about halfway through as of 12/31/11?

I think that’s dead on accurate.

The peak non-current rates were in February 2010 at ~15% in CA. At December 2011, the number was 10%. To get to my “normal” we need to shave off another 5 points.

At 4/30/12, we were down to 9.1%, 4 points go to. At the current rate of about 1 point every 4 months, that’s 16 months, or, as I’ve said before, by the end of 2013.

However, what we seem to be seeing is that perceptions will change before that point, since distress will be worked out of the better locations first, which can change market psychology in a region like a pebble striking the surface of a pond. In AZ the market seemed to tighten considerably when their non-current rate was still at around 9%.

So, while the pace of working through inventory seems to indicate that we will be back to “normal” levels of distress within a year and a half, we could experience AZ type action before the end of 2013.

And if CA passes some sort of law like NV, you can guess what will happen…if the NV market tightened with their non-current rate at 15%+, what do you think would happen with CA, when their non-current rate is 9%?

The passage of foreclosure stopping laws essentially stops the clearance of the distress, making the market supply appear as though we’ve cleared the distressed inventory.

I certainly hope CA doesn’t follow NV’s path…I’d like to rip the band-aid off here, rather than prolong the process.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 19:42:06

That’s a fascinating report — thanks!

Check out the FHA foreclosure graph (p. 9) — pretty shocking stuff there, suggesting that Uncle Sam did a great job of handing out mortgages to low-income households just in time for them to loose their homes in the worst financial crisis in a generation. The 2008-2009 vintage loans are the ones with foreclosure rates shooting skyward. There is a clearly visible upturn in the rate of FHA loan foreclosures beginning in March 2012, for all vintages before 2011.

Given a couple of years to season, I expect the 2011-vintage FHA loans to also generate “higher than expected” foreclosure rates. What were the affordable housing advocates in fedgov thinking?

 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 19:46:22

“I think that’s dead on accurate.”

It seems reasonable to me. Dating the start of the foreclosure crisis to the onset of recession in 2007, this means we have half a decade down (2007-2012), half a decade to go (2012-2017). While I don’t object to anyone who wants to buy a house doing so, I personally am likely to wait until 2017, at the earliest, and very well may rent for the remainder of my days on the planet. I simply don’t care about ‘pride of ownership,’ and consider anyone who still insists that real estate is a good investment at this point to be a certifiable idiot.

 
Comment by Rental Watch
2012-06-29 19:57:24

Sorry repost from below…

Why do you expect the 2011 vintages to experience higher than expected foreclosures? Page 10 shows a pretty steady progression by year, and the 2010/2011 vintages are performing so far as the best on the page.

By the way, LPS is what I track frequently and quote all the time (and encourage people to also review). They also have about a 30 minute oral presentation that is accessable to go along with the PowerPoint to get a bit of data beneath the surface.

If you track the non-current rates for AZ and CA, they are the only two states that haven’t seen an increase in their non-current rates going back to early 2010 (either flat or down at every data point–mostly down). Their progress working through the distress has been remarkably steady, and is nearly a straight line from the peak non-current to “normalcy” at the end of 2013.

This report comes out monthly and is free, the next one is due to be released at around the 9th/10th of July (a bit delayed from usual…I guess people still take the 4th off). If you want lots of granular data, last I checked, they’ll charge you $1k per month (with a minimum 12 month contract). I haven’t gone there yet…this report is sufficient for my data consumption needs. But, the fact that their pricing is $1k, tells me that people respect the data.

 
Comment by Rental Watch
2012-06-29 20:00:55

OK, bathtime for the girls…I’ll check back later…I’m glad you’re looking at the LPS data…it has been largely driving my view of the housing cycle dynamics (with other data augmenting/tweaking my perspective).

 
Comment by Rental Watch
2012-06-29 22:05:21

“It seems reasonable to me. Dating the start of the foreclosure crisis to the onset of recession in 2007, this means we have half a decade down (2007-2012), half a decade to go (2012-2017). While I don’t object to anyone who wants to buy a house doing so, I personally am likely to wait until 2017, at the earliest, and very well may rent for the remainder of my days on the planet. I simply don’t care about ‘pride of ownership,’ and consider anyone who still insists that real estate is a good investment at this point to be a certifiable idiot.”

I’m not sure he is saying “half-way” is in terms of time, but instead half way through working off the excess.

