8-14 The “Foreclosure Wave” – Now, a Tsunami of Sorts

August, 14 2009 | markmti

*This report was first published as part of the Mortgage Pages research series on 8-13

• “The Foreclosure Wave” — Now a Tsunami of Sorts
• Housing Supply at Multi-Year Lows — Housing Supply at Multi-Year Highs
• Foreclosure Reservoir Continues to Fill
• CA & National Foreclosure Stats

Over the past two days, the popular foreclosure reporting firms released their monthly numbers and the takeaway was that the foreclosure crisis is getting worse. Indeed, the foreclosure crisis is worsening, but July’s actual foreclosure numbers do not pose much additional risk to the housing market because most of the worsening was seen in the pre-foreclosure pipeline (notice-of-default & notice-of-trustee sale). Based upon July’s results, the players that will feel most of the additional reported foreclosure pressure are the banks, mbs holders, insurers, and servicers.

On April 7th, I made the call for a “foreclosure-wave” to hit CA and other bubble states based upon our proprietary data — the trend was obvious. A CA wave did build from April to June with foreclosures going from less than 10k to over 22k. But in July it aborted because of gov’t interference through HAMP and the July 28th servicer cattle call — no servicer wanted to go DC with record foreclosures in their books for July.

The only caveat in my 4-7 foreclosure wave report was “there is a massive wave of actual foreclosures that will hit beginning in April that can’t be stopped without a national moratorium — this wave is so big I would not put it past them trying it?” Well, there ya go.

But despite CA foreclosures dropping m-o-m, the national foreclosure wave (red) that began a month later in May is still building with foreclosures up m-o-m. As other states start to feel the default and foreclosure heat, CA is not the swing state any longer.

Housing Supply at Multi-Year Lows at the Low-End
Housing Supply at Multi-Year Highs at the Mid-to-High End
Forecosure Reservoir Continues to Fill
Extreme Negative Equity

Because of the record number of properties in the foreclosure pipeline — and on a national level the actual foreclosures rising month-over-month — the housing market sits in a precarious position.

During the past Spring/Summer selling season we saw serious demand from first-timers and investors for low priced houses and now supply sits at multi-year lows. Organic supply is not coming onto the market the way it should because too many homeowners are too far upside down on their mortgage and short sales remain an arduous process.

In the mid-to-upper price bands, conditions are bad with a fraction of the buyers and mountains of supply. In addition, unlike the bubble year’s affordability through exotic loan leverage, most lower-end buyers can’t reach out of their affordability band into the higher priced markets. Instead they do without further isolating this market.

Yes, the servicers can continue to let these properties drip out while homeowners continue to default at a record pace each month. But that will only keep filling the reservoir until one day the dam breaks — it is already at critical levels. It is more likely that as the massive supply of pre-foreclosures in the reservoir continues to build, the number of properties that fall into the spillway increase naturally pushing foreclosures higher in tandem.

And a massive amount of foreclosure-ready supply is on tap as the first group of modifyees exit the HAMP trial-mod period within 30 to 60-days and monthly from then on out. At this point — before year end — either foreclosures will begin to flow hard again or the gov’t will come back in and change around the HAMP to prevent it. But the more they change the rules to allow people to stay in homes that they have no business being in, the more they will brand loan defaults and mortgage mods as mainstream turning good borrowers into bad borrowers who default on purpose.

The bottom line for July was that gov’t meddling did push down actual foreclosures in CA but pre-foreclosures (Notice-of-Defaults and Notice-of-Trustee Sales) remained above 2008 crisis levels. On a national basis, the foreclosure activity is so strong that actual foreclosures rose in spite of CA. The foreclosure reservoir is filling quickly, contains hundreds of thousands of foreclosure-ready properties, but the spillway is has a blockage for now.

With the tax credit still in place, mortgage rates still attractive, and first timers and investors slugging it out for a $150k house, there could not be a better time to foreclose and get houses onto the market. But don’t get too excited — ForeclosureRadar.com reported that in CA the average foreclosure was nearly $200k upside down on the mortgage.

