The Blog of Author Mark MacKenzie: It's The Housing Market, Stupid!

White House: Unemployment To Average 9.8% In 2010

Mark MacKenzie Real Estate Planning — Sat, 29 Aug 2009 08:11:23 -0500

This past week the White House downgraded their assessment of the economy when they contracted their GDP projection for 2010 from 3.2% to 2% and increased their original unemployment outlook from below 8% to 9.8%.

There are two concerns with unemployment. The first is the actual percent, and the second is the duration. What the White House is predicting, and keep in mind they have been behind the curve on this recession for the past two years, is that 2010 is going to be worse than 2009 in terms of sustained high unemployment. Unemployment is expected to average "only" 9.3% for 2009.

What this means for the housing market is that we are going to see continued record setting foreclosure rates for another 12 months, maybe longer. Already, in July, according to RealtyTrac, foreclosure filings were at a record high, and were up 32% from last year.

Additionally, a recent report published by Fitch Ratings showed that consumers are already on the brink. According to their study, the "cure rate" for delinquent mortgages plunged to just 6.6% when compared to 45% from the years of 2000-2006. What this communicates is that once a homeowner falls behind on their mortgage payment, there is only a 6.6% chance they are going to get caught up. And considering the MBA is reporting that a record 13.16% of all mortgages are at least 30 days late or in foreclosure, it paints a very worrisome picture for the housing market.

Yes, demand for housing has rebounded from the bottom thanks to a Fed $1.25 trillion funny money policy. But it appears that foreclosures are going to rise at a greater rate than the demand for them. This means we will be looking at at least another year of continued price deterioration in the housing market. And this assumes that the Fed doesn't begin to contract their monetary policy yet.

New Home Sales, Mortgage Rates, and the $1.25 Trillion Dollar Question

Mark MacKenzie Real Estate Planning — Sat, 29 Aug 2009 07:39:48 -0500

According to the Census Bureau, new home sales jumped 9.6% from June to July to a seasonally adjusted annual rate of 433,000.

This is the highest rate of home sales since August of 2008. However, new home sales are still down -13.4% from last July.

The inventory of unsold new homes fell -3.2% from last month to 271,000 and is down -35.3% from last year. This is a massive improvement and as a result, the month's supply of housing fell to a 7.5 month supply.

There are all positive indicators for the new home market. As new homes are built, jobs are created, supplies and materials are purchased, and local municipalities benefit from new sources of tax revenue.

The question that remains, as it does with the broader economy, is whether or not the housing market will be able to sustain these improvements once the Fed begins to tighten the monetary policy and raise rates.

The Fed has committed to purchase $1.25 trillion in mortgage backed securities and has kept the federal funds rate at near zero. And yet despite this funny money policy, the new home market is still off -13.4% from the pace last year. What happens when the Fed removes this stimulus?

Mortgage Purchase Applications Showing Stability

Mark MacKenzie Real Estate Planning — Thu, 27 Aug 2009 08:15:29 -0500

The MBA reported on Wednesday that the mortgage purchase application index rose 1% this past week to 280.5.

While the reading of 280.5 does not represent overly encouraging demand for real estate, the index has slowly risen for four consecutive weeks.

The 30-year fixed rate mortgage rose from 5.15% to 5.24% for the week ending August 21st.

Between the recent surges in existing and new home sales, as well as the past four weeks of mortgage purchase applications, it appears that demand has stabilized thanks to precipitous home value declines, an $8,000 first time home buyer tax credit, and a $1.25 trillion Fed funny money monetary policy.

Unfortunately, the context that is being lost is that while demand has rebounded back to pre-September of 2008 levels, foreclosures (supply) are escalating at a greater rate than demand is.

According to RealtyTrac, foreclosure filings were up 32% year over year in July to a new record high while exisiting home sales were only up 5% during this same time frame.

CNBC's Diana Olick on "Cure Rates"

Mark MacKenzie Real Estate Planning — Tue, 25 Aug 2009 23:22:08 -0500

On Monday CNBC's Diana Olick wrote a post about mortgage cure rates. For those of you who haven't read her stuff before, I recommend it. She is one of a very small minority of housing analysts who understand the comprehensiveness of the housing market.

