Tuesday, May 18, 2010

Current Real Estate Trends - The New Wave of Foreclosures

Leading Real Estate Data Trend Expert Tom Ruff''s Monthly Housing Report:

"The only correct actions are those that demand no explanation and no apology." - Red Auerbach

The above link takes a look at strategic defaults, our soup de jour. I hear the young couple explaining their four to five year strategy. Last month I heard Citigroup’s chief executive before Congress apologizing for the financial crisis; a lot of explaining, a lot of apologizing going on. We know the ramifications of lending practices during our housing bubble, in 3 to 5 years we will know if a strategic default today is a good or bad decision. From the lessons of childhood I hear the voices of depression era parents, “The in thing is seldom the right thing.” I hope 60 Minutes revisits this story in 4 years.

Defining the Bubble

In March of 2005 the median price of all resale homes sold in Maricopa County rose above $200,000 and remained there through June of 2008. The housing bubble can simply be defined as the 40 month period when median sales prices were above $200,000. There were 405,900 sales in this period with the highest sales volume taking place in the first 20 months; there were 154,620 sales in the last 9 months of 2005; 128,802 in 2006; 89,247 in 2007 and 33,231 in the first 6 months of 2008.

A Closer Look

A closer look at the 405,900 sales reveals 343,010 unique home sales. Parties purchasing in the early months of the bubble were actually able to successfully sell their properties. Of the 343,010 unique homes purchased during the bubble, 70,433 or 20.18% have already been foreclosed, an additional 18,033 sold after June of 2008, most likely short sales. From within the bubble 84,767 were cash purchases or had down payments greater than $50,000. The foreclosure rate on these properties is less than 3% compared to the current 20% foreclosure rate of all homes purchased in the bubble. We currently have 21,594 active notices on homes purchased between March 2003 and June 2008, and an additional 16,516 purchased earlier than March 2005 but refinanced within the bubble. Of the 343,010 homes purchased during months where the median sales price was greater than $200,000, 194,827 have either been foreclosed, had a short sale, put down over $50,000 at the time they purchased their home and have a greatly reduced risk of foreclosure or have an active foreclosure notice. Anyway you dice it, that’s a lot of water under the bridge.

More Sixty Minutes

In doing research I came across a convincing video done by 60 Minutes regarding the second larger wave of foreclosures. In the report investment fund manager Whitney Tilson stated we were only half through the correction. For those of you viewing this video for the first time, I’d like to remind you, it was made in December of 2008. At the time this video was made Maricopa County had seen 109,397 recorded notices in the previous two years and 50,470 Trustee’s Deeds. Since this piece was aired, we’ve had an additional 135,952 notices filed and 71,206 Trustee’s Deeds, these numbers reference all property types.

The Next Wave

Over the past year and half two topics have consistently made media headlines, shadow inventory and the next bigger wave of foreclosures. The bigger wave theory was in part inspired by the 60 Minutes piece linked above. We have always contended we’re in the middle of an equity crisis; a loan for more than the property is worth is a troubled loan, period, regardless of its exotic name. There are three ways to remedy this situation quickly; foreclosure, short sale, and modifications with principle reductions. The fourth sure fire way, although a little old fashion, make payments as agreed. Since the foreclosure crisis began, 113,827 homes have gone to Trustee’s Sale, 107,969 were from mortgages originating inside the bubble, breaking down as 70,433 foreclosures on homes purchased within the bubble and 43,394 homes purchased prior to March 2003 and refinanced inside the bubble. For those predicting a new wave, I ask the simple question, where are they going to come from? In order for a new larger wave to happen, new notices by origination dates are going to have to move back in time. The chart below gives a break down of all pending notices. We have more active notices on 2007 originations than 2005 originations, and it has been this way for several months.

Current Trends

The number of active notices peaked on December 31, 2009 reaching 51,466; today that number is 46,078 a decline of 11.69 % since January 1st. We’re seeing a 20% decline in new notices this year over the first four months of last year; 36,981 to 29,497. The number of recorded trustee’s deeds have increased 18.90% over last year; 15,575 to 18,518. The biggest change we are seeing is in cancellations, with a 79.41 % increase in the first four months compared to last year, 7986 to 14,231. For whatever reason, the banks are beginning to make quicker decisions; whether a foreclosure, aggressive pricing strategy at auction, how short sales are handled or implementing loan modifications; they are picking up the pace. Look for May’s notice numbers to continue their downward trend as May filings are expected to be around 6500, the lowest total since the summer of 2008.

Final Thoughts

I recently caught up with some old friends from High School on Facebook. Last week we reunited after 38 years, horse back riding and camping. Since returning from my brief vacation, I’ve had a difficult time gathering my thoughts for this month’s opinion and newsletter. Tying foreclosures to the horse manure clean up tasks at last week’s retreat would have made for easy analogies albeit somewhat inappropriate. In LeBron James fashion I offer my apologies for this month’s opinion, this will be only my third bad opinion in seven years and I hope my spoiled readership understands.

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  1. Brenda,

    Nice article. There's a lot of hard data to sift through. I'm not an expert but, it has been pointed out to me that just as foreclosures are hitting peak numbers in hard hit areas like southern Florida, near record closings are happening now. This kind of data, superimposed over the above data, would make for very interesting thoughts.

    I am currently here in Southwest Florida and the median home price in 2005 was, I believe, over $400,000. The current median price is under $200,000 and, there are record closings right now. Interestingly, average home buyers are not able to get loans but, investors are buying "blocks" of homes for "pennies" on the dollar. Inventories are lowering at incredible rates in some neighborhoods. We all know that supply and demand will soon push the prices back up.

    What's your thoughts and, am I being a bit skeptical to think that there are some very savy investors making a "killing" while many average people are "taking a bath"? If there's a thread to this thought, contact me, I have more compelling data and thoughts regarding the "rich getting richer".

  2. Great article, and thought provoking. I would add one idea. Nobody seems to see the Federal Reserves' hand in all this. They loan the treasury credits to print money out of thin air, and then the US Govt owes them. The Federal Reserve is not part of the Federal Govt. It is a privately owned entity, owned by the 10 largest banks in the country. They were incorporated before the Great Depression. And this current crisis can be directly laid at their doorstep. They pushed the banks in the 90s to loan easy money to folks who couldn't afford homes, and the banks complied. Why? The y wanted to keep the stock market cruising and the housing bubble to keep going. I suggest a great book on this subject, that has a great section on Real Estate. It's called THE CREATURE FROM JEKYLL ISLAND, by G.Edward Griffin. He's not related to me. Or lookup articles on The New American magazine on the Federal Reserve.