The difference between the two is 2017 vs. 2013…is a wide chasm in time.

I encourage you to graph the non-current loan rates for California going back to the first available data provided by LPS.

PLEASE do this–I’m trying to share what I’ve been absorbing over the prior couple of years…

What you will see is that the non-current loan rate in California rose from 13.3% in June 2009, steadily up to 15.3% in February 2010 (the peak), and then proceeded to fall. After some initial volatility (for a few months), the number starts to fall at a remarkably steady pace:

7/10: 13.5%
8/10: 13.3%
9/10: 13.3%
10/10: 13.2%
11/10: 13.1%
12/10: 12.8%
1/11: 12.7%
2/11: 12.6%
3/11: LPS didn’t provide the data this month
4/11: 11.7%
5/11: LPS didn’t provide the data this month
6/11: LPS didn’t provide the data this month
7/11: 11.2%
8/11: 10.9%
9/11: 10.8%
10/11: 10.5%
11/11: 10.4%
12/11: 10.1%
1/12: 9.9%
2/12: 9.6%
3/12: 9.3%
4/12: 9.1%

Extrapolate the line, you see CA at about 5% by the end of 2013.

This is the new distress entering the foreclosure process…what about the REO?

Look at Foreclosure Radar for California.

http://www.foreclosureradar.com/california-foreclosures

Look at the “foreclosure inventories”, the third graph down and look at the REO data.

From people we know, the activity of investors started to ramp up quickly at about Q1 (people I know say it was like a light switch went on–this is two groups that I know who said the same thing, in SD and LA counties). Note the bend down in the graph starting in January 2012. They only have data going back 12 months on the website now, but I did a printout of the CA data a while back, so I’m including the data in terms of REO on the books of financial institutions going back to December 2010. This is the number of homes as REO in terms of total numbers in the State of CA:

12/10: 105k
1/11: 108k
2/11: 109k
3/11: 109k
4/11: 109k
5/11: 107k
6/11: 105k
7/11: 104k
8/11: 103k
9/11: 101k
10/11: 99k
11/11: 97k
12/11: 95k
1/12: 94k
2/12: 91k
3/12: 86k
4/12: 80k
5/12: 75k

Note the change in slope corresponding with the institutional “buy to rent” crowd entering the market in early 2012. At the current pace, the number of REO on the books of banks will get to zero about the same time the non-current loan rates get to “normal”, the latter half of 2013.

Per Foreclosure Radar, peak REO happened in the first part of 2011, and has been declining ever since.

Onto Fannie data, from their quarterly credit reports. This is REO on the books as of the end of the quarter for the state of CA.

Q3 2008: 7,957
Q4 2008: 7,454
Q1 2009: 8,207
Q2 2009: 8,078
Q3 2009: 8,954
Q4 2009: 10,472
Q1 2010: 14,676
Q2 2010: 16,630
Q3 2010: 20,992
Q4 2010: 20,164
Q1 2011: 21,800 (this is the last quarter where new REO taken onto the books was greater than REO sales)
Q2 2011: 20,224
Q3 2011: 16,759
Q4 2011: 14,147
Q1 2012: 11,789

Again, at the pace of the last 12 months, Fannie will have gone through their REO for CA homes by mid-2013 (when there is little non-current inventory left). Peak REO happened at the same timeframe as per Foreclosure Radar, as of the beginning of 2011.

So, there you have it. Three different sources with respect to data showing shadow inventory, and REO inventory–the major sources of distress (and the bulk of willing sellers on the market today).

One government agency
One institutional data provider
One free website

All point to exactly the same thing…the shadow inventory being worked through in the State of California by the end of 2013.

Until these clear trends are broken (and trust me, I’m watching every time a new report from these three and others come out), the only conclusions can be either:
a) we have less than 18 months of shadow inventory in CA; or
b) there is a massive conspiracy between these three sources of information

I believe “a” until proven otherwise.