A cure rate is a term used to represent the percentage of delinquent loans that are returned to "current" status each month.

In other words, for every 100 loans that are delinquent, how many of the owners will get caught up with the payment they have missed.

According to Fitch Ratings, Olick writes that from 2000-2006, 45% of loan delinquencies were being cured. That percentage has dropped to just 6.6% now.

More interesting, of the 6.6% that are being "cured", approximately 25% of those are from loan modifications. Unfortunately, statistics have shown that loan modifications have high re-default rates when measured over a period of several months.

What this cure rate study reveals is that many home owners are on the brink and are unable to rebound as they have before in the past.

This Fitch study, when combined with the recent MBA delinquency study which showed that 13.16% of all mortgages were at least 30 days late, reveals that a massive number of loans will be going into foreclosure over the next 12 months.

While home sales have increased over the past couple of months, the number of foreclosures continues to increase at a greater rate. This means that home values will continue to erode.

The Real Story Behind Case-Shiller Home Price "Increases"

Mark MacKenzie Real Estate Planning — Tue, 25 Aug 2009 22:38:21 -0500

Case-Shiller announced today that home prices rose in June from May by 1.4% for both the 10-city and 20-city indexes.

I'm still trying to figure out why this makes headlines and why people think that this indicates that the housing market is bottoming.

Of course home prices rose from May to June. They did it in 2007 and 2008 too. They do it every year. It is called a seasonal variance.

According to the NAR the median home value rose from $222,700 to $229,000 in May of 2007 to June of 2007.

And then again in 2008, the median home value rose from $207,900 in May to $215,000 in June.

And here we are in 2009, and the median home value according to the NAR rose from $174,700 in May to $182,000 in June.

It's what home values do.

In order to better understand real estate trends you need to compare year over year data. Just as a weather man wouldn't compare June temperatures to those in December, you can't compare month over month data unless the data is seasonally adjusted. The Case-Shiller index is not seasonally adjusted.

According to Case-Shiller, year over year, from the 2Q of 2008 to the 2Q of 2009, home values have fallen by -14.9%. Over this same time frame, the NAR reported a -13.8% decline.

81 Bank Failures...And Surging

Mark MacKenzie Real Estate Planning — Sun, 23 Aug 2009 16:16:15 -0500

On July 3rd, more than half-way through the year, I wrote a post that the number oif bank failures had reached 52. Now here we are, less than two months later and that number has exploded to 81. We have had nearly 30 bank failures in less than two months. That is a pace of nearly one every other day.

The most notable of the bank failures this weekend was Guaranty Bank, it was the third largest this year.

The systemic cause of these failures is falling asset prices, specifically residential and commercial real estate. The problem is that despite aggressive monetary efforts by the government, asset values are still falling.

Monetary policy is not working because it is not targeted, it is not timely, and it is anything but temporary. Monetary policy is broad, slow, and long-lasting. And yet despite the impotence of monetary policy, Washington continues to step on the gas.

On the other hand, fiscal policy is cost-effective, timely, targeted, and temporary, and yet despite this, Washington continues to ignore it and is allowing asset values to continue to deteriorate.

Mortgage Rates, Existing Home Sales, And The $1.25 Trillion Dollar Question

Mark MacKenzie Real Estate Planning — Sun, 23 Aug 2009 15:50:34 -0500

With existing home sales rebounding this past month to the fastest pace since the financial crisis made land-fall in September, it begs the question, was the Fed's monetary policy of purchasing $1.25 trillion in mortgage backed securities worth the cost?

To put this Fed monetary intervention into perspective, it was nearly the size of the TARP and the stimulus package...combined. And yet despite this, it has not received much attention. Part of the reason may be because it is not "tax-payer" money, it is new money that the Fed has printed.

The implications of the Fed's $1.25 trillion monetary policy is that rates are going to surge. It may not happen in 2009, or 2010, but it is going to happen, and when it does, the housing market is going to be in a lot of pain. Is the current monetary policy only creating another crisis down the road?

