Allan S. Glass on Realtor.com

photo courtesy: pciofederations

Have you wondered why residential real estate professionals have seemed a bit less happy over the past few months?  Fannie Mae may have uncovered the answer in their third quarter national housing survey.   According to the report, when considering the state of the economy, those who know a defaulter are more likely to have a negative outlook.

In today’s marketplace you’d be hard pressed to find a single Realtor who does not know someone facing foreclosure.

The silver lining when looking at this months data – nationally defaults are on the decline and delays in processing defaults may slowly be replaced with more efficiency.

Foreclosure Radar released their data report for October (showing September statistical data).  Like last month new filings continue their surge in California although down when compared to September 2010.

Below is a summary of the monthly foreclosure statistics:

• NOD’s – a 28.5 percent increase from August to September. 25,777 total filings, which is a 25.24 percent decrease over September 2010.

• Notice of Trustee Sales – a 28.22 percent decrease from August to September. 17,490 total filings, which represents a 35.0 percent decrease over September 2010

• REO’s – a 24.83 percent decrease from August to September. 8,385 total sales ended up in the banks REO portfolios representing a 44.64 percent decrease from September 2010.

• Third Party Auction Sales – 3rd party sales were down 18.86 percent in September compared to August. 3,128 homes were sold to investors at the court steps, representing a slight 6.65 percent increase from September 2010.

• Cancellations – Cancellations were also down in September by 7.20 percent as 12,219 households left the foreclosure process without proceeding to trustee sale. This figure represents a 20.02 percent decrease from September 2010. Homeowners leave the process when they become current, complete a short sale or permanent loan modification.

• Number of Homes Scheduled for Foreclosure – The estimated total number of homes in the foreclosure process remains high in California although decreasing in the month of September. Pre-foreclosure properties in the NOD stage decreased 21.97 percent and those scheduled for sale decreased by 6.65 percent. A total of 192,000 total properties statewide (104,000 in pre-foreclosure and 88,000 scheduled for trustee sale) are currently in the foreclosure process.

• Foreclosure Discounts – The average value of properties sold to third party investors at the court steps was discounted 44.2 percent below the outstanding loan balance and 24.3 percent below fair market value .

Nationwide Lender Processing Services (LPS) indicates that the total number of mortgages delinquent continue their contraction.  Down for the third straight month to a total of  6,373,000 mortgages 30 days or more past due (down from 6,538,000 in July and 6,397,000 in August). This number is taken from their database of loans totaling nearly 40 million. Of these loans 2,172,000 have started working their way through the foreclosure process leaving 4,202,000 yet to be addressed delinquent borrowers.

Backlogs of inventory at the banks continue grow as they face longer timelines to complete the foreclosure process.  According to LPS it takes a bank on average 761 days (25.36 months) to complete a foreclosure cycle in judicial foreclosure states.  Not far behind, non-judicial states, like California, are averaging  581 days (19.36 months).

Foreclosure service Realtytrac.com posted a slight decrease in foreclosure filings across the country. Their October release, indicates that servicers filed 214,855 foreclosure related actions for the month, down 6 percent from September’s report.  California tops the list as the state with the most foreclosure actions (153,051 statewide) and accounted for 1 in every 4 foreclosure actions filed nationwide.  The state also accounted for 15 of the top 25 metro areas included on Realtytrac’s most distressed metro area list.

As we noted in last month’s foreclosure report, residential shadow inventories seem to be shrinking according to Corelogic. July supply of shadow inventory (foreclosed properties not currently listed for sale) stands at 1.6 million units nationwide (5 month supply). The inventory numbers show some promise as inventory continues to shrink from 1.9 million units one year prior (six month supply) and 1.7 million units in April 2011.   With new defaults entering the system we would not be surprised to see shadow inventories grow over the third and fourth quarter of 2011.

Then again, we may also see banks proactively pushing short sales on their delinquent borrowers.  Many banks have begun offering incentives to borrowers who initiate short sales.  We may also see banks bend to the pressure of several states as they move to settle with attorney generals who want principle reductions to be a part of loan modifications.  If that’s not enough to move them, perhaps the strong suggestions by the Fed will prompt them to action.