It is important to always remember that when one person gets a ‘good deal’ on a house, orders of magnitude more are thrown into a negative-equity (or deeper negative equity) position exponentially increasing their likelihood of loan default. Loan default leads to foreclosure and another ‘good deal’ on a house and so on and so on.

CA & National Foreclosure Stats

Despite foreclosures falling, CA pre-foreclosures remained very strong. As a matter of fact, the number of foreclosure-eligible properties stuck in the pipeline has never been greater. Notice-of-Defaults at 45k in July remain above July 2008 crisis levels.

CA Notice-of-Trustee Sales also remain above 2008 crisis levels at near 40k. When you back out actual foreclosures from the counts below, there are a record number of foreclosure-ready properties in the pipe at this very moment in time.

Below is a chart of all three phases of the CA foreclosure market plus total activity (red). Other than actual foreclosures (yellow), all three charts show counts at or above peak 2008 crisis levels.

Below is the same chart but of national foreclosure activity. The same applies here — default and pre-foreclosure activity is remaining highly elevated at crisis levels, while foreclosures are sloshing around due to market meddling.

Lastly, this chart looks at CA foreclosure activity relative to total monthly house sales (green).

Foreclosure supply (yellow) has been artificially held back, which has allowed the low end of the real estate market to perform very well over the past several months. But the reservoir of foreclosures (blue + pink) is getting full and at some point the dam will crack and break.

With monthly new foreclosure pipeline supply greater than total sales – when the dam breaks — where does that leave Ma and Pa Organic seller and the builders…they can’t compete with foreclosure resales as it is now let alone when more supply hits.

With monthly Notices-of-Default averaging over 45k per month in CA, sales have to remain near their peak 2009 levels even through the slow months just to tread water – and this does not include organic supply (me selling a house to you and short sales).

As long as foreclosure and foreclosure pipeline housing supply makes up such a large percentage of total sales the housing market will never be on the mend because supply is effectively infinite.

Best Regards,

Mark Hanson
Mark@MHanson.com

-data from ForeclosureRadar.com, RealtyTrac, LoanPerformance, DataQuick

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.

8-1 House Prices — The Next Leg Down

August, 1 2009 | markmti

Henry Blodgett, bless his heart, picked up on a recent research report of mine describing the likely reason that median and average house prices have increased slightly over the past two months in CA and other bubble state MSA’s.

The report that he republished was actually a one page follow-up with one chart to a multi-page report entitled ‘HOUSE PRICES — the next leg down‘ containing several charts that I published a couple of days earlier — before Case-Shiller was released.

This update was taken slightly out of context with respect to CS. It is important to note that my reports were referring to reported median and average house prices – not CS. However, I did refer to CS as noted in the excerpt from the original report below.

Excerpts from original 7-27 report — HOUSE PRICES…the next leg down

Summary (7-27 Report)

Several factors influence reported house sales and price indices. Some are age-old macro and some new-era micro. At the present time, several price indices are showing many MSA’s flattening out or even rising slightly. Is this the ‘housing bottom’ everybody has been calling constantly for two years? Or, just a false bottom caused by factors never before seen, therefore, never analyzed?

In this report, I examine the foreclosure-related resale and organic (the healthy market) markets, and how each group influences the housing market as a whole. The mutually exclusive movement of these two markets of relatively equal size — one of which follows typical seasonality trends and one which doesn’t — can quickly change the total market make-up and reported house prices.

In large part, this large-body push-pull effect accounts for the past few months of increased prices across many MSA’s in CA. It also points to another drop beginning as early as late Fall, as organic seasonality ends and foreclosure-related resales reclaim the mix.

Case-Shiller may Start Acting Very Strange as Well

The CS indices will run into the same seasonal mix-shift as the hard monthly data released by other sources each month. It just may take a little longer to be seen because of the multi-month averaging, lag reporting, and sale scrubbing.