As I have written about before, monetary policy is one of the most costly, inefficient, and encumbersome methods in dealing with this housing depression. On the other hand, fiscal policy is one of the most cost-effective, targeted, and timely strategies that the government has at their disposal. Unfortunately, Washington has been reluctant to aggressively use fiscal policy to address falling property values, residential nor commercial.

Here is a look at the results of the Fed's policy on impacting demand for real estate over the past several months. The first numbers are the seasonally adjusted annual rate of existing home sales according to NAR. The mortgage rate data is taken from Freddie Mac. There is very little correlation between lower mortgage rates and increased home sales.

Sep 2008: 5.10 million sales / 6.04%

Oct 2008: 4.94 million sales / 6.20%

Nov 2008: 4.54 million sales / 6.09%

Dec 2008: 4.74 million sales / 5.29%

Jan 2009: 4.49 million sales / 5.05%

Feb 2009: 4.71 million sales / 5.13%

Mar 2009: 4.55 million sales / 5.00%

Apr 2009: 4.66 million sales / 4.81%

May 2009: 4.72 million sales / 4.86%

Jun 2009: 4.89 million sales / 5.42%

Jul 2009: 5.24 million sales / 5.22%

The concern is that while home sales have "recovered" to pre-crisis levels thanks to the $1.25 trillion Fed investment, could the same success have been accomplished without it? To put this into perspective, the $8,000 first time home buyer tax credit will likely only cost the government between $10 and $20 billion.

NAR: Home Values Fell -15.1% Year Over Year In July

Mark MacKenzie Real Estate Planning — Sat, 22 Aug 2009 22:58:07 -0500

With all of the talk about a housing bottom, I thought I would point out a small little statistic that the media continues to overlook...home values are still falling. And they are still falling in all four regions that the NAR tracks.

Specifically, the median home value fell by -15.0% in the Northeast, -5.9% in the Midwest, -7.1% in the South, and -28% in the West.

According to the most recent NAR existing home sales report, the national median home value fell -15.1% from July of 2008 to July of 2009.

Here is what the year over year percentage change in the median home value has looked like over the past several months according to the NAR:

Jun 2008: -6.1%

Jul 2008: -7.1%

Aug 2008: -9.5%

Sep 2008: -9.0%

Oct 2008: -11.3%

Nov 2008: -13.2%

Dec 2008: -15.3%

Jan 2009: -14.8%

Feb 2009: -15.5%

Mar 2009: -12.4%

Apr 2009: -15.4%

May 2009: -16.8%

Jun 2009: -15.4%

Jul 2009: -15.1%

While the argument can be made that the "pace" of home value declines is slowing, and there are plenty of people who will try to make that argument, those same people need to also account for the fact that the pace of foreclosure filings just set a new record in July, according to RealtyTrac. The trend is for deeper and prolonged property value declines in the absence of a real housing stimulus.

Observations on NAR's Existing Home Sales Report

Mark MacKenzie Real Estate Planning — Sat, 22 Aug 2009 22:39:30 -0500

The NAR published their monthly existing home sales report on Friday which showed that home sales rose 7.2% in July from June on a seasonally adjusted rate and are up 5% from last year at this same time.

This is clearly good news as the real estate market needs a massive increase in demand in order to absorb the excess supply of homes that is sitting on the market as well as the foreclosures that are about to hit the market.

The interesting statistic within the report that didn't make the headlines but is just as relevant is that housing inventory, the number of homes for sale, also rose 7.3% from last month. This could be the first indicator that the foreclosures that were held back by the moratoriums that expired in March, may slowly be making their way to the market. Typically there is a delay in time from when a property is actually foreclosed on to when it goes back up for sale.

The "net" result is that the month's supply of housing, which represents the relationship between supply and demand, remains unchanged from the previous month with a 9.4 month supply. This month's supply still indicates that home prices are going lower.

As I have written about before, while these increases in home sales are good, they are insufficientin dealing with the number of foreclosures coming to the market. According to RealtyTrac, foreclosure filings set a new record in July and are up 32% year over year.

A (New) Record 13.16% of All Mortgages At Least 30 Days Late

Mark MacKenzie Real Estate Planning — Thu, 20 Aug 2009 23:19:07 -0500

The MBA announced today in their quarterly delinquency report that a new record 13.16% of all mortgages were at least 30 days late or already in the process of foreclosure. This was an increase from the previous record of 12.07% during the first quarter of 2009.