Our conclusion this month – It seems likely we’ve seen the worst of the worst in this housing cycle.  Banks are now in a position to financially withstand their losses and political headwinds point towards helping main street, at least those remaining in their underwater homes.  We expect to see more bumps in the road of recovery and expect it to be slow in coming.  However, while it was ridiculous to think that housing prices would always go up, as some did in the early 2000′s, it’s equally misguided to assume housing is a bad investment and will never again return as a safe investment.

Good luck to everyone.

###

Freedom

CNBC – Mortgage Default Filings Surge

Big news on the foreclosure front for August 2011. Led by a 200 percent nationwide increase in new foreclosure filings by Bank of America, California foreclosure starts surged upward in August to levels last seen in September 2010. The BofA increase represented a 116 percent increase in the Golden State over July 2010. They were not alone as both Wells Fargo and US Bank also posted increased filings for the month.

Perhaps this month will mark a change in direction for lenders who spent the better part of this year bogged down with long processing delays and declines in new filings while servicers sorted through the fall out of the robo-signing scandal and other shoddy processing practices. These delays have pushed the average days delinquent for US homeowners facing foreclosure action to a new record 611 days (over 20 months), according to Florida based Lender Processing Services (LPS).

While many delinquent homeowners will be disappointed by the end of free housing, the move towards resolutions will ultimately prove healing for the ailing housing market.

Foreclosure Radar released their data report for September (showing August statistical data) reflecting the surge in new California foreclosure filings accompanied by a slight increase in homes moving from the initial phase towards foreclosure sale. Below is a summary of the monthly foreclosure statistics:

In Memory Steve Jobs 1955-2011

The World lost a visionary, an inspiration and a leader.

Always attentive to design and quality. His imagination and drive changed the world.

“…And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”–Steve Jobs

Think Different!

photo courtesy Gothamist

10 years and two weeks ago I started on a journey to follow two dreams.   The first was to live in a city, The City, that fascinated me since I was a kid;   New York.   The reason I moved across the continent to live there was to fulfill a second dream, to graduate from Columbia University.

Since being a kid I was captivated by the prospect of being part of a larger cause.   To me urban environments, diverse, dense and bustling are the ultimate manifestation of that concept.   Having grown up in a suburb of Southern California life for me felt very homogenous.   No complaining, I had everything I could hope for, great family, fun school, good friends.   Yet, everyone I knew looked the same, dressed the same, had the same hairstyle, listened to the same music, new the same people… you get the point.

I had a taste of city life, beginning with my four years at USC, followed by a job in Downtown Los Angeles working for one of the country’s largest commercial real estate firms.   It had been a great time for me and a treasure trove of new and exciting experiences, most good and some bad.   I learned that you can’t leave your doors unlocked and expect your stuff to be there when you return.   I also learned that there are incredibly intelligent and caring people from all over the world who grow up in vastly different circumstances eager to find out how they too fit in.   I helped put together real estate projects that revitalized what were once a collection of shuddered dilapidated buildings, and witnessed rioting mobs burn down and loot shops where I did my weekly shopping.

In 2001, I realized I wanted more.   Part of me felt I needed to know what it took to live in a real city if I was ever going to build urban buildings.   Part of me was driven by the desire to prove I could make it, and part of me was driven by Kurt Vonnegut who suggested that we should all live in California once, but leave before it makes us soft.   Live in New York, once, but leave before it makes us hard.   I had lived in Southern California all my life, was I too soft already?   Regardless, I could probably use a bit of an east coast hard edge.

8:15 am, September 11, 2001 I woke up in my apartment on the upper West Side of Manhattan, turned on New York 1, poured a cup of coffee, and decided I would head downtown on the 1 train to the World Trade Center.   My class assignment was to hand sketch a building in city and bring it in for discussion later that afternoon.   I jumped into the shower before leaving figuring I’d either sketch the NY Stock Exchange building or the Woolworth Building, for 17 years the World’s tallest building.

Before leaving I glanced at the TV one last time to see something odd.   Fire and smoke was flowing out of the World Trade Center.   I turned the sound back up to hear confused newsmen trying to figure out what had happened.   There was talk of an explosion, a small plane or helicopter that may have crashed, but no one seemed sure exactly what had occurred.   That was until the second plane crashed into the second tower.   I was stunned.

A product of Southern California, my first thought was that somehow I had turned the channel and was watching a movie.   Surely this had to be make believe.   No way I just saw what I saw live on the news.   I called my parents in LA, told them to turn on the television and realized the world would never be the same.

