Editor’s Note: BUSINESS INSIDER has been featuring Keith Jurow’s housing market articles regularly for the past two years. He is the author of Minyanville.com’s Housing Market Report.In my last BUSINESS INSIDER article posted in May, I explained why a housing collapse in major metros was coming and why you needed to prepare now. Since then, Wall Street economists, analysts and other pundits have smugly noted that a consensus has been reached that housing is bottoming. So it’s time for me to show you why this consensus view is pure rubbish.
For months, a slew of pundits have pointed to figures which allegedly show that home prices are now on the rise around the country. Nearly all refer to the Case-Shiller price index which has become the gold standard of what’s going on in housing markets. The June index revealed that the year-over-year price declines for 20 major cities had finally ended. Prices in June were higher than May in most of these metros. Analysts were most excited by how Phoenix had turned around. The Phoenix index was up by nearly 14% year-over-year.
OK, let’s see what is really occurring in Phoenix. My source is Phoenix realtor, Leif Swanson, whose charts I have used in several previous articles. It is not an index and shows the raw sales data for homes sold in Maricopa County where Phoenix is situated. Here is his latest chart which shows the historical percentage of all homes sold in Maricopa County that were lender repossessions.
Photo: Keith Jurow
In the spring of 2009, 2/3 of all sales were REOs. A year ago, it was still nearly 40%. By July 2012, that percentage had plunged to a mere 11%. For the last year, the banks have tightened the spigot and dramatically reduced the number of foreclosed properties which they put on the active MLS.
What is the significance of this? There is hard evidence that REO properties sell at the greatest discount to the non-distressed market price. That discount normally varies from 20-40% depending on the metro and particular location. So when far fewer REOs are sold in a given metro, this will necessarily push upward any measure which uses median prices. That’s why the median sale price for Maricopa County has soared from $114,000 in July 2011 to $145,000 a year later. Take a look at Leif Swanson’s chart on the median price.
Photo: Keith Jurow
This may have been why Professor Robert Shiller, co-creator of the Case-Shiller Index, said in a recent interview that we may be witnessing a new bubble in Phoenix.
The supply of repossessed properties for sale has been intentionally constricted by the servicing banks, the GSEs and by HUD. So buyers have been forced to turn more to short sale listings as well as to non-distressed properties. Remember, many are all-cash investors who have been lured from Canada, California and just about every other state for several years by the collapsed prices in Phoenix.
That is why short sale listings plunged from 11,000 in January 2011 to under roughly 1,000 in July 2012 . This has pushed the average price-per-square-foot for distressed and non-distressed homes up from their lows of 2011.
Leif Swanson also informed me that the average price-per-square-foot for short sales in July was $76. That hardly seems like the stuff of a roaring housing market. This was actually lower than the average price-per-square-foot for repossessed home sales. Leif explained to me that the short sellers don’t care, don’t maintain their homes and sell them “as is.”
Does this mean that the Phoenix market has actually bottomed? No way. At some point, the banks will have to unload their REOs onto the market. Much more important is the shadow inventory of seriously delinquent underwater properties about which I have written extensively. We’ll take another look at this important overhang briefly.
Home Prices Continue to Fall Throughout New England
In many areas of the country, it is not easy to obtain accurate, comprehensive and reliable statistics on home price changes over time. However, there is a source in Connecticut that provides the best picture of home prices from any source of which I am aware. William Raveis & Co. is the largest family-owned brokerage firm in the northeast with offices in six states. It has an impeccable reputation.
On their website – raveis.com – you can view accurate statistics on single-family home prices and price changes over time for any town or city in six New England states. I’ve spent literally weeks pouring over these statistics to get a good feel for what was occurring in these states. Here is a summary of what I found for five of these states.
Photo: Keith Jurow
Let me explain these numbers. The first column of figures is the average price-per-square-foot (ppsf) for all single family homes sold in that town or city for the period January – July 2012. The next column shows the per cent change from the same seven months in 2011. You can also go to any town or city and find year-over-year comparisons for the month of July, the previous three months or the previous twelve months. Try it yourself. It’s very easy to use.