The MBA's chief economist, Jay Brinkmann, was quoted as saying, "As for the outlook, it is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves." His prognosis, while not unique, is cause for concern as many economists don't expect the unemployment rate to peak until mid 2010. Banking analyst Meredith Whitney recently projected that unemployment could peak at 13%, something that would severely impact the banking system and housing market.

With all of the talk about a housing bottom, what the housing bulls continue to overlook is that the number of homes going into foreclosure continues to outpace the demand for them. According to RealtyTrac, foreclosure filing were up 32% year over year in July, while existing home sales were down -0.2% year over year in June.

You can't have a housing recovery when more people are losing their homes than there are people buying homes.

Mortgage Purchase Applications Rise 3.9% The Past Week

Mark MacKenzie Real Estate Planning — Thu, 20 Aug 2009 07:49:47 -0500

According to the MBA, after five consecutive weeks in which the mortgage purchase application index remained below 270, signaling weak demand for real estate, the index rose 3.9% this past week to 277.7.

The 30-year fixed rate mortgage fell from 5.38% to 5.15% for the week ending August 14th.

Mortgage purchase applications are an indicator of future demand for real estate. Typically a potential buyer will apply for a mortgage, write a contract that goes "pending", and then eventually close on the property for a "sale".

The reason why demand is a critical component of a housing recovery is because the number of foreclosure filings just hit a record in July and are up 32% year over year. There needs to be a buyer for the foreclosed properties.

While the most recent mortgage purchase application index is a move in the right direction, demand has yet to rise in proportion to the number of foreclosures that will be coming to the market over the next several months. This means home prices will be going lower.

Housing Permits Lose Steam In July

Mark MacKenzie Real Estate Planning — Tue, 18 Aug 2009 23:07:47 -0500

According to the Census Bureau total housing permits fell by -1.8% in July from June to a seasonally adjusted annual rate of 560,000.

Interestingly the decline in housing permits in July was driven by multi-family units. According to the Census Bureau, single family housing permits were up 5.8% from last month but 2-4 unit properties were down -21.7% and 5+ unit properties were down -26.3% from the previous month.

Compared to last year single family housing permits were down -20.3%, 2-4 unit properties were down -48.6% and 5+ unit properties were down -73.2%.

This data is a representation of the broader real estate market. While demand for single family homes appears to have stabilized in recent months, the commercial real estate market continues to free fall, adding significant stress to bank's balance sheets.

The underlying trend is that there is not sufficient demand for real estate, residential or commercial, to stabilize real estate values due to escalating delinquencies.

All Real Estate Is Local, But...

Mark MacKenzie Real Estate Planning — Mon, 17 Aug 2009 22:40:23 -0500

The NAR published their quarterly metro home value report this past week. While there were some bright spots like Elmira, NY, which showed 11.3% year over year appreciation, there is also continued systemic weakness throughout our countries housing markets.

Broadly speaking, the median home value fell -15.6% from the 2Q of 2008 to the 2Q of 2009, this is the steepest decline on record for this quarterly report.

Additionally, all four regions within the United States were down. The Northeast, Midwest, South, and West experienced home value declines of -9.7%, -8.6%, -10.3%, and -26.6% respectively. While all real estate is local, every corner of the country is being impacted by eroding property values, every American is being affected.

Digging deeper, of the 155 metros that the NAR reported on, only 26 of them, or approximately 17% of them, showed year over year price increases in home values. While this is an improvement from the previous quarter when only 10% of the markets showed increases, the broader home value trend is still deteriorating.

Here is a look at the past several quarters and the year over year home value declines according to the NAR quarterly metro report.

2Q 2007: -1.5%

3Q 2007: -2.0%

4Q 2007: -5.8%

1Q 2008: -7.7%

2Q 2008: -7.7%

3Q 2008: -9.0%

4Q 2008: -12.4%

1Q 2009: -13.8%

2Q 2009: -15.6%

While there is debate about the potential for home sales to have bottomed, what continues to be overlooked is that the number of foreclosure filings continue to set new records. In the absence of a meaningful surge in demand to absorb these foreclosures, home values will continue to deteriorate as this report shows.