 
Comment by Professor Bear
2012-06-29 22:45:30

Here are a few potential scenarios your trend-extrapolation exercise won’t capture:

c) The economy has another leg down ahead, due to some combination of Eurozone debt crisis spillover, the fiscal cliff, or some other millipede shoe dropping which “nobody could have seen coming.” This will kick unemployment and foreclosures back up for a few more years before we are out of the woods.

d) A failure of top-down, government-sponsored “extend-and-pretend” measures in the U.S. housing market to last forever shocks the all-cash Canadian, Chinese and other nations’ foreign investors, who respond by dumping their U.S. residential property holdings on the market en masse, precipitating another leg down in U.S. home prices which “nobody could have seen coming.”

e) The number of U.S. citizens who think that “real estate is the best investment” unexpectedly drops to generational lows, resulting in a return of U.S. home prices to levels justified by fundamental factors, like incomes and rents, rather than a foolishly consistent belief that “real estate always goes up.”

f) A combination of an aging population trying to downsize from family-sized housing to assisted-care living, a decline in median middle-class net worth to 1992 levels, and the emergence of a college debt-strapped generation of new entrants to the labor force facing paltry employment prospects delivers a crushing blow to housing demand which cannot support U.S. home prices anywhere near their 2006 levels.

g) The addition of latent supply, due to people who want to sell but holding off “until prices come back,” on top of the sizable remaining backlog of foreclosure inventory still to reach the market, creates a “larger than expected” weight on future home prices.

Impending recession? Bump in road? See the charts
The Week in Charts
Manufacturing data from U.S., Europe, China shows worries
June 22, 2012 | Steve Goldstein, MarketWatch

Philly Fed shocker

The Philadelphia Fed’s manufacturing index was deeply negative in June, news that shocked stock markets Thursday. Using Macroeconomic Advisers’ monthly GDP data, sometimes a negative Philly Fed reading is associated with a recession — and sometimes not, like last summer. Either way, the data underscored the lack of confidence the Federal Reserve exhibited this week in the economy as the central bank opted to extend a bond swap program by $267 billion.

Read Philly Fed story.

Read story on Fed.
U.S. purchasing managers index for manufacturing

Also contributing to the gloom were weak readings from the “flash” purchasing managers indexes for manufacturing. In the U.S., this is only the second month the figures have been publicly released, so economists are still getting used to the new data. What the data show is a slowing manufacturing sector, though not an outright contracting one the Philly Fed reading suggested.

Read story on U.S. flash manufacturing PMI.
China purchasing managers index for manufacturing

China’s economy isn’t close to recession, but it is struggling. June marked the eighth straight month that this key index of manufacturing was below the 50 line.

Read more on Chinese manufacturing
Euro-zone purchasing managers index for manufacturing

There isn’t a huge debate about whether Europe is in recession. This index tied a 35-month low in June.

Read more on euro-zone manufacturing.
Initial jobless claims, four-week moving average

The average of first-time claims for unemployment insurance over the past month climbed by 3,500 to 386,250, marking the highest level in almost seven months. Claims have totaled 380,000 or higher over the past four weeks, a level economists say is consistent with modest hiring trends at best.

Read story on jobless claims.
Job seekers per available job

Job openings dropped sharply in April, which meant that the number of people seeking a job faced tougher odds. Though the number of openings per job seeker is much healthier now than at the worst point of 2009, it’s still above the roughly 2-to-1 ratio before the recession.

See story on job openings.

 
Comment by Professor Bear
2012-06-29 23:28:15

If Greece weren’t enough, check out the problems in China

Global investors are anxious about a possible messy Greek exit from the Euro Zone and what that might mean for regional banks and economies. Yet there is another big area of concern for the world economy in 2012: China. The world’s second biggest economy behind the U.S. is decelerating and that has big implications for growth in Asia and elsewhere. Here are five reasons to be worried:

1) The World Bank is forecasting Chinese gdp to fall to 8.2% in 2012 vs. 9.2% last year. That in turn could depress growth across Asia. The bank sees growth in the East Asia-Pacific region falling to 7.6% this year from 8.2% in 2011–and 10% as recently as 2010.

2) China’s manufacturing sector has hit an air pocket. The closely-watched HSBC Purchasing Managers’ Index (PMI) fell to 48.7 from 49.3 in April and has been contracting for some seven months now, according to this BBC report.

3) Slower Chinese growth is dampening global prices for iron ore and coal, a big source of export income for Australia and emerging markets. Iron ore prices recently fell to $144 per metric ton, a low for the year.

4) During the first quarter of 2012, Chinese home prices fell 18 percent. That’s a worry not only for the unlucky consumers who paid inflated prices in recent years, but also mainland banks.

