Wednesday, March 4, 2009

One in Five Houses Underwater: Foreclosure Sales Surge 177% in 2008

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The laws of economics are beginning to play out in the housing market: lower prices draw in more demand. Now if only the government would allow this to happen we could have our pain and recovery much earlier than it will now happen.

Below we have 2 articles from different side pockets of the housing market - one dealing with the number of people underwater, and one dealing with how many sales in 2008 were foreclosures. Now, for newer readers let me repeat this - in most recessions housing is a lagging indicator; housing weakens during the recession as people lose jobs, can't make payments, etc. In this recession housing instead was a leading indicator - it actually was a great part of what led us INTO the recession. Hence almost everything you have seen thus far is atypical; we have yet to see the housing pain that comes from the recession itself. That's coming.

Further, foreclosure sales are going to dominate the market for a long time - which will absolutely punish "normal people" trying to sell a home at "market prices". So until foreclosure sales do not dominate the house sale numbers, we are not working through the "natural" (non foreclosure market). Further, as we said throughout 2007 and 2008 - people are still in denial of what their house is worth - we posted surveys showing some people incredulously thinking their home value is going up or would in the near future. I'd end this by saying that aside from first time home buyers, every other home buyer needs to sell a home to buy a home. So we have many pickles and this will be a very drawn out affair - even more so by government interference....

While a 1x downward adjustment will be very painful for those owning homes (myself included) in reality low housing costs would be a benefit for the entire society as less of a % of monthly income would have to go to putting a roof over our heads. Instead of this situation --> [Sep 26: 15% of Americans Spend 50%+ of Income for House Payments] [Apr 26, 2008: Bankrate.com - Average Joe Still Can't Afford a Home]

Lower prices would also be good for renters because lower prices mean the cash flow needed to be a successful landlord would be less (hence lower rents). But since the national ethos is houses should trade like NASDAQ stocks (and my house ATM lets me get away from not saving money!), I have a minority view in this regard.

Reuters: Foreclosures drove up 2008 sales
  • Foreclosures drove U.S. home sales up 7 percent in 2008 after a 40 percent plunge the prior year, with eligible buyers lured by deep discounts and low loan rates, according to real estate data company Radar Logic. So-called "motivated sales," or foreclosed houses sold at auctions or by financial institutions, surged 177 percent last year while all other sales in the 25 metro areas tracked by Radar Logic fell by 17 percent. (so this is our divergence between *ahem" motivated sales versus natural sellers)
  • "The market seems to have migrated to the point where motivated sales have become a far more constant part of the housing sales market," Michael Feder, chief executive of Radar Logic, told Reuters. These distressed transactions represented as much as a third of all activity last year, he said. "Buyers recognize that those are at significant discounts versus what all other people are asking for homes and are migrating to those first," Feder said.
  • The biggest sales gains were in areas with the largest annual price declines: California, Nevada, Arizona and Florida. (Economics 101) In California, motivated sales accounted for 47 percent of total sales in December, up from 23 percent a year earlier. [Feb 27, 2009: California Home Sales Double as Prices Plummet]
I did find it interesting to see so many foreclosure sales in such a small number of states - but once more this portion of the housing crash (so far) has been mostly "bad mortgages" versus what typically causes losses of home ownership. (lost jobs)

Now we move onto underwater mortgages. Again this has so far been concentrated in states with the biggest housing bubbles OR longest economic troubles. In the year ahead you will see the more traditional drops as local economies weaken, and places that have been (mostly) immune so far such as New York City will be the next shoes to fall. Per the story 8.3 million properties (20%) are underwater, and another 2.2 million will be underwater if prices fall another 5%. I predicted in [Oct 9, 2008: WSJ - Nearly 1 in 6 Homes Underwater]

I believe we're going to see > 1 in 4 homeowners under water - no matter what year they bought.


We're almost there; in fact I'd argue we are already there as the reality of what a house will sell for, versus what people are listing at is out of whack. But I'm a patient person... I'll be posting the story "One in Four Homeowners is Underwater" soon enough.

Reuters: One in Five U.S. Mortgage Borrowers are Underwater
  • One in five U.S. homeowners with mortgages owe more to their lenders than their properties are worth, and the rate will increase as housing values drop in states that have so far avoided the worst of the crisis, a new study shows.
  • About 8.31 million properties had negative equity at the end of 2008, up 9 percent from 7.63 million at the end of September, according to the study, released Wednesday by First American CoreLogic. The percentage of "underwater" borrowers rose to 20 percent from 18 percent.
  • Another 2.16 million properties could go underwater if home prices fall another 5 percent, the study shows.
  • While states such as California, Florida and Nevada were particularly stressed, the study showed worrying signs of deterioration in relatively healthy parts of the nation. "As more people lose jobs, it will be more difficult to sustain the levels of pricing and home ownership, and that is a big factor driving down housing prices in more parts of the country."
  • Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio remained the most stressed states, with 62 percent of underwater borrowers and just 41 percent of mortgages. (aside from Georgia these were either the bubble states or economic distressed states - the next leg down will be most everyone else; although it won't be quite as harsh as anything these states have faced)
  • Other areas, though, also face more stress. Connecticut, for example, saw a 25 percent increase in homes with negative equity, while Washington, D.C., had a 44 percent increase. (the next wave) "More people are being laid off, resulting in reduced income and therefore less consumption. That leaves fewer people with money to buy homes, and the mentality is that people believe they should wait six months rather than buy now. Less demand means falling prices."
  • By other measures, Nevada was the most stressed, with 55 percent of owners having negative equity and borrowers on average owing 97 percent of what their homes are worth. About 28 percent owe more than 125 percent of their homes' value. (think about that - in Nevada almost 1/3rd owe 125% of their home value)
  • Michigan had 40 percent of its homeowners underwater, while Arizona had 32 percent.
Despite 5% mortgages ... or 4% or whatever Obama decides it should be my prediction of a median home price of $167K made in 2007 [Dec 6, 2007: Analysis What Should Median Home Prices Be Today?] looks not only likely - but perhaps Kool Aidish. Quite remarkable since at the time pundits were screaming "housing has never fallen nationwide - hence it never will" [Jan 24, 2008: They Said it Could Never Happen. Ever.]

[Feb 13, 2009: US Home Prices Fall to 2003 Levels]
[Dec 24, 2008: Median Home Prices Fall Most Since Great Depression]
[Feb 10, 2008: Kedrosky - The Next Wave of Mortgage Defaults]
[Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble]
[Jul 10, 2008: Foreclosure Activity Map]
[April 13, 2008: Unintended Consequences of the Coming Socialization of the Housing Market]
[Mar 25, 2008: WSJ - Wave of Foreclosures Drives Prices Lower, Lures Buyers]
[Mar 19, 2008: Alt A Mortgages Beginning to Break Down]

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