Exactly 8 miles north of Ground Zero, the campus at Columbia felt a million miles away.   It was almost a perfect day.   Not one cloud in the sky and temperatures were perfect.   Had I not watched the news, I would never had known anything was off except for military jets flying up and down the Hudson every 10-15 minutes.   I ran into several classmates at a nearby cafe and stopped to chat with them about our bizarre morning.   Most of them were native New Yorkers, still calmly taking in the idea of what had happened and remembering several years early when someone tried to blow up the towers using a bomb in the parking garage.

Then, again, as if I were in a movie, their cell phones starting ringing, each of them realizing that family members or friends worked in the WTC buildings and getting word that the towers were falling.   One by one they peeled off from the group until I was left trying to figure out what would come next.   Another of my friends had suggested we go to a Hospital down in the Village to give blood.   When we arrived near midday,   there was a line around the block with volunteers waiting to give blood or help;   Out front doctors and nurses had rolled out equipment, setting up a triage unit awaiting victims – nearly a half-hour later most started to grasp the reality that no one was going to show up.

The terrible events of 9/11 have left a scar across the chest of Americans. Still a visitor to the city, I felt like a unwelcome bystander in the middle of someone else’s disaster.   Ten years later now back in Los Angeles, I feel honored to have become a New Yorker, if for only a short time.

I will never forget watching fireman race towards a burning building, watching policemen calm panicked and confused crowds, witnessing taxi drivers help ash covered workers into their cabs.   I will never forget the surreal images of collapsed buildings, abandoned cars and a completely deserted Time Square. I will never forget the resolve of a determined city eager to become bigger than itself.

The greatest lesson I learned that day was the importance of calm in the midst of a storm.   Patience and strength pervaded the city, uniting everyone towards solving a problem.   That contagious decisiveness spread across the city, state and country as images spread across televisions and news across radios.

Congratulations to the city for your continued drive to heal and thank you for setting an example for all of us to follow.

Let’s hear it for New York!

The real estate market has never been as chaotic, challenging and full of opportunity as it is in 2011.   While many homeowners continue to struggle with mortgages that exceed the value of their home and difficulty meeting their monthly mortgage payments, homebuyers and investors alike are finding incredible opportunities to find the home of their dreams and investments leading to financial independence.

These buying opportunities also come with the responsibility to be prepared and make sound buying decisions.   A faltering market does not hide mistakes like a market in hyper-drive.   Overpaying, lack of planning, or faulty assumptions on the markets future can lead to disaster.   Conversely, a well prepared buyer with a sound plan can find unlimited success.

To help with your buying decisions in 2011, I’ve prepared a list of the 10 things every buyer should know before buying real estate in 2011:

1) Distressed Properties Still Drive the Market

Although it’s still possible to find a home owner attempting to sell in a buyer’s market, an overwhelming number of sales are still distressed in nature.   Foreclosures, trustee auctions, short sales, probates are available in large numbers and continue to have a significant impact on buyer decisions, lender outlooks, and overall market values.   The most distressed states such as Nevada, Washington, California, Texas and Florida are still experiencing declining values due to the sheer volume of distressed sales.

2) Secure your Financing Before you Start Shopping

Good things come to those who are prepared!   As I tell my clients most sellers are concerned with the “surety of a deal.”   In many cases sellers will forgo thousands of dollars from the sale price for the assurance of a cash buyer who can close quickly.   Although you may not be fortunate enough to have the cash reserves to buy a home without a loan, you can do the next best thing and secure your financing before you start looking for a home.   Those who do tend to be better armed for a quick decision and far more likely to find the diamond in the rough.

3) Jumbo loans aren’t as Jumbo come October

This is most important in the high cost areas of the country.   For example Los Angeles County, Orange County, Marin County all in California.     Financing a home purchase has been especially challenging since the market changed in 2007.   Many home purchases were only possible because the FHA continued buying loans making conforming loans the predominant form of financing across the country.   By contrast Jumbo loans, were difficult if not impossible to find.   For most markets this meant that homes priced above the FHA conforming loan limits were difficult to sell.   After October 1, 2011, the high cost conforming loan limits will be reduced from $729,750 to $625,500 for single family homes.   This will likely mean that buying a home beyond the $625,500 price tag after October 1 will be more challenging and costly.