5) One Credit Suisse analyst forecasts Chinese banks could face non-performing loans equivalent to 65% to 100% of their equity in coming years. Bank loans to Chinese real estate developers, manufacturers and local governments may be particularly at risk.

There’s more to fret about right now than just the Greeks.

 
Comment by Rental Watch
2012-06-30 00:16:16

We’ve been dealing with shock, after shock, after shock, massive uncertainty with respect to Europe, US debt downgrade, massive and weak job recovery generally in CA (still high unemployment rate here), etc. The trend has not been derailed…assuming the next shock will derail it is certainly an assumption that one could make, but given the clear trends so far, it is not an assumption I would make. One would need to assume 1) that a shock will come (which we’ve seen several), and 2) that the shock derails the trend (so far they haven’t).

f. I’ve never said we will get back to 2006 levels of prices. I don’t expect us to come close. I’m talking purely about getting back to a more “normal” market, where most sales transactions are non-distressed in nature. When we are back at this stage, the market will look very different than today.

g. The data I didn’t show was vacancy rate data for California. People downsizing/moving, etc. is going to be a game of musical chairs…there is not some massive amount of empty housing waiting in the wings to flood the market (unlike the potential in some other states). I know people don’t believe this to be true, but I’ve yet to see data supporting an alternate view for the State of CA.

I’m looking at the trends as being what they are based on the massive poor lending, price crashes, and ensuing processes necessary to clear the inventory given the rules in place in California. So I’ve not bothered to talk about conjecture about the future (since obviously macro events COULD change the trends).

However, in the discussion of additional negative events, you ignore the possibility of positive black swans related to the concept of “reversion to the mean”:

h. With job recovery (as slow as it is), shadow households formed over the past 5 years (married couples living at home, etc.) begin to come out to add pressure on housing…CA added ~180k net jobs in the last 12 months, and built ~30k homes…with low vacancy rates already, the pressure is building; and

i. That when construction begins to revert back to historical norms, we will add 1MM+ direct construction jobs in the country, and when one includes the ancillary jobs, it is substantially more (I’ve read in at least one place that this could be another 2-3 jobs–can’t find the link at the moment). In CA, because we are running at about 15% of where we should in terms of housing construction (30,000 vs. 200,000 at a “normal” level), there is a massive potential for job creation related to construction in CA. With vacancies already at pre-recession levels, this construction may not be too far off.

 
 
 
 
 
Comment by Rental Watch
2012-06-29 19:55:54

Why do you expect the 2011 vintages to experience higher than expected foreclosures? Page 10 shows a pretty steady progression by year, and the 2010/2011 vintages are performing so far as the best on the page.

By the way, LPS is what I track frequently and quote all the time (and encourage people to also review). They also have about a 30 minute oral presentation that is accessable to go along with the PowerPoint to get a bit of data beneath the surface.

If you track the non-current rates for AZ and CA, they are the only two states that haven’t seen an increase in their non-current rates going back to early 2010 (either flat or down at every data point–mostly down). Their progress working through the distress has been remarkably steady, and is nearly a straight line from the peak non-current to “normalcy” at the end of 2013.

This report comes out monthly and is free, the next one is due to be released at around the 9th/10th of July (a bit delayed from usual…I guess people still take the 4th off). If you want lots of granular data, last I checked, they’ll charge you $1k per month (with a minimum 12 month contract). I haven’t gone there yet…this report is sufficient for my data consumption needs. But, the fact that their pricing is $1k, tells me that people respect the data.

Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 20:04:54

“Page 10 shows a pretty steady progression by year, and the 2010/2011 vintages are performing so far as the best on the page.”

1) Low downpayment requirements.

2) Super-low interest rates now against a backdrop of still-declining prices suggest many of these low-downpayment loans will soon be underwater.

3) Selectivity bias in the data due to difference in duration: The 2011 borrowers haven’t been in their homes long enough to have encountered significant exposure to the many reasons people stop paying their mortgages; by contrast, the 2008-2009 vintage loans have had plenty enough exposure.