I was quite surprised when I examined roughly 200 towns and cities. I found only one town that showed a year-over-year price increase – Cambridge, MA. That’s where Harvard and MIT are located. Like many towns where much of the labour force works for a college or university, not many people get fired there. So its economy and labour market are much stronger than most places. Cambridge is certainly not indicative of what’s going on in the rest of New England.
I believe that comparisons using average ppsf are the best way to view home price changes. It eliminates distortions caused by the size of a house. For example, median price statistics could be seriously distorted by changes in the mix of homes sold. If a large increase in the sale of expensive homes occurs, this will inflate the median price for that area.
Price-per-square-foot eliminates that bias. I realise that different kinds of homes will fetch a higher ppsf than others in the same locale. If you spend time on trulia.com, you’ll see that 3-bedroom homes often sell for a somewhat higher average ppsf than 4-bedroom homes. However, with the raveis.com figures, the mix of three and four bedroom homes sold will not ordinarily change dramatically for any town. So their figures give us a very good indication of what buyers are willing to pay per-square-foot for houses in that town.
Take a look at the price declines in the raveis.com table, especially those for Connecticut where I live. You’ll see some very nice towns with double-digit year-over-year price declines. Some are wealthier towns in Fairfield County. But not all. New Britain is a blue-collar town. Shelton is a nice town with a mix of household incomes.
Now you may say that what’s occurring in Connecticut and other New England states may not be representative of the rest of the nation. That is certainly possible. Many of you will probably refer to the Case-Shiller Index. OK, let’s take a look at it.
The World According to the Case-Shiller Index
Without a doubt, the Case-Shiller Index has more credibility than any other home price index. Its publisher – Standard & Poors — has actually put out a 41-page explanation of the methodology behind the Index which I have read.
The Index uses a “repeat sales” model because it takes recent home sales and matches them with a previous sale of that property. It is essential for you to understand that at the foundation of the Index are certain key assumptions. The most important is that different weighting is assigned to matched pairs of home sales depending on certain criteria.
Paired sales are assigned a weight anywhere from zero to one depending on how far the pair differs from the “average price change for the entire market.” The purpose of this is to smooth out distortions which the creators believe are caused by extreme price changes that differ markedly from most of the other price changes in a given metro.
Another key weighting factor is that a home which has a longer time interval between its two paired sales is given less weight than one where the interval is much shorter. For example, a home in which the interval between sales is 10 years may be assigned a weight of only 80% of that of a paired sale with a six-month interval. The weight could be as low as a mere 55%.
The assumption behind the time interval weighting is that “over longer time intervals, the price changes for individual homes are more likely caused by non-market factors” (i.e., physical changes in the property).
Why am I digging into this? It’s very simple. The weighting of paired sales and the assumptions underlying it will necessarily cause the index figure to be far removed from the raw sales data. To put it differently, the Case-Shiller Index is not a measurement of what is going on in any major housing market. If its Index methodology were used on the raveis.com numbers for New England, they would look completely different.
Just understand that if you use the Case-Shiller Index as a measure of what is occurring in a major metro, it is like someone with good vision viewing things through very strong glasses. The world will look very different for you.
Why the Shadow Inventory Will Bury Nearly All Major Housing Markets
By the spring of 2009, the foreclosure situation had become so awful that servicing banks decided to sharply reduce the flow of REOs onto the market to keep home prices from completely collapsing.
Nowhere was this done more vigorously than in the New York City metro area. Unlike other major metros, however, the banks have never turned the spigot back on in the New York metro area. Once the word got around that the banks were not foreclosing or evicting, borrowers stopped paying their mortgage in droves.
Late in 2009, the NYS legislature passed a law requiring all mortgage servicers to send a “pre-foreclosure notice” to all owner-occupant borrowers who were delinquent more than 30 days on their mortgage. The purpose was to warn the delinquent borrower of the danger of foreclosure and to explain steps they could take to prevent it. The act did not require notices to be sent to investor-owned properties nor for properties known to be vacant.