Home Value Declines Continue to Drive Sales

Mark MacKenzie Real Estate Planning — Sun, 16 Aug 2009 17:06:59 -0500

The NAR published their quarterly home sales report this past week which shows the rate of home sales for all 50 states as well as the District of Columbia.

Of the 51 total markets, 41 of them showed year over year home sales declines from the 2Q of 2008 to the 2Q of 2009.

The year over year data, the weather man's guide, is a better indicator than month over month data as it accounts for seasonal variances as well as providing a larger scope to interpret the information, in other words, a frame of reference. It is this year over year perspective that is often swept under the carpet by the media when reporting on the economy and housing market.

The only markets to see year over year increases in home sales were Arizona (41.5%), California (20.8%), District of Columbia (5.6%), Florida (20.9%), Iowa (1.6%), Maryland (4.4%), Michigan (10.0%), Minnesota (12.7%), Nebraska (6.4%), and Nevada (76.8%). Not surprisingly, the places with the largest increases in home sales were also the same places with the most significant declines in home values.

In other words, despite the Fed's efforts to plunge mortgage rates and the governments $8,000 first time home buyer tax credit, the primary driver of home sales continues to be home value declines. The governments housing stimulus plans are not positively impacting demand for most of the markets in the country.

Broadly speaking, the NAR report showed that nationally home sales fell -2.9% from the 2Q of 2008 to the 2Q of 2009. Interestingly, of the four major regions, only one showed an increase in home sales, the West, by 11.8%. In the Northeast, the Midwest, and the South, home sales were down -8.4%, -5.3%, and -7.2%, when compared to the previous year.

What this report reveals is that as foreclosures are on the rise throughout the country due mounting job losses, demand in the majority of markets remains insufficient in dealing with the problem. According to RealtyTrac, individual property foreclosure filings were up 20.3% during the first half of 2009 when compared to the first half of 2008. On the other hand, using the NAR data for first half of 2008 and the first half of 2009, it reveals that home sales are down by -5%. This supply and demand imbalance means that home values are going to erode further.

Consumer Confidence Falls In August

Mark MacKenzie Real Estate Planning — Sun, 16 Aug 2009 08:49:46 -0500

According to the Reuters/University of Michigan Surveys of Consumers, confidence fell in August to 63.2 from a July reading of 66.

Additionally, the measure of consumer expectations fell to 62.1, the lowest reading since March.

The reason these numbers are somewhat alarming is because not only has the pace of job losses slowed, but the stock market has rallied nearly 45% from March. And yet the confidence and expectations of the consumer remain weak.

Remember, in March, according to the Bureau of Labor Statistics, we saw 652,000 jobs lost. As recently as July there were "only" 247,000.

It is possible that this decline in consumer confidence may be being reflected in the mortgage purchase application index of the past couple of weeks. As I have been following, the weekly mortgage purchase application index has remained below 270 for five consecutive weeks. This is an indication that demand for real estate may be slowing down. Mortgage purchase applications are typically an indicator of future demand for real estate.

If this decline in consumer confidence and mortgage purchase applications continue, it could further complicate efforts towards a housing recovery.

Bank Failures Surge to 77

Mark MacKenzie Real Estate Planning — Sun, 16 Aug 2009 08:28:17 -0500

Colonial Bank became the biggest bank failure this year, the 6th biggest of all time, and the largest since Washington Mutual, as the FDIC took over the company on Friday, according to an article written by Alison Vekshin, David Mildenberg and Dakin Campbell in Bloomberg.com

Additionally, four more banks were taken over this weekend, bringing the total this year to 77.

This is more than triple the number of bank failures that we saw in 2008 when there were only 25, and we still have over four months left to the year.

The reason why the number of bank failures are escalating is because of the number of non-performing assets on their balance sheets are exploding. With all of the talk about a housing bottom, what continues to be overlooked is that the number of loan defaults are rising, and they are rising at a greater pace than the demand for real estate is.