Comment by Rental Watch
2012-06-29 20:51:08

1. Low downpayments were there in the other vintages;

2. Low rates on much lower home prices make it far easier for people to continue to pay. Why do they continue to pay? With their payment being lower than rent in many cases means that even if the home is underwater, they would end up paying more per month for shelter by defaulting;

3. The selectivity bias is actually dealt with in slide 10. Study the graph so you can understand what it is saying. 12 months in, 2007 vintage loans had a default rate of 1.4%. 12 months in, 2011 vintage loans had a default rate of 0.2%. In other words, 2010 and 2011 vintage loans are performing far better with the same seasoning as older vintages. Same with 2009 vintages…while worse than 2010 or 2011, they are far better than 2005-2008.

This is especially telling since the 2005 vintages were already doing worse 12 months in, even though the housing bubble hadn’t yet popped.

So, 2005 were doing worse, despite home prices still rising for the first 12 months of those loans. 2011 are doing better despite home prices still sliding during the first 12 moths of those loans. This implies that the homes acquired by those borrowers are far more affordable, allowing them to stay current at much higher rates.

The data so far doesn’t support your conjecture, and in fact is actually MUCH different…2007 vintage loans 12 months were 7 times more likely than 2010 or 2011 vintages 12 months in.

What is actually happening so far is that the 2009, 2010 and 2011 vintage FHA loans appear so far to be becoming delinquent at much lower rates than any of the years 2005-2008 at the same point in their seasoning.

Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 22:24:11

“The data so far doesn’t support your conjecture, and in fact is actually MUCH different…2007 vintage loans 12 months were 7 times more likely than 2010 or 2011 vintages 12 months in.”

Your point (that, say, 2007 loans deteriorated much faster than 2011 loans) is taken, but does not contradict my point, which is that putting 2011 data on the same graph with earlier years’ data is misleading, because the 2011 data have not have time to ’season.’

(Comments wont nest below this level)
Comment by Rental Watch
2012-06-29 23:23:50

This chart is an apples to apples comparison with respect to seasoning:

The x-axis of the graph is the age of the loan (regardless of year). So at the intersection of 12 on the x-axis and the 2007 line is the average default rate of loans made in 2007 when they were 12-months old (seasoned 12 months). At the intersection of 12 on the x-axis and the 2011 line is the average default rate for 2011 loans that are 12-months old (seasoned 12 months).

Are you saying that for 2011 vintages, we don’t have a full year of data? And so the numbers will be more meaningful at 1/1/13?

Then look at the 2010 vintage, where we do have a full year.

Otherwise, I don’t understand your point.

Are you saying that despite the default rates for 2011 being much lower that other years with the same seasoning, you think that the default rate for 2011 vintages will rise faster than any of the prior vintages?

 
Comment by Rental Watch
2012-06-29 23:25:07

Sorry…the numbers are the number of payments, not months…

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-06-29 23:06:54

We sure do see that presentation differently.

For one thing, p. 3 shows foreclosures were around 0.5% for the entire period from 1995-2005 (11 years), then approached 4% by June 2009 and subsequently continued to climb to above 4%. The increase in foreclosures started way back in 2006, supporting my conjecture that we are already over five years into this. The fact that foreclosures have recently begun to climb and are already at or near a record high level suggests we are not going to get out quickly. All of this has played out against a backdrop of frequently-announced government-sponsored “Save Our Homes” bailout programs, which apparently have had little effect.

Secondly, as the p. 9 chart clarifies, FHA foreclosure starts have recently gone skyward for 2008-2009 origination loans. I can’t quite reconcile that chart in my mind with the one to address selectivity which you suggested I study. The p. 9 picture this spring appears much worse than the p. 10 version.

(Comments wont nest below this level)
Comment by Rental Watch
2012-06-29 23:33:49

The foreclosure rates on slide 3 include both judicial and non-judicial states. You’ve got to recognize that there is a difference between the two. Slide 14 shows the difference between the two. CA is in the non-judicial camp.

CA percentage of loans in foreclosure peaked in late 2009 at 3.9%, and has since moved down to 2.7% (not as steadily as the overall non-current, but down none-the-less). While CA and other non-judicial states are working off their mess, the judicial states are not.

I have been talking entirely about California.

I agree with you…we will take a long time to work through these foreclosures in the US. However, the data is showing that CA and other non-judicial states will be done long before the judicial states.

 
Comment by Rental Watch
2012-06-29 23:41:30

On slide 9 vs. 10.

Also consider slide 11 in conjunction with slide 9.

Slide 10 shows rates of default with the same seasoning–the best measure, IMHO of the quality of the loan underwriting.