The servicing banks were also compelled to send information about the delinquent property to the NYS Division of Banking after they had sent out the notice. The state published a preliminary pre-foreclosure notice report in October 2010, but has never updated its statistics.
I immediately saw the importance of these numbers because it could provide the most comprehensive statistics on the true extent of serious delinquency of any state. For months, I sought to obtain updated numbers, but none were forthcoming. Finally I was able to get updated stats for New York City and Long Island. My contact has updated these quarterly numbers three times since then.
What follows is a table showing the cumulative totals through June 2012 of pre-foreclosure notices sent to delinquent owner-occupants in NYC and Long Island. The accuracy of these statistics has been confirmed by the Division of Banking although they have not published any official updates.
I have spoken to my contact in the Division of Banking numerous times on the phone. He is quite sure that there are very few delinquent properties which have received more than one pre-foreclosure notice. More important, I also received an explanation from the foremost foreclosure attorney in NYS that the statute did not require a follow up second pre-foreclosure to be sent to a delinquent borrower. Therefore, I am confident that the totals in the table are almost entirely separate properties and have exceptionally few duplicates.
Photo: Keith Jurow
A total of roughly 212,000 owner-occupants of delinquent properties in New York City and 193,000 in Long Island had been sent pre-foreclosure notices by their mortgage servicer at some point between February 2010 and June 2012.
My source at the Division of Banking sent me a further breakdown showing that roughly 86% of these mortgages were first mortgages and the remainder were second liens. I have fairly reliable statistics from the Federal Reserve Bank of New York showing the total number of first liens outstanding in these counties through the first quarter of 2011.
Keep in mind that I have posted several articles showing that for several years hardly any seriously delinquent first liens have been foreclosed in either NYC or Long Island. If we use both of these reliable sources, then nearly 24% of all outstanding first liens in NYC are still seriously delinquent and nearly 30% of all the first liens on Long Island. Many of them have not yet started the foreclosure process and are still lived in by owners who have not paid a cent on their delinquent first liens for 2-3 years or more. Nice deal, huh?
Though some may try, it is very difficult to spin these numbers or explain them away. The total continues to grow as new pre-foreclosure notices are sent out each day. It would not be a stretch to conclude that these seven counties have the worst serious delinquency percentage in the nation.
What will the servicing banks do with all these seriously delinquent properties? I am asked this question all the time. Who can know for sure? But I am quite certain that this game cannot continue indefinitely. At some point in the not-to-distant future, they will have to begin to take action. When they finally start to foreclose on these properties or even accept short sales, home prices in these seven counties will begin to collapse.
How low? I don’t have a crystal ball. Three years from now, I am fairly sure that most properties in these counties will be worth less than half of their current value. If you want to project where the NYC metro is headed, take a good look at what happened in Phoenix since the end of 2006.
The Serious Delinquency Fiasco in Other Major Metros
To get a good sense of the enormity of the serious mortgage delinquency problem, you need to understand that it has two components:
- mortgages which have been delinquent for 90+ days but which have not been put into default (NOD) – the first formal stage in a foreclosure proceeding
- those mortgages which have been placed into default but have not yet been foreclosed and sold at a trustee sale
For any specific metro, you need to add both of these numbers to get a complete picture of the “shadow inventory.” A website called foreclosure-response.org tracks this total delinquency picture. Here is a table showing 15 of the worst metros and the percentage of all first liens that are seriously delinquent as of the first quarter of 2012:
Photo: Keith Jurow
It’s essential to understand that these statistics do not include first liens delinquent between 30 and 90 days. Based on LPS’ latest Mortgage Monitor, you need to add another 5% to the delinquent percentage in the table to get a complete delinquency picture.
Note also that the percentages in the table exclude the nearly three million first liens which were modified by mortgage servicers in 2010-2011and have not yet redefaulted. All non-HAMP modifications are considered “current” and no longer delinquent once the modifications are put in place. We have reliable evidence that nearly half of these modified mortgages will eventually redefault.
