Editor’s Note: Keith Jurow is the author of Minyanville’s Housing Market Report.
Bill McBride is a very credible economic analyst whom I respect. But he is dead wrong in predicting that the housing market is bottoming. Here is why.
I will not discuss the first part of his claim – about housing starts – because I do not care about that at all. Only economists and Bill think that this is important.
I will focus on prices in major metro housing markets. That is what you really care about, isn’t it?
Let’s start with a major metro to which investors have been flocking because they believe a bottom in prices is at hand – Greater Phoenix. Here is a chart that was custom-made for me by the housing data website – FNC.com
The chart shows an index of the median sale price of only single-family homes in Maricopa County (where Phoenix is located) with livable space anywhere from 1,500 to 3,000 square feet. That is the heart of the Phoenix market. This price chart gives a much more accurate picture of what has happened in Phoenix than the typical median price charts which can be very misleading. You can see that there really was no uptick in price during 2009 and even early 2010. Can you see any bottoming over the past six months?
Investors paying all cash have flocked to Greater Phoenix because they believed all the talk about the housing market showing signs of a bottom there. We’ve been hearing that for more than two years now. Any investor who bought in Maricopa County in the last two years owns a property worth less than the purchase price.
You see, I’m the only analyst who discusses the significance of the home equity line of credit (HELOC) debacle and its impact today. Take a look at this shocking chart for refinancings in Maricopa County from data provider, mortgagedataweb.com
During the years 2004-2006, there were a total of roughly 877,000 refinanced mortgages originated in Maricopa County. Wait a minute, you say. That’s greater than the total number of properties in Greater Phoenix with first liens.
I’ve pointed out in previous articles that most of these refinancings were not for first mortgages. They were second liens, mostly home equity lines of credit (HELOC).
Keep in mind that those three bubble years were utter madness in Phoenix and elsewhere. Homeowners often refinanced first or second liens two or three times during this madness. The loans became known as “cash-out refis.” They took advantage of the rising value of their property and pulled lots of cash out of their “piggy bank” home.
The Wall Street Journal finally recognised the magnitude of this second lien problem in a front page story on June 7, 2011. Discussing CoreLogic’s latest negative equity report, the author briefly noted that the percentage of homeowners with a second lien who were “underwater” was twice as high as those who had only a first mortgage.
It is no exaggeration to suggest that at least 95% of these properties with refinanced liens are now underwater. There is strong evidence that as prices decline, a greater percentage of underwater homeowners choose to walk away from the mortgage(s). This creates a vicious circle. That is now happening in Greater Phoenix and other major metros around the country. Do you begin to see the scope of the problem?
The New York City Metro
It would be a huge mistake for you to think that this problem is localised and confined only to bubble metros such as Phoenix or Las Vegas. It is nationwide.
Let’s look at the most misunderstood housing market in the country – the NYC metro. The published median sale price for both NYC and Long Island has seemingly held up better than other major metros – not much less than $400,000 for Queens or Suffolk Counties. This has fooled people into thinking that the worst is over in the NYC area. On the contrary, the real collapse in prices is imminent.
In November 2011, Minyanville.com posted my 30-page New York City Housing Market Report. The report included never-seen-before charts, graphs and data that revealed what has been going on there. The banks have not been foreclosing for the past three years. This started well before the robo-signing mess. On February 7, 2012 there were a total of only 242 repossessed properties on the active MLS in Queens according to foreclosure.com. This is a borough with a population of 2.2 million.
Because of this, the number of seriously delinquent properties throughout NYC has been soaring. Based on individual charts for each borough from the NY Federal Reserve Bank which I included in my report, there were roughly 80,000 properties where the mortgage had not been paid in more than 90 days as of June 2011.
That number is considerably higher now. How about this statistic? I received updated numbers from the NY State Department of Banking a few weeks ago. In 2009, the state legislature passed a law requiring all mortgage servicers to send a “pre-foreclosure notice” to all delinquent owner-occupants in danger of losing their home to foreclosure.
As of the end of December 2011, a total of 165,000 pre-foreclosure notices were sent to delinquent owner-occupants just in NYC. This does not include delinquent investors because the law requires that these notices be sent only to owner-occupants.
While not all of these borrowers were more than 90 days delinquent, the vast majority were 60+ days delinquent. What do you think will happen to home prices once the banks finally begin to foreclose on these properties? Prices will collapse in the four outer boroughs and will decline sharply in Manhattan. I am convinced that this will occur although we can’t be sure when the banks will begin to move on this.
The situation is even worse in Long Island – Nassau and Suffolk Counties. I wrote a 22-page report on the Long Island housing market which Minyanville posted in December 2011. Just for these two counties – with a total of less than three million people – more than 149,000 pre-foreclosure notices had been sent as of the end of 2011. As in NYC, the banks have not been foreclosing in Long Island. But they cannot put it off indefinitely. When they begin, prices there will collapse.
Let’s take one last metro area – southern Connecticut where I live. In November 2011, the median sale price per square foot – a good way to compare apples to apples – was down by 25% in Bridgeport from a year earlier. A very nice nearby town – Seymour – showed a drop of 20% in December from a year earlier. The statistics come from Wm. Raveis & Co. which is the largest family-owned brokerage firm in New England and whose numbers I trust. Not much bottoming in southern Connecticut, is there? Remember, this is Connecticut, not Detroit.
Housing analysts have been confidently predicting a bottom for the housing market for the last three years and they have been totally wrong. Anyone who acted on their advice and purchased a home has taken a beating. The clamor about a bottom finally arriving this year is just as loud and will be just as wrong.
Those of you who have an interest in your local housing market – either as a prospective buyer, seller, or just a homeowner worried about how low the value of your house might go – need to disregard this nonsense about a bottom arriving now. There is no housing bottom in sight.