4) Appraisal Values are Not a Given

It seemed that all you needed was a pulse and a signature to get a loan in the early 2000′s.   Of course the result of such lax standards was a disastrous fall in values after the spigot of easy financing was shut off.   Nearly every sub prime lender has left the business along with the eternal optimism that was often supported by appraisals that unfailingly showed rapid appreciation.   Today’s appraisers are rightfully conservative. Further, due to changes in lending laws lenders and real estate agents have limited to no control over the appraisal process.   The result of this in 2011 is that the pendulum has swung in the opposite direction.   Many buyers across the country are finding that getting an appraisal that supports their purchase price is not a given and in many cases results in broken deals where values can’t be supported.

5) Know the Costs – it’s More than Just a Mortgage Payment

Don’t forget that owning a home comes with the responsibility of caring for your investment.   At a minimum homeowners should have 1% of their purchase price socked away for unexpected expenses.   Better yet, 2%-3% of the purchase price will help insure that sudden disasters like roof replacements, plumbing or electrical malfunctions can be addressed quickly and properly.   Although many foreclosure victims find themselves in trouble after a life changing event or loss of job, it’s typically the big unexpected repair which pushes them over the financial edge.   Be prepared.

6) It’s Still Possible to get a Loan with Stated Income

Although not a place for the novice buyer, it is still possible to find a loan without having to document your income.   Welcome to the world of private lending.   Bad credit, self employment, or poor performing tax returns do not necessarily lock you out of the buying market.   These loans may carry rates far in excess of the average conforming loan (think 10%-14%) and may also require larger down payments (eg. 20%-40%) but can be a useful tool for investors, rehabbers, or homebuyers with a deal just too good to pass up.

7) Investors can Generate Positive Monthly Cash Flow

A novel concept indeed.   However the heady days of the early 2000′s often forced investors to buy investments based on the hope that values and rents would continue to rise.   Now that most sane investors realize that appreciation will be slow or stagnate over the next few years values have dropped to the point where property can generate positive monthly income after mortgage payments, taxes, insurance, and monthly operating expenses.   It’s time to seek these opportunities and build your real estate empire.

8) Investors Should no Longer Buy rental property on “Scheduled” Income

Like Unicorns and Fairies, projected income should be treated as pure fiction! In a seller’s market when competition is stiff and values are rising rapidly it’s almost plausible that an investor would pay a seller for the work he or she would do “after” the close of escrow, but in a buyer’s market it makes little sense, carries tremendous risk and will not be supported by your lender.   Capitalization rates and Gross Rent Multipliers should be based in “actual” income.

9) It’s still about Location, Location, Location

In hot markets when prices are rising rapidly buyers tend to settle for buying opportunities in secondary markets or awkward locations. The primary reason; buyers get priced out of the best locations.   When markets cool investors tend to follow whats known as a “flight to value.”   In other words, when prices are reasonable most buyers avoid troubled locations and secondary markets seeking to buy an affordable home in the most desirable or best location.   In 2011 home buyers will find the best opportunities by targeting the worst house in the best location.   Seek to add value with physical improvements, get to know your local hardware store, but target the best location you can afford.

10) A Seller Under Duress Does not Guarantee a Good Deal

REO does not equal bargain!   Short sales are not always sold at a discount.   The smartest and most successful home buyers understand that the distressed label does not guarantee a good deal.   Do your homework before committing to a deal. Review comparable market information and remember a good comparison of value is a closed sale.   Homes actively being marketed for sale can be and often are listed at prices that have no factual support from closed sales.   Be a smart buyer.

Everyone looks like an all star real estate investor when markets are good and prices are appreciating rapidly.   A challenging market and bad economy hide   no skeletons.   2011, while challenging and distressed, provides an astute buyer with incredible opportunities to buy right.

For those of you who waited out the middle part of the last decade wondering how anyone could justify buying at those crazy prices, your time has come.   Price levels are back on average to 2003 levels wiping out the craziness.   For seasoned investors ready to jump back in, the time has come to start adding   to your real estate empire.   May you all find success.

photo credit: Andrew Ciscel

California jumped ahead of the nation in July with regards to protecting homeowners against deficiency judgments during a short sale or foreclosure.   With the passage of SB 458 (Corbett) signed into law by Governor Brown July 11, 2011, it’s now illegal for lenders to pursue most homeowners after agreeing to settle their debt in a short sale.