Refinanced First Liens Originated During the Bubble Years
You must also keep in mind that there was a refinancing frenzy during the height of the housing bubble – 2004, 2005, and 2006. Take a look at this amazing chart from mortgagedataweb.com.
Photo: Keith Jurow
In the three years 2004 – 2006, an incredible total of roughly 27.5 million first and second liens were refinanced. Many of them became known as “cash-out refis” where the borrower tapped the “piggy bank” house and took cash out from the growing equity in the home. They would later regret this.
We know from the Federal Financial Institutions Examination Council (FFIEC) that roughly 20.8 million of these refinanced loans were first liens. This means that around 6.7 million were refinanced second liens and most of these were home equity lines of credit (HELOC).
You need to understand that millions of these properties were refinanced more than once during the insane bubble years, especially in California. It is also essential for you to realise that nearly all properties with either first or second liens which were refinanced during 2004-2006 are now underwater. The total amount of mortgage debt on the property exceeds the value of the property. This does not include the millions of mortgages that were refinanced in 2007 – 2009.
Disregard reports you may have read purporting to show what percentage of homes are now underwater. These reports almost never include the second liens on the property. Even the Wall Street Journal’s June 7, 2011 report claiming that 38% of all homeowners with second liens were underwater is much too low a figure.
According to Equifax, there are roughly 16 million homes with outstanding second liens. More than 70% of these loans are HELOCs with an average outstanding balance of $50,000. However, there are millions of homeowners in California and numerous major metro areas with HELOC balances exceeding $100,000. It’s not going out on a limb to say that any homeowner with a HELOC in excess of $100,000 is badly underwater.
Believe it or not, most banks are still offering HELOCs to those with very good credit up to an 80% loan-to-value ratio even though home prices have been declining since 2006. I’ve spoken to several of them and they seem totally oblivious to the risks.
The serious delinquency statistics in the previous section show only those borrowers who were delinquent as of March 30, 2012. I have explained in previous articles that walking away from a mortgage increases as the borrower goes further underwater. Thus there are countless millions of underwater owners with refinanced mortgages who are likely to default in the next few years. They are a ticking time bomb just waiting to explode and expand the number of seriously delinquent properties.
What Should a Homeowner Do?
I suggest that you pay no attention to all the talk about possible solutions to this housing mess. They aren’t any solutions. The question is this: What should a homeowner do now to protect against the looming disaster?
The problem is that the insistence by the pundits that the worst is over has led many homeowners to believe this nonsense. On August 20, the website redfin.com released the results of a survey of would-be home sellers conducted during the second week of August. It found that 38% of them plan to wait more than a year before selling their home. Another 36% intended to wait anywhere from 3 to 12 months before putting the house on the market.
Why are they doing this? They are optimistic that prices will be higher down the road. 80 per cent of those surveyed believe they will get a higher price after a year or two. Only 7% thought that prices would be lower.
This thinking has caused large numbers of sellers to pull their house off the market in the last six months. If you are among those inclined to believe the drivel about a housing bottom, I urge you to reread this article carefully. Also, check out the home price statistics on raveis.com. Go to your local tax assessor’s office and review the sales of the past six months. Talk to people who have actually sold their house and find out how much of a loss they had to take. See if you can find any successful sellers under 60 years old who actually profited from the sale of their house.
I believe that doing this research will cause you to reassess your optimism. Time is running out. What is the risk of keeping your home off the market until next spring? Plenty. Many major metro markets will almost certainly show signs of further weakness. Some may begin to unravel with willing buyers increasingly hard to find. I cannot think of one major market that I expect to be stronger.
Once you discover that your home is underwater, many of you will probably feel trapped. There are many homeowners who are simply unwilling to contemplate taking a loss and doing a short sale. If you simply hope for better times ahead, I believe you will regret that inaction. Now is the time for you to act.
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