Remember, CS scrubs the sales included in the survey for things such as flipping, renovation etc by eliminating resales that occur within 6-months of each other. But they do include foreclosure resales by lenders because they are arms-length transactions.

The low-end of the market led by foreclosure resales was the CA housing market until recently when organic took over again. Because servicers can easily own REO for longer than 6-months before it resells, CS has likely been capturing much of the foreclosure resale market. Due to the fact foreclosure resales have been outpacing organic sales until recently, the CS in many MSA’s may have been pulled towards the distressed pricing.

But now that the market at the low end — especially foreclosure resales — have picked up dramatically and is turning much faster than it did in the past, CS might throw out more foreclosure resales because they are transacting within the 6-month window. This could really skew their mix to the organic side temporarily while other monthly indices are showing the opposite in the Fall and Winter. Seeing CS rise while everyone else is reporting a drop would be par for the course in this Bazarro universe.

But if this does occur, CS will simply lag. As foreclosure resales once again outpace organic due to the seasonal effects explained in this report, it will roll over a few months after the hard data that we follow.

7-28 (Update 1) HOUSE PRICES — the next leg down

(The report below is the full update to the original report)

Good Morning,

Slight median and average house price appreciation is being seen across some MSA’s mostly in the bubble states – there is no doubt about this. In my ‘House Prices — the next leg down‘ report released earlier this week (attached), I detailed the primary reason for this happening and why it should turn around in the Fall/Winter. In the original report, there are eight charts but I think the simple line chart I added below best highlights the temporary organic/foreclosure-related seasonal mix-shift responsible for the price movement.

The chart below shows clearly the organic sales seasonality (pink) in 2008 and 2009. But in 2008, foreclosure-related resales were surging relative to organic sales each month. And in 2009 they have remained relatively flat all year. The leveling out of foreclosure-related resales has made organic sales going up and down the deciding price factor. This year, as more organic sales (including more jumbo homes going off this year due to price dumping) relative to foreclosure-related resales happened during the peak season, the median and average prices moved in lock-step towards the higher organic market price.

But the season ends now. Every year, organic sales fall off of a cliff beginning in August primarily because kids go back to school in Sept. If organic sales follow typical seasonality trends lower again this year and foreclosure-related resales stay the same or rise (no reason they shouldn’t), then the average and median prices will be pulled quickly back towards the distressed market price. Never before in the history of the housing market have we had two market pulling and pushing on each other like this.

You hear all of the time — ‘”house prices turning is like turning a freighter therefore, this tick up is a definitive leading indicator”. That is just not the case in the new-era housing market. The bullet points below correspond to points in the chart below.

1. Previous to 2007, organic sales were the housing market. Foreclosure-resales made up 5% at most.

2. Prices were at a peak through mid 2007.

3. Foreclosure resales (sold through a Realtor channel) began infesting the mix – organic sales and median prices began to drop sharply.

4. Foreclosure resales keep rising for over a year while and prices continued to fall as the median price was pulled towards the foreclosure-related resale market price. In Sept they overtake organic sales. By Nov 2008, foreclosure resales peaked due to maximum demand from investors and first timers and foreclosure moratoriums etc.

5. In Jan 2009, after a 55% house price drop, median prices level out as the early purchase season begins and organic sales begin to increase. Additionally, foreclosure-related resale inventory has been held artificially low due to moratoriums and/or servicers keeping inventory off the market on purpose. In April 2009, CA median house prices bottom.

6. Going into the busy season, organic sales bounce hard (just like they did the year prior), hit an inflection point in May and reclaim the mix in June.

7. Median house prices began to turn upward in May — moving toward the organic market price — shortly after organic sales began to reclaim the mix. (See pink line leading yellow line beginning at ’6′.

Over the next few weeks we will be putting together more foreclosure data driven reports for clients like the ones in the 3/18 ‘housing bottom‘ report resent yesterday that will do even a better job getting ahead of the monthly house price movement. Mark Hanson