Adding to the protection already afforded to many California homeowners after a non-judicial foreclosure auction, SB 458 and SB 931, which passed in January 2011 now extend deficiency judgment protection to most borrowers on single family homes, condominiums and 2-4 unit apartments in short sale transactions.

This new law (CA Civil Procedure Code 580e) has been lauded by most real estate trade groups who recognize it as the last hurdle towards bringing short sale regulations in line with non-judicial foreclosure regulations in the state.

Significant to Note

• It covers all parties related to or represented by the lender in the transaction.   Therefore in agreeing to a short pay, the borrower will not be pursued by the lender, the investor on the loan or the Mortgage insurer after the close of escrow.
• It specifically states that, the lender cannot require the borrower to “pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.”   Therefore the lender cannot legally ask the seller to sign a promissory note, or contribute cash at close of escrow.

Potential Snags

It’s hard to find a reason why anyone would choose foreclosure over a short sale in California now that the new laws have passed.   However, there are a few potential snags which remain.

For example, junior lenders are not compelled to agree to a short settlement.   Since they have nothing to lose and everything to gain, it may compel some lenders to hold out for a better contribution towards their debt.   Although promissory notes are out of the question and seller contributions are prohibited, the law does not forbid other parties from contibuting towards the debt settlement.   Family members, ahem… agents in the transaction, buyers, may all be “hit up” for additional money to settle the debt.

Junior liens not associated with the senior loan are still able to pursue a deficiency judgment after a non-judicial foreclosue sale.   Considered “sold out junior liens” after the foreclosure sale and rendered legally worthless these loans allow the lender to pursue a borrower after a foreclosure.   In cases of a strategic default and short sale where a borrower has other significant assets to pursue, the junior lender may choose to take it’s chances, foreclose and pursue a judgment.

To note, these sold out junior loans do not have the same rights to deficiency in cases where the foreclosing lender wiped out it’s own interest (Simon v. Superior Court (Bank of America),  4 Cal. App. 4th 63 (1992)) or in cases where the worthless security exception does not apply, like purchase money loans (Brown v. Jensen, 41 Cal. 2d 193 (1953)).

Conclusion

Primarily a non-judicial foreclosure state, California has protected homeowners against deficiency judgments better than most.   As a single action state, lenders have but one remedy to collect on debts when a borrower stops paying.   Security first rules further protect borrowers in California by requiring lenders to exhaust the collateral of the loan before personally pursuing the borrower for liability.

Now that the state has passed laws that protect borrowers both in short sale and foreclosure scenarios it will be rare and difficult to find situations where a homeowner remains on the hook for a debt after resolving a sale.

photo credit: asgreinc

May 2011 had the fewest new foreclosure filings or foreclosure starts since October 2008.   At first pass this seems to be good news, perhaps an indication that the worst is over and fewer households will face foreclosure going forward.   A deeper look at the housing market tells us that other mitigating factors led to the slowdown in May and that we still have a long way to go.

One this is clear; proposed solutions are many and a lacking clear direction from banks is causing delays, delays, and more delays.

Foreclosure Radar released their data report for June showing drops in new California foreclosure filings and an increase in homes moving from the initial phase towards foreclosure sale.   Below is a summary of the monthly foreclosure statistics:

• NOD™s “ a 2.36 percent decrease from April to May.   20,533 total filings, which is a 24.3 percent decrease over May 2010.
• Notice of Trustee Sales “ a 18.38 percent increase from April to May.   25,967 total filings, which represents a 16.6 percent increase over May 2010, an increase after fourth consecutive monthly drops in filings
• REO™s “ a 3.54 percent increase from April to May. 11,750 total sales ended up in the banks REO portfolios representing a 3.4 percent increase from May 2010.
• Third Party Auction Sales – mirroring the increase of new REO’s, 3rd party sales were also up 4.19 percent in May as compared to April.   3,704 homes were sold to investors at the court steps.   This figure also represents a 4.1 percent increase from May 2010.
• Cancellations – Cancellations were dropped in May by 24.3 percent as 14,010 households left the foreclosure process without proceeding to trustee sale. A significant drop after three months of consecutive gains. This figure represents a 18.92 percent decrease from May 2010.   Homeowners leave the process when they become current, complete a short sale or permanent loan modification.
• Number of Homes Scheduled for Foreclosure – The estimated total number of homes in the foreclosure process remains high in California and remained flat in the month of May.   Pre-foreclosure properties in the NOD stage decreased 4.07 percent following suit with those scheduled for sale which decreased by 1.83 percent.   A total of 225,000 total properties statewide (118,000 in pre-foreclosure and 107,000 scheduled for trustee sale) are currently in the foreclosure process.

