Supply-and-demand thinking no longer applies

July 24, 2012

Recovery hinges on home prices Commentary: Supply-and-demand thinking no longer applies By Lou Barnes Inman News® Share This It is high summer, a scorcher, even mad dogs looking for shade. It's supposed to be a nothing-happening time. However, the anxious suspense in markets is as high and hot as the sun. Everyone knows that the U.S. economy has lost momentum. Federal Reserve Chair Ben Bernanke on Tuesday twice in one page used "decelerated," followed by "... the generally disappointing tone of recently incoming data." Everyone expects that the Fed will do something, but nobody knows what or when, possibly not the chairman. Bernanke vaguely mentioned use of the Fed's balance sheet -- "QE3" the shorthand for a third round of "quantitative easing" -- but no one outside the Fed can tell if action is held up by internal politics (resistance by the regional-Fed hardheads), or by doubts of QE effectiveness, or by desire to keep powder dry for something more troublesome than a slow patch. The primary purpose of QE has been to knock down long-term rates, but markets have already done that, the 10-year T-note to 1.46 percent, and mortgages to 3.5 percent (if someone answers the phone). The secondary purpose has been to encourage risk-taking by investors and lubricate lending, but credit is choked by regulation and post-Bubble over-reaction. Bernanke: "…Prospective homebuyers cannot obtain mortgages due to tight lending standards." In the Fed's most-recent meeting minutes, the only group agreement in 12 pages was the plaintive wish for new ideas to help the economy. The Fed should hold something in reserve to meet two contingencies: a failure to defer the fiscal cliff now five months away, and/or a euro collapse. The fiscal cliff is actually nearer by. We are only three months from election. President Obama has been unable to make a deal with the current Congress; whether he is re-elected or the lamest of ducks, Congress will remain the same until January. Europe is like watching the Liar on "Saturday Night Live." Day after day after day after day, leadership says everything is fine, going according to plan. Right. This week Finland's short-term sovereigns went to negative yield, and Spain's 10s rose to 7.2 percent. Marker: For the moment French debt is still receiving flight-to-quality cash, its five-year down to 0.86 percent. When markets realize that French banks, budget, economy and trade deficit are in sum no better shape than Italy, and French yields begin to rise ... On to something understandable: U.S. housing. For once, the National Association of REALTORS® has properly explained the drop in June sales of existing homes, down 5.4 percent from May, up 4.5 percent from June 2011. The primary reason: a scarcity of the cheapest distressed inventory, the darling of cash-paying investors. Listed inventory is down 24 percent versus last year. Does this pattern mean anything? For the economy, or housing in general? No. Not yet. Listed inventory is merely apparent supply. The shadow supply lies offshore like ocean swells not yet formed into waves. The most deeply distressed inventory, not yet seized in foreclosure, let alone listed, seems to be down from 4.5 million homes to 4 million but replenished by constant inflow of new delinquency in shaky-economy feedback. Some especially favored local markets -- like mine in Boulder, like Saudi Dakota, and San Francisco and any of the other IT paradises -- are doing remarkably well. The rest of the country ... how can the inventory/sales ratio fall so far and prices not rise? Because we still have at least 15 percent of homes underwater, most owners still making payments; many new sales merely recognizing the pre-existing loss, hardly encouraging to sellers or buyers. Supply-and-demand thinking by finance types when the "bubble" blew was wrong then, and still is. Prices crashed far below "clearing prices" and resulted in more sellers and fewer buyers; now it will take quite a while to work off immense but latent inventory. Media also focus on sales of new homes. Although rising a little, they are not particularly useful, except to the stock prices of builders. The gross domestic product (GDP) contribution of new construction even in good times is low single digit. For a better economy we need home prices to rise. That will repair household balance sheets, and every percentage point of home price gains will mean fewer homes underwater. And for that, as ever since 2007, we need credit. Supply vs. sales today is a statistical curiosity. Watch prices. Prices, prices, prices. Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com. Contact Lou Barnes: Email Letter to the Editor Copyright 2012 Lou Barnes

