Mar052013

Low housing inventory is an indicator of residual mortgage distress

The cost of ownership numbers proclaim now is a good time to buy. However, the available inventory is so low that actually purchasing a home is nearly impossible. As I’ve written many times, the banks have engineered much of this shortage by endless can-kicking through loan modifications and refusing to foreclose on delinquent mortgage squatters. Lenders benefit from rising prices because they recover more capital when they do foreclose, and loanowners benefit because rising prices also makes it possible for them to sell without the lingering debt issues of a short sale. It’s only future buyers that get screwed, and obviously, nobody cares about them.

In a normal market, there is not an overhang of distressed loans that need to be processed. The flow of properties on and off the market is not constrained by lender policy. In a market where down payments are more substantial and prices are slowly rising, nobody is underwater and thereby reluctant to sell for a loss. The fact that inventory is so low right now is directly related to the choices of these two groups.

Although lenders deserve much of the blame for the lack of inventory, loanowners are the oft ignored group who isn’t listing their homes. And why should they? If they wait, and if prices keep going up, they can avoid a short sale. As long as prices are rising, they have a huge disincentive to sell. As a result, the number of short sale listings is plummeting. For example, in Orange County there are currently 4,280 listings. When short sales are excluded, that number only drops to 4,090. There are only 190 short sale listings in all of Orange County. Given that somewhere between a quarter and a half of all borrowers are effectively underwater (unable to sell and pay the debt, commissions and closing costs), to have only 190 listings is clear evidence that loanowners are not listing their properties for sale. Conventional wisdom holds that rising prices would bring out sellers. However, its clear that rising prices causes short sale listings to dry up.

Consider the ramifications of the dearth of short sale or foreclosure listings. The lack of listings is a direct result of distressed loans. With a little math, the true level of market distress can be calculated. For example, In Irvine, there is typically about 750 listings at any given time. In the winter it’s less, and in the summer its more, but the normal rate of turnover would suggest that for whatever reason about 750 people always want to move. Right now, the listings are under 250. Two-thirds of the normal listings are simply not there.

It’s even worse in Aliso Viejo. Normally there are about 250 listings. Right now, there are less than 50. This strongly suggests the mortgage distress in the market is much greater than the shadow inventory numbers or the underwater numbers give credit. Mark Hanson is the only one whose been pointing out that the effectively underwater cohort is much larger than people realize.

The national numbers show a similar result. A baseline for comparison can be constructed if you project the line from 2000 through 2005. Based on that projection, we should have about 3,000,000 homes for sale nationally. Currently, there are about 1,750,000. That strongly suggests that about 40% of those who would ordinarily be selling are not because they are either squatting in their properties or hopelessly underwater. Some might argue that discretionary sellers are also withholding their properties because prices are rising, but that isn’t supported by data from the past. In 2004, prices went straight up due to the proliferation of the Option ARM. Inventory held its long-term trendline suggesting that discretionary sellers do not withhold their listings just because prices are rising rapidly.

Inventory will likely remain low until we reach the debt levels of loanowners. Some have speculated that since loans amortize, loan balances are declining, and many more loanowners will emerge from the depths as we near the peak. That sounds plausible, but since many loanowners used toxic loans and received loan modifications which added lost interest, fees, and missed payments to the loan balance, many loanowners owe far more than the peak valuation of their properties. Rising prices haven’t lifted many borrowers back above water, and given the increased loan balances many have, rising prices are likely not the final answer. If banks won’t process foreclosures, we may have depleted home inventory levels for a very long time.

Home Buyers Are Back, but Where Are the Houses?

Published: Friday, 1 Mar 2013 | 11:36 AM ET

By: Diana Olick — CNBC Real Estate Reporter

… Buyer traffic is rising along with home prices, but one traditional Spring phenomenon is sorely absent: rising supply. The raw number of homes for sale is now at its lowest level in over 13 years, according to the National Association of Realtors, and the numbers continue to fall. …

Supplies are down across the nation, not just in the former crash markets, like Phoenix and Las Vegas, where investors decimated inventories of distressed homes in bulk purchases. Listings are down 31 percent in Seattle from a year ago, down 32 percent in Denver, down 20 percent in Houston, down 37 percent in Boston, according to local Realtor associations.

Distressed loans are everywhere, and since banks aren’t processing them, inventories are down everywhere. This is clearly not a local problem.

“At the moment it’s a seller’s market again,” said David Fogg, a real estate agent in Burbank, CA. “Very low inventory, very low interest rates, almost no bank inventory of homes, it’s crazy out there. Every good property I’ve listed this year has brought 10-50 offers and sales prices 10-20 percent over comps. Cash is King.” …

Ordinarily I would chastise the realtor for overstating the strength of the market, but his depiction is accurate.

Fierce competition is forcing buyers to use every advantage, given that so many are going after so little.

In California’s San Fernando Valley there are usually over 9,000 homes for sale this time of year, according to real estate agent Billy Wynn. Today there are just over 1,400.

The same conditions are here in Orange County. The worse the distressed loan situation the worse the inventory situation is as well.

“Realtors are getting so many offers they are taking the homes off the market and not accepting additional offers before any offer is even accepted,” said Wynn. “This is real estate bubble 2.0 on steroids.”

Lenders, politicians, regulators, and the federal reserve are successfully reflating the housing bubble.

It is a puzzling situation, given all the warnings of a tsunami of so-called “shadow inventory” that was supposed to be flooding the market right now. As it stands, fewer distressed properties are coming to the market.

“The ticking time bomb of shadow supply has been diffused by a combination of foreclosure processing delays in judicial states, legislation slowing down the foreclosure process in non-judicial states, foreclosure prevention programs and initiatives encouraging short sales,” said Daren Blomquist of RealtyTrac. “Notably, in 2012, was the National Mortgage Settlement, which both encouraged foreclosure prevention and short sales as an alternative to foreclosure, and the loosening of short sale guidelines by Fannie Mae and Freddie Mac in November.”

I wouldn’t go as far as to say the shadow inventory problem has been diffused. The can has been kicked down the road. Lenders hope the solution is to drive prices back up to the peak so either borrowers can sell on their own or lenders can foreclose and get back all their money. If this strategy doesn’t succeed, and I doubt that it will, lenders will have to deal with the delinquent mortgage squatters lounging in shadow inventory.

Low inventory is the new normal

Back during the housing bubble, the fear was that if you didn’t buy, you would be priced out forever. realtors liked to make that bogus claim to create a false sense of urgency to generate commissions. Now that prices have come down and interest rates are very low, affordability is not a problem; however, with the conspiracy to reflate the bubble, limited inventory is now the problem. Since it will take many years to reflate the housing bubble, and since so many need peak prices to sell without a loss, low inventory will be with us for a very long time. It will become the new normal.