Loan mods, short sales, and lawsuits continue to delay banks as they deal with homeowners who stop paying.   The average time to foreclose in the state of California continues its steady climb, increasing 10.3 percent in May 2010 to a new record 344 days on average to foreclose.   On average, it takes a bank almost one full year to foreclose on a homeowner once they stop paying the mortgage.

Investors buying at trustee sales, on the other hand, are faring much better now that the summer buying season has hit full swing and inventory levels of homes that aren’t in some stage of distress become rare commodities.   These buyers are now reselling their investments at a much faster clip 7.6 percent faster at 134 days on average.   This is the fastest pace since September 2010.

Lender Processing Services (LPS) also noted some distressing news for those hoping the worst was behind us. The LPS Mortgage Monitor monthly in May shows us that loans 90+ days delinquent and in foreclosure outnumber foreclosure sales 50:1.

The report (download LPS report here) covering nearly 40 million loans across the country indicates that 7.96 percent of total US home loans are delinquent adding to that 4,084,557 homeowners are 90+ days delinquent on their mortgage and in some stage of foreclosure.   This number part of a total 6,350,487 homes not current and in some stage of foreclosure nationwide.

The conclusion to draw from this months reports – lack of direction from all ends of the distressed market.

From servicers unclear how to follow proper procedure, to loan investors lacking a clear guidelines.   From homeowners unsure if they’d like to stay and modify or leave and sell short, to Government programs which seem to lack effectiveness.   One thing is clear, as Los Angeles Times reporter Michael Hiltzik suggests, Homeowners deserve more.

photo courtesy: thetruthabout

What does it mean when the foreclosure experts are baffled by the statistics of the foreclosure housing market?   Most often the anomalies are explained by uncovering some hidden manipulation taking place behind the scenes, artificially creating temporary outcomes that are later explained when more information comes to light.

Not one to follow conspiracy theories, I’ve been reluctant to buy into the theory of foreclosure roulette, Foreclosure Radar CEO Sean O’Toole put forth last August.   However as loan modifications continue to wallow, short sales become more predominant in the market, confusion and lack of clear guidelines reign supreme, and REO’s continue a slow trickle into the market it all seems to make more sense.

As the banks emerged from self imposed foreclosure moratoriums and slowed foreclosure filings due to the robo-signing scandals and resulting lawsuits, most expected new filings in April to increase as banks pushed through the backlog of files on their desks.   Defying logic, the opposite happened this month.

Foreclosure Radar released their data report for May showing unexpected drops in California foreclosure filings this past April.   Below is a summary of the unexpected monthly foreclosure statistics:

• NOD™s “ a 25.84 percent decrease from March to April.   20,788 total filings, which is a 28.04 percent decrease over April 2010
• Notice of Trustee Sales “ a 10.92 percent decrease from March to April.   21,732 total filings, which represents a 31.21 percent decrease over April 2010, the fourth consecutive monthly drop in filings
• REO™s “ a 17.24 percent decrease from March to April. 11,342 total sales ended up in the banks REO portfolios representing a 21.09 percent decrease from April 2010.
• Third Party Auction Sales – mirroring the drop in REO sales, 3rd party sales were also down 15.75 percent in April as compared to March.   3,553 homes were sold to investors at the court steps.   This figure also represents a 16.24 percent decrease from April 2010.
• Cancellations – Cancellations were up in March by 26.95 percent as 18,488 households left the foreclosure process without proceeding to trustee sale. While representing a significant gain over the past two months this represents a paultry 1.15 percent increase from April 2010.   Homeowners leave the process when they become current, complete a short sale or permanent loan modification.
• Number of Homes Scheduled for Foreclosure – The estimated total number of homes in the foreclosure process remains high in California and remained flat in the month of April.   Pre-foreclosure properties in the NOD stage increased 10.93 percent offsetting those scheduled for sale which decreased by 9.80 percent.   A total of 231,000 total properties statewide (123,000 in pre-foreclosure and 108,000 scheduled for trustee sale) are currently in the foreclosure process.
• Lender Discounts at Auction – Winning bid amounts averaged 44.2 percent less than outstanding loan amounts and a 26.2 percent discount to fair market value.