And these losses are not just isolated to smaller community banks, both Bank of America and Wells Fargo have been hit by massive surges in the amount of non-performing loans during their recent quarterly earnings reports. Wells Fargo showed a 45% increase in non-performing assets when compared to the first quarter. Bank of America's non-performing assets jumped 21% from the first quarter.

Additionally, according to RealtyTrac, foreclosure filings set a new record in July as they rose 32% from the previous year.

The banking crisis is ongoing to do falling values in both residential and commercial real estate. In the absence of strong demand for these assets, values will continue to fall for the next two to three years putting even more pressure on the banking system and broader economy.

The Weather Man's Guide To Understanding Real Estate Data

Mark MacKenzie Real Estate Planning — Sat, 15 Aug 2009 08:10:19 -0500

Due to some recent improvements in seasonal housing data and statistics, a lot of people (Jim Cramer) and media outlets (AP) are beginning to sound the drum for a housing bottom.

I thought it would be worth pointing out that much like the weather, the majority of real estate data is best interpreted in a year over year comparison versus month over month. The reason for this is because real estate is a seasonal industry, much like the weather is. Home values, the number of listings, and the number of sales, are driven by the time of the year.

You don't see weather men or women comparing the temperature in August with that of February, but that is what we are seeing more and more of in the news as the media along with Wall St. are reaching to put a spin on what is an ongoing deterioration of the housing market.

Broadly speaking there are four indicators that represent the health of the housing market; the median sales price, sales, listings or inventory, and the month's supply of housing.

In terms of the median sales price, during the summer month's, when there is more demand for real estate, price typically edge higher. This is because there is more demand. We are seeing this now. According to the NAR, the median sales price in June of 2009 was $181,800. In January of 2009 it was $164,800. Does this mean property values have "appreciated" 10% in five months? No. In fact home values have actually fallen by -15.4% from last year when the median sales price was $215,000.

In terms of home sales, demand for real estate has increased month over month on a "seasonally" adjusted basis for the past couple of months. This is without question good news. The NAR uses a seasonally adjusted basis to "remove" the seasonal impact on demand for real estate and project out an estimated number of annual sales based on the current pace. Interestingly, home sales are still off by -0.2% from where they were last year.

The NAR is reporting that total inventory is down, and it is, month over month by -0.7% and year over year by -14.9%. But much like the banking system, due to massive government intervention in terms of foreclosure moratoriums and loan modifications, it is difficult to get a pulse on exactly how "healthy" the foreclosure market or the inventory really is. Some estimates show a shadow inventory, which represents homes that have already been foreclosed on by the banks but have not yet been listed for sale, as high as 700,000. Additionally, RealtyTrac is reporting that foreclosure filings just set a new record in July and are up 32% year over year. Even Bank of America and Wells Fargo are reporting in their quarterly earnings reports that their number of non-performing assets are surging 21% and 45% respectively, quarter over quarter. The trend is that inventory, over the next 6-12 months will be on the rise.

And finally, the month's supply of housing which represents the relationship between supply and demand. This indicator is down month over month by -4.1% and year over year by -14.5%. The improvement in this indicator is being driven by the decline in inventory, which as I described, is the result of massive government programs to delay foreclosures.

As the number of foreclosures rise and as demand remains weak, the month's supply of housing will increase and this means home values will fall further on a year over year basis.

RealtyTrac: Foreclosure Filings Set New Record In July

Mark MacKenzie Real Estate Planning — Thu, 13 Aug 2009 07:30:23 -0500

According to RealtyTrac, foreclosure filings set a new record in July as they rose 7% from June and are up 32% year over year.

According to James J. Saccacio, RealtyTrac's chief executive, "July marks the third time in the last five months where we've seen a new record set for foreclosure activity".

In other words, despite calls of a housing bottom by CNBC's Jim Cramer and even the AP, the housing market is still deteriorating and home values are still eroding.

This escalation of foreclosure activity also brings into question the effectiveness and long-term sustainability of the Obama Administration's $75 billion loan modification program which has under-performed due to weak participation by major banks, namely Bank of America and Wells Fargo.

Ironically, both Bank of America and Wells Fargo have been hit by massive surges in the amount of non-performing loans during their recent quarterly earnings reports. Wells Fargo showed a 45% increase in non-performing assets when compared to the first quarter. Bank of America's non-performing assets jumped 21% from the first quarter.