Rising home prices bring 700,000 homeowners above water

DAILY REAL ESTATE NEWS July 17, 2012

Rising home prices bring 700,000 homeowners above water CoreLogic: Negative equity concentrated among homes under $200,000 By Inman News Inman News® Share This Rising home prices helped more than 700,000 homeowners regain equity in their homes during first quarter, but 11.4 million borrowers still owed more on their mortgage than their homes were worth, according to the latest report from data aggregator CoreLogic. The number of U.S homeowners with negative equity declined by 6 percent in the first quarter compared to the fourth quarter, leaving 23.7 percent of all homes with mortgages underwater. That's down from 25.2 percent in the fourth quarter. When the 2.3 million borrowers with less than 5 percent equity, which CoreLogic calls "near-negative equity," are included, 28.5 percent of mortgaged homes were either underwater or nearly underwater in the first quarter, down from 30.1 percent. All told, negative equity nationwide totaled $691 billion in the first quarter, down from $742 billion the previous quarter. The decrease was largely due to home-price increases, CoreLogic said. "In the first quarter of 2012, rebounding home prices, a healthier balance of real estate supply and demand, and a slowing share of distressed sales activity helped to reduce the negative equity share," said Mark Fleming, chief economist for CoreLogic, in a statement. "This is a meaningful improvement that is driven by quickly improving outlooks in some of the hardest-hit markets. While the overall stagnating economic recovery will likely slow housing market recovery in the second half of this year, reducing the number of underwater households is an important step toward reducing future mortgage default risk." Some 1.9 million borrowers were only 5 percent upside down in the first quarter, meaning further price appreciation could move them into positive territory. Among states, Nevada had the highest share of mortgaged loans in negative equity (61 percent) followed by Florida (45 percent), Arizona (43 percent), Georgia (37 percent) and Michigan (35 percent), CoreLogic said. Negative equity is concentrated at the low end of the market, CoreLogic said. Among homes under $200,000, 31 percent were upside down, compared with 15.9 percent among homes worth more than $200,000. The majority of the underwater homeowners -- 6.9 million -- had only a first mortgage with no home equity loans, and owed an average of $212,000 on their mortgages with negative equity averaging $47,000. While 19 percent of these borrowers were underwater in the first quarter, the negative equity share among borrowers with both first liens and second liens was more than twice that, 39 percent. Those 4.5 million borrowers owed an average of $299,000 and were underwater by an average of $82,000. Starting with this report, CoreLogic revised the methodology it uses to calculate negative equity and has therefore revised its historical data for both the nation and states. Below are revised figures beginning with the third quarter of 2009. Revised National Negative Equity Time period Negative equity loan count (in millions) Negative equity share Q1 2012 11.4 23.7% Q4 2011 12.1 25.2% Q3 2011 11.4 24.1% Q2 2011 11.5 24.5% Q1 2011 11.5 24.7% Q4 2010 11.7 25.1% Q3 2010 11.4 24.5% Q2 2010 11.5 24.9% Q1 2010 11.9 25.6% Q4 2009 11.9 25.7% Q3 2009 11.1 24.3% Source: CoreLogic Contact Inman News: Email Letter to the Editor Copyright 2012 Inman News

Foreclosure inventory remains near all-time high

From Inman News of July 10, 2102

LPS: Most homes in foreclosure in judicial states delinquent for more than 2 years
By Inman News
Inman News®

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The number of U.S. homes in the foreclosure pipeline remained near an all-time high in May with judicial foreclosure states posting inventory levels more than twice that in non-judicial foreclosure states, according to a monthly report from loan data aggregator Lender Processing Services released today.

The nation's foreclosure inventory stood at 4.1 percent of all active mortgages in May. This includes all loans that have been referred to an attorney for foreclosure but have not yet finished the foreclosure process through sale.


Right-click graph to enlarge.
That percentage doesn't show the "stark contrast" in foreclosure inventories between states that handle foreclosures through the courts and those that don't, said Herb Blecher, LPS Applied Analytics senior vice president, in a statement.

"In the former, 6.5 percent of all loans are in some stage of foreclosure -- that's more than 2.5 times the rate in non-judicial states where only 2.5 percent of loans are currently in the foreclosure pipeline," Blecher said.

"Both these figures are significantly higher than the pre-crisis average of 0.5 percent, but it is worth noting that the average year-over-year decline in non-current loans for judicial states is less than one percent, whereas in non-judicial states, it's down 7.1 percent."

More than half, about 53 percent, of loans in foreclosure in judicial foreclosure states have been delinquent for more than two years, compared to just over 30 percent in non-judicial states, LPS said.

Serious delinquencies of 90 days or more, which are not included in foreclosure inventory, made up 3.2 percent of active mortgages in May. Overall, 7.2 percent of active mortgages were delinquent in May, down nearly 10 percent from May 2011.

Foreclosure starts rose 2.9 percent year over year in May, to 202,707. Foreclosure sales stood at 73,439 in May -- far below their September 2010 peak of 124,347. Starts outnumbered sales by almost 3 to 1, LPS said.

Florida, Mississippi, New Jersey, Nevada and Illinois posted the highest shares of non-current loans among states in May. Non-current loans include both delinquent loans and those in the foreclosure process.
Montana, Alaska, South Dakota, Wyoming and North Dakota posted the lowest shares of non-current loans.

As of April, new mortgage loan originations had increased 7.4 percent on an annual basis, to 510,127.

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