Dear Blog Readers,

To those of you who are new, we are not perma-bear just data parrots. The following report is from my March ‘housing bottom’ series on which I focused intently earlier this year in The Mortgage Pages. This was one of the first reports of the series published March 18th, describes in detail why we thought at the time that the headlines were about to change to ‘housing is bottoming’ in the near-term, and lays out the data that led to this prescient call.

Although we saw reported prices greatly improving over the near-term obviously, unforeseen events such as gov’t stimuli, servicers keeping foreclosures off of the market on purpose, and the tax credits juiced the low end of the market more than we expected. But nevertheless the headlines were here a few months ago about when we expected them. Mark Hanson

- Housing is “Bottoming” but Only in the Headlines
- Present-Value ‘Mix-Shift’ – The First Available Forward Look at House Price Movement

• What is Present-Value “Mix-Shift”?
• Foreclosure-Related Resales Dictate Prices
• What Will Cause Rise in Reported Prices
• Detailed Charts Highlighting CA Present-Value Mix-Shift at the REO and NOD Stages

Housing is close to ‘bottoming’ but only in the headlines. The truth and the ‘reported’ national, statewide and MSA housing statistics are completely different stories. Most of you are affected by headlines but make real money by knowing the truth. These new data sets tell the truth.

What is Present-Value and Foreclosure-Related ‘Mix-Shift’

Based upon this research, beginning in March Existing Home Sales headlines should show a much smaller drop in median prices than February’s number did — perhaps even a leveling out of prices and subsequent rise at least in the West in the near-term. But this does not mean the entire housing market is getting better? On the contrary, due to most of the existing sales being from the foreclosure stock, it means conditions are changing for the selling season and getting worse in the mid-to-high end.

For months I have been closely watching all loan defaults and foreclosures for a shift in the loan-level detail – specific loan types, loan amounts and UPB’s. My thought was that when higher paper grades/loan amounts go through their respective ‘implosions’ and the higher value properties attached to the loans resell, it will push up reported median prices and cause the housing head-fake of the century. Although the housing implosion did swim up-stream in 2008, average original deed-of-trust amounts on defaults and foreclosures did not rise that much throughout the year; certainly not enough to offset the house-price depreciation.

With most of the foreclosure-related sales being from the lower-priced Subprime stock, median values have been pushed down fast. We have yet to see large numbers of higher original loan amounts/paper grades make it all the way through the foreclosure and resale process due to the lengthy foreclosure time line. From the time a borrower gets a Notice-of-Default — after 3-4 months of missed payments — to the time the home is taken back at foreclosure can be 7 to 10 months. Then, the resale cycle can take another 3-6 months. Therefore, a foreclosure-related resale that goes off today may have been from a first payment missed in 2007 – the heart of the Subprime crisis. Because of this, most have not been able to catch much of a glimpse of anything in the ’default and foreclosure mix’ that would push up house prices, especially if they are looking at specific loan-level detail as I had been.

Foreclosure Related Resales Dictate Prices

During the present slow season — in CA and most other bubble states — approx 60% total sales are foreclosure-related with organic sales (Ma and Pa Homeowner) being at the lowest levels on record. In my opinion, organic sales are one of the most important metrics of the true health of the housing market but that is for a different story. It is this massive group of foreclosures and subsequent REO resales that most influence future median house prices. Never before in history have we seen the majority of properties for sale being controlled by so few entities – the banks and servicers.

Near-term Rise in Prices will be caused by Increased Mid-to-High end Foreclosure Resales, More Organic Sales Occurring & Price Dumping During the Busy Season

Despite positive, market-moving headlines about the end to the housing crisis that may accompany a ‘reported’ median house price stabilization or slight move higher, ultimately it will be caused by a) significant price discounting in the mid-to-high end price bands leading to more organic sales, b) higher-priced properties going through their respective ‘implosions’ and resale, c) and a seasonal shift away from the majority of sales being from the foreclosure stock to the majority being from the organic stock. Obviously, on a macro-economic level this isn’t great — the consequences of body-slamming the mid-to-upper end earner/homeowner at this point in the economy’s fragile state are unknowable.

Bottom Line - The present value of the massive pool of properties in the foreclosure process — and that make up 60% of total sales in CA — most influence reported median house prices. Therefore, tracking the real-time present value of properties throughout all stages of the foreclosure process should be the best indicator of future reported house prices near and long-term. And it looks like reported prices are going up.