Continuing a trend that should prompt more short sale approvals in the coming months the report also indicates that foreclosure time lines have grown again throughout the state.   The average time to foreclosure is now 312 days (roughly 10 months) a 3.31 percent increase over last month and a 15.56 percent increase from April 2010.

The banks aren’t doing much better after foreclosure, taking on average 222 days (7.4 months) to resell their REO’s once they take ownership.   Whether due to inefficiencies, lack of motivation to move property quickly, or internal procedures, it takes on average 34 percent longer to resell an REO compared to properties resold by third parties (investors) after buying at the court steps.

To add a bit more confusion into the market, Florida based Lender Processing Services (LPS) also released their monthly foreclosure report covering nearly 40 million loans across the country.   After reporting a 12 percent drop in foreclosure filings last month, LPS notes a slight 2.4 percent increase in filings from March to April.   Their overall mortgage delinquency rate rose to 7.97 percent at the end of April.   This number accounts for mortgages that are at least 30 days past due but have not formally entered the foreclosure process by receiving a notice of default (NOD).

LPS reports the nation™s foreclosure rate stands at 4.14 percent at the end of April 2011, slightly lower than March 2011(4.21 percent).   These figures amount to 6,388,000 homes in the US either delinquent or in foreclosure, representing 2,184,000 are part of the foreclosure inventory and 4,204,000 are delinquent but have not been formally served.

The Mortgage Banker’s Association also released the quarterly National Delinquency Survey (NDS) for Q1 2011 today (Thursday) showing that on a seasonally adjusted basis 12.84 percent of mortgages were either one payment delinquent or somewhere further along in the foreclosure process.   This is essentially flat compared to Q4 2010.

In a conference call earlier today MBA chief economist Jay Brinkmann noted “(the) Bulk of problem loans were originated in 2005, 2006, and 2007.” Also, suggesting that “Outlook is good. Market is on the mend.”   However later in the call Brinkmann suggested employment figures will continue to drive and direct and pace of the market recovery reminding listeners “Unless people have a paycheck, they can’t make a mortgage payment.”

According to MBA Florida and California lead the nation in foreclosures, representing 24 percent and 11 percent of all troubled loans respectively.   Drawing from the statistics that the NDS covers about 43.7 million first lien mortgages on SFR one-to-four unit properties, covering about 88 percent of the outstanding first lien mortgages in the market, the writer’s at calculated risk indicate this reflects a total of 6.4 million delinquent borrowers, right in line with the LPS report earlier this month.

As a result of the sheer volume of distressed properties, it seems we still have a long way to go before the stress is worked out of the markets; perhaps years.   Massive foreclosures and quick/efficient short sales are certainly not our current norm; further it seems unlikely that will change anytime soon.   What can be expected is the unexpected.   If Mr. O’Toole is correct with his theory, we can expect more of the same illogical and confusing responses and results along the way.

.
© 2011 Allan S. Glass – ASG Real Estate Inc. ®

Zillow chief economist Stan Humphries is certainly not on the housing recovery bandwagon.   In a recent article from National Mortgage News he suggests that œHome value declines are currently equal to those we experienced during the darkest days of the housing recession.   With accelerating declines in the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011.

He’s not alone.   In a Wall St. Journal article Nick Timiraos and Dawn Wotapka note that Paul Dales, senior US economist with Capital Economics, expects nationwide prices to fall another 10 percent adjusted down from his previous outlook of 5 percent.   They also refer to the MacroMarkets LLC March survey in which 111 economists and real estate experts conveyed a continually deteriorating outlook for the housing markets, likely to continue until 2013.

The somber outlook continued in both the Clear Capital Home Data Index (HDI) and S&P’s Case-Shiller Home Price Index (HPI).   The former indicating that prices have fallen 11.5 percent over the past 9 month period citing a particularly ominous trend in the west region as distressed sales continue to grow as a percentage of the overall market.   According to Clear Capital, REO market saturation has reached 34.5 percent nationally compared to 20 percent in mid 2010 (Los Angeles / Long Beach Santa Ana MSA shows a 34 percent REO saturation rate; Riverside / San Bernardino / Ontario MSA shows a 49.6 percent REO saturation rate).