Slide 9 shows total volume of new foreclosure starts by vintage…this volume of foreclosure starts is effected by the total volume of loans those particular years. 2009 had more FHA loans than 2008, so even though the volume of foreclosure starts makes them look the same, the rate of starts is lower for 2009 (the denominator is larger given the number of loans originated).

If you made 100 loans, and 50 went bad 24 payments in, that’s a 50% default rate…pretty crappy. If you made 100,000 loans, and 50 went bad after 24 payments, it’s a 0.05% default rate…pretty damn good.

Even though 50 is the same number nominally.

Slide 9 and 11 are nominal numbers.
Slide 10 deals with the default RATES at various numbers of payments made.

 
Comment by Professor Bear
2012-06-30 00:05:45

“Slide 10 deals with the default RATES at various numbers of payments made.”

So if I get your drift, then those big spikes in 2008-2009 FHA loans that recently went into foreclosure are dampened when stated as rates on slide 10, because there were SO MANY CRAPPY LOANS MADE?

 
Comment by Rental Watch
2012-06-30 00:25:28

Sigh…

The big spikes in slide 9 are because there were SO MANY LOANS MADE (as shown on slide 11).

Whether the underwriting was crappy would show up on slide 10 in terms of default rates relative to other years.

So yes, if you want to only judge the nominal numbers of bad loans without regard to the number of good loans made, you can say that there were lots of crappy loans made. But that would be like saying that Wells Fargo is clearly inferior at making loans than ABC Bank that was taken over by the FDIC, since Wells Fargo has more bad loans nominally than the failed bank (that had a higher percentage go bad).

As of right now, the data shows that there were more loans made in 2009-2011 by the FHA than in 2005-2007 (slide 11), but they were far less crappy (slide 10).

 
Comment by Rental Watch
2012-06-30 08:13:41

Oh, and another thing that I nearly forgot…

http://www.businessweek.com/news/2012-06-29/review-finds-report-of-april-fha-foreclosure-surge-inaccurate

The FHA raised a big stink about the spike saying it was inaccurate…LPS dug through the data, and are correcting themselves.

 
 
 
 
 
Comment by BetterRenter
2012-06-30 02:36:27

I’m starting to catch on more and more about what’s happening to the world.

Sustainable growth is a hobgoblin. It’s given lip service, but ultimately it’s never actually sought, since it’s expensive, laborious and takes too much time. The media and various mouthpieces will keep claiming it’s desired, but in practice it’s really shunned.

UNsustainable growth wins out. Billions slosh into a market. The market tends to naturally rise from the buyer interest. That signals other buyers to also buy. Tens of billions slosh in. Lucky markets find this input triggers the “high ROI” that all money seeks these days, and so then hundreds of billions then slosh in. The tsunami of money is fully expressed.

But the entire thing was fueled by buyer interest. Real wealth isn’t built. Money is only made because money was made. Profits come to exist merely because profits were achieved the week before.

And so it’s built to crash, and at some point, with 100s of billions still churning in the slosh zone, a panic trigger is reached. Money flees (knowing nothing suspended prices and profits in the air, except itself). The crisis of confidence is on, and all the talking heads lament that nobody could have seen this coming (having confused monetary growth with real economic growth). Crash!

The world economy is nearly frictionless for money-sloshing, now. The world’s so flat for billions of dollars, that a tsunami is easy to start. Only a little bit of pull in one particular direction can mount up a serious wave over such long distances.

So… while the world remains nearly frictionless for money-sloshing, and while petroleum is still so very cheap (25000 man-hours of labor-energy equivalent in every barrel, for a lousy $100), then this sort of thing will continue to happen. It’s really the only definition of the world economy when you consider tracking money in billion-dollar chunks.

To return to the topic, the point these Aussies are trying to make with their propaganda is that they’re in a peak money slosh. The experts will never admit the water will flow away quickly. “Look at how wet everything is,” they exclaim. “Remember when it was so very dry around here? Those were the bad old days. It’ll be wet from now on. Forecast: Rain.” Never do they mention the ease by which all that water can and WILL heave away to some point on the compass, forming another tsunami of sloshing money, eager to find another market to destroy.

 
Name (required)
E-mail (required - never shown publicly)
URI
Your Comment (smaller size | larger size)
You may use <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong> in your comment.

Trackback responses to this post