What If The Housing Bulls Are Dead Wrong?

by Keith Jurow, Capital Preservation Real Estate Report
. . . Appeared in Real Clear Markets 01 August 2013

Bidding wars! Multiple offers on a property. Houses selling for more than the asking price.

Has the buying frenzy of 2005 actually re-emerged? Have the good times of double-digit year-over-year home price increases returned out of the ashes? Or is this merely a fantasy and all the housing bulls are flat out wrong?

The Reality of California Housing Markets

California is almost always the best place to start for seeing what is really going on in major housing markets. Take a look at this revealing chart from PropertyRadar.com on the plunge in foreclosure activity.

You can see how both the number of homes being placed into default and sales of these defaulted properties have plunged by nearly 70% in the last 12 months. Servicers have made a conscious and determined effort to turn around housing markets by starving them of repossessed property listings (REOs).

Since REOs normally sell for a considerable discount, their absence has pushed up the median price substantially in those metros where the REO listing have plunged the most.  Take a good look at what has happened in Phoenix.

In the last two years, foreclosed property sales have fallen from nearly 40% of all Phoenix sales to a mere 7% in June.   That’s why median sale prices have soared in Phoenix.

In California, Phoenix and around the country, this plunge has absolutely nothing to do with robo-signing scandals or changes in state laws.  The servicing banks have made a clear decision to withhold repossessed homes from the market.  Of course, they will not admit this publicly.

The notion that the drop in REO sales is due to a decline in the number of delinquent homeowners is laughable.  Look no further than the NYC metro about which I’ve been writing for more than two years.  You can find these crucial stats in my previous Real Clear Markets article.

Serious Mortgage Delinquencies – You Can’t Spin Them

Although I’ve emphasized this key issue for three years now, it is too important not to discuss again.  Futhermore, it gets little play in the mainstream media.  If you review even a few of my 40 articles published since early 2010, you’ll see that I always provide solid historical charts and graphs.  One crucial piece of data is that the vast majority of loans which become delinquent by more than 60 days and are not modified do not become current.

Take a good look at this table showing the serious delinquency rates for the 15 worst major metros.

You need to understand that these statistics do not include first liens which are delinquent between 30 and 90 days. Based on LPS’ latest Mortgage Monitor, you should add another 3.5% to the total percentages in the table to get a complete delinquency picture.

Even more important is the fact that this table also excludes the 1.9 million permanent modifications completed by mortgage servicers just in 2011 and 2012 according to HOPE NOW. Also, let’s not forget the usually overlooked HOPE NOW category of “Other Workout Plans Completed” which totaled 10.1 million through September 2012. These are entirely separate from modifications.

Except for those loans which have re-defaulted, these modified loans or “other workout plan” mortgages are considered current and no longer delinquent. All non-HAMP modifications are considered “current” and no longer delinquent once the modifications are put in place.

How many of these modified loans will re-default? I have solid data showing that mortgages in non-guaranteed mortgage-backed securities (RMBS) which were modified in 2010 have re-defaulted at a rate of 40%. Loans modified in 2011 are fast approaching a re-default rate of 40%.

It is therefore safe to say that several million of all the loans modified or put into other workout plans will eventually re-default. This does not include all the borrowers who will default this year and in 2014.

When you add all the defaults that will be coming in the next 18 months to the mortgages seriously delinquent right now, even the cockeyed optimists ought to see the serious dangers ahead for housing markets.