Detailed Charts Highlighting CA Present-Value Foreclosure-Related Mix-Shift

The following reports show average present values — based upon our enterprise AVM — of CA properties at specific foreclosure stages highlighting the REO stage as the most important. When the bank buys it back at the courthouse steps, which happens in 95% of cases, it goes into the REO resale pool and is sold through a Realtor. This counts as a comparable sale and effects similar house prices in the appraisal zone.

REO – Most Important Stage: The chart below shows the monthly aggregate average present value of all actual foreclosures that have become REO. Present values of props at this stage are still falling especially in the lower value tranches but at a much slower pace. From here these properties may go straight to the Realtor network and be only 1 – 6 months away from final resale. Properties in this foreclosure stage will have the most impact on house prices in the near-term. The clearly shows a near-term price stabilization on the exact inventory that will make up 50% to 60% of of the resales 1-5 months from now.

The following two charts cut all foreclosures above into multiple present value tranches in order to track more closely exactly what is happening with the mix-shift. The percentages on the left side of the chart clearly show the mix-change of property values entering the resale stream over time. With the sales cycle anywhere from 1-5 months, this gives a great forward indication of the direction of reported median house prices.

NOTICE-OF-DEFAULT – Leading Indicator Stage: The chart below shows the monthly aggregate average present value of all Notice-of-Defaults (NOD) – the first foreclosure stage. Prices are rising for the first time due to higher priced homes entering the stream.

This is significant and may be the earliest look available of ‘present value mix-shift’ as the average price here at the NOD stage is 10% higher than at the REO stage shown previously. But from here the properties are 5-7 months away from foreclosure and 8 months to a year away from being resold to a private party. Properties in this stage of foreclosure will not have any impact on house prices in the near-term but towards the end of summer could give house prices a good kicker.

The following chart cuts all Notice-of-Defaults into multiple present value tranches in order to track exactly what is happening within the mix-shift. At the NOD phase the mid-to-upper end present value tranches are now expanding. If this holds for 5-7 mo’s until the REO phase will have the effect of pushing up reported median and average house prices when resold.

Fast-Forward Five Months — DataQuick Recently Confirms False Bottom in Housing

Lastly, in their most recent Bay Area Housing Report DataQuick — a leading data provider — confirmed what was primarily responsible for the reported house price increases seen in much of CA this summer selling season. It is important to note that as organic sales drop sharply as they always do in the fall and winter, then foreclosure related resales will once again reclaim the mix likely bringing reported prices right back down.

Bay Area home sales hit 4-year high; median price up again
August 21, 2009

La Jolla, CA.—-Bay Area home sales rose last month to the highest level for a July in four years as deals above $500,000 continued to accelerate. The median sale price climbed above the prior month for the fourth consecutive month, lifted by the combination of more high-end transactions and fewer sales of lower-cost, lender-owned foreclosures (my emphasis), a real estate information service reported.

The median price paid for a home in the nine-county region rose to $395,000, up 12.2 percent from $352,000 in June, but down 16.0 percent from $470,000 in July 2008, according to MDA DataQuick of San Diego.

Although last month’s median was 36.2 percent higher than the current cycle’s low of $290,000 in March this year, it was still 40.6 percent below the peak $665,000 median reached in June and July of 2007.

The median’s $43,000 gain between June and July was mainly the result of a shift toward a greater portion of sales occurring in higher-priced neighborhoods. The trend has been fueled this summer by several factors, including: More distress in high-end areas, leading to more motivated sellers; more buyers sensing a bottom could be near; and increased availability of larger home loans, which had become more expensive and far more difficult to obtain after the credit crunch hit two years ago(my emphasis).

Best Regards,

Mark Hanson

This document is for your private information only. In publishing research, Mark Hanson and M Hanson Advisors are not soliciting any action based upon it. Mark Hanson and M Hanson Advisors publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Mark Hanson and M Hanson Advisors does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Mark Hanson and M Hanson Advisors publications only. Mark Hanson and M Hanson Advisors are not liable for any loss or damage resulting from the use of its product. Mark Hanson and M Hanson Advisors are Limited Liability Corp registered in CA.

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Filed on: August, 29 2009 by Mark

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