The Case Shiller report mimics the depressed housing news, with the February report marking the eighth straight month the HPI readings have been lower.   Both the 10-city and 20-city index fell 1.1 percent over last month, while falling 2.6 and 3.3 percent respectively over the same period last year.   Los Angeles posted a 2.1 percent year-over-year decline setting prices just above the previous low experienced in April 2009.   “There is very little, if any, good news about housing. Prices continue to weaken, while trends in sales and construction are disappointing,” said David M. Blitzer, chairman of the index committee at Standard & Poor’s.

While it’s starting to feel like I’m beating a dead horse, the Corelogic Home Price Index (HPI), which is the report used by the Federal Reserve and the most followed by leading economists, also posted another decline in values, extending the trend to 8 consecutive months of declines.   Nationwide dropping 7.5 percent in March 2011 compared to March 2010, and following a 5.8 decrease in February 2011.

œLast year the First Time Homebuyer Tax Credit pulled a significant number of sales forward and, to an extent, artificially supported prices. So, absent the tax credit, it is understandable that we see prices continue to decline when compared with last year, said Mark Fleming, chief economist with CoreLogic. œAs we move further away from that support, we will see a leveling of prices and eventually organic improvements in the market.

Where do we Head From Here?

Amid the consensus doom and gloom it’s difficult to see why anyone could be positive on housing in the near term.   Persistently weak market fundamentals continue to exert downward pressure on the housing markets, as high unemployment, excessive supply, constrained mortgage credit, and unrelenting foreclosure issues still have not shown improvement.   Yet that’s exactly where we find economist Scott Grannis in a recent article he contributed to Seeking Alpha.   He compares both Case Shiller and Radar Logic home value numbers finding comfort in both the consistency between the two and the relative stability over the past two years.

Grannis also points to affordability as a factor in his optimism.   He notes that national home values have dropped nearly 40 percent (in real terms) from their highs in 2006.   Further noting, “over the same period, disposable personal income has risen by about 15%, and 30-yr fixed mortgage rates have fallen from 6.5% to 4.8%. Do the math however you want, that adds up to a gigantic decline in the cost for the average family of buying a home (available measures of housing affordability show that homes have never been so cheap).”

Price to Rent Ratios

Atlanta Federal Reserve research director Dave Altig also suggests a bit of cautious optimism in his article “Just How Out of Line Are House Prices?”   Mr. Altig’s calculations show that current prices have nearly returned to levels relative to rents that prevailed in the decade prior to the housing boom that began in the late 1990s.   Considered by some an overly simplistic view of housing numbers, his calculations do show that the cost to rent vs. own is quickly finding equilibrium.   For those of you interested in a more in depth discussion on price to rent ratios, economist John Krainer and research associate Chishen Wei of the Federal Reserve Bank of San Francisco wrote an in depth analysis in 2004 entitled: Housing Prices and Fundamental Value.

Positive Indicators to Consider

Real Estate is also considered a good hedge to inflation.   If you look at the incredible run in values on other traditional hedges, like gold, real estate begins to look lie a bargin if you share the concern that inflation will be a problem once the economy rebounds.   I would venture to guess that real estate prices will be poised for a rebound once excess debt is washed through the housing markets and the economic recovery picks up steam.

Depressed construction activity could also be considered a positive indicator.   Constrained supply resulting from years of lackluster new construction should help the ailing market recover.   This will be further supported by large numbers of renters who are precluded from buying due to low credit scores resulting from foreclosures and/or short sales.   Many of these renters will be families with children who were once home owners and are reluctant to return to multifamily housing after owning a home.

Conclusion

There is no crystal ball available to housing prognosticators.   However the hard data shows that market values have continued to fall in recent months and most signs point to continued trouble and downward pressure on prices.   However, as prices continue to fall and interest rates remain low, affordability should put many potential homebuyers in a very good position in terms of entering the home buying market.   More homes lost to foreclosure or short sale will both pressure values downward in the short term and potentially lift the economic value of homes as rents increase along with the rental pool for single family homes.

It is both risky and difficult to effectively mark the last 5 percent (drop or increase) in home values.   Doing so is a very speculative and short term mentality in what should be a very long term investment.   For buyers intending to live in the home they purchase and investors who buy and rent, jumping into the market now could likely reap profits over the long term.   For speculators, getting in and out over the short term, watch out – we still may not have found our bottom.