What all of this data points to is that foreclosures, in addition to driving down home values, are also continuing to put pressure on bank's balance sheets.

Assuming that banks actually do participate in the loan modification process, and that remains to be seen, it is only a temporary stop-gap measure. The greater systemic risk to the housing market is that home values are still falling and more homeowners are being plunged underwater.

Deutsche Bank is estimating that approximately half of all mortgages will be underwater by 2011.

The solution is for a new fiscal policy, the reform of Tax Reform Act of 1986, that would stimulate sufficient demand for real estate to absorb the excess housing inventory that contninues to erode property values.

Pending Home Sales vs. Existing Home Sales

Mark MacKenzie Real Estate Planning — Wed, 12 Aug 2009 08:33:50 -0500

With all of the talk about the recent strength in pending home sales over the past couple of months, there continues to be a headwind-effect between pending contracts and actual existing sales that are reported by the NAR.

The relationship between the two indicators has revealed that pending home sales appear to be taking a longer time to close, more like 60 days rather than 30 days, and a smaller percentage of the total pending contracts are actually making it to a successful close.

This attrition rate could be attributed to a couple of influences including the new appraisal HVCC guidelines, the complexities of short sales or bank sales that often times are unsuccessful, as well as strict loan underwriting. Additionally, as Jim Crawford with REMAX points out, some of the pending contracts are actually lease-purcahse contracts which may never close.

Here is the relationship between the NAR's pending index and existing home sales over the past several months:

October 2008 Pending Index -0.7% / November 2008 Existing Home Sales -8.6%

November 2008 Pending Index -4.0% / December 2008 Existing Home Sales +6.5%

December 2008 Pending Index +6.3% / Janaury 2009 Existing Home Sales -5.3%

January 2009 Pending Index -7.7% / February 2009 Existing Home Sales +5.1%

February 2009 Pending Index +2.1% / March 2009 Existing Home Sales -3.0%

March 2009 Pending Index +3.2% / April 2009 Existing Home Sales +2.9%

April 2009 Pending Index +6.7% / May 2009 Existing Home Sales +1.3%

May 2009 Pending Index +0.8% / June 2009 Existing Home Sales +3.6%

June 2009 Pending Index +3.6% / July 2009 Existing Home Sales ???

What this relationship reveals is that while there is no question that home sales have at least bottomed for the near term, the robust growth in pending home sales over the past five months has yet to translate into robust closed sales.

Mortgage Purchase Applications Remain Steady But Weak

Mark MacKenzie Real Estate Planning — Wed, 12 Aug 2009 08:06:46 -0500

The Mortgage Bankers Association announced today that the mortgage purchase application index remains steady but weak as it rose just 1.1% from last week to 267.3.

It is the fifth consecutive week that the index has been below 270.

The 30-year fixed rate mortgage jumped from 5.17% to 5.36% for the week ending the July 31, 2009.

This data continues to reinforce two ongoing trends. First, while demand for real estate appears to have bottomed from the lows we saw in January in the NAR existing home sales report, the current demand is being outpaced by the rate of homes going into foreclosure. In other words, the supply of homes is going to outpace the demand for them, this means prices are going lower.

Second, despite mortgage rates rising from their lows that we saw in April and May, demand for real estate remains largely unaffected. This inelastic relationship between demand and historically low mortgage rates points to a failed Fed monetary policy.

While the Fed has committed $1.25 trillion into purchasing mortgage backed securities in an effort to plunge mortgage rates and stimulate demand for real estate, the only markets, with the exception Minnesota and Virginia, that are showing year over year increases in home sales are the markets where home prices have fallen most precipitously. Unfortunately, massive home price declines are responsible for strong demand for real estate, not historically low mortgage rates.

Fannie Mae Needs Additional $10.7 Billion

Mark MacKenzie Real Estate Planning — Sun, 09 Aug 2009 08:40:23 -0500

CNNMoney.com is reporting that the mortgage giant Fannie Mae needs another $10.7 billion from the Treasury in the wake of a $14.8 billion quarterly loss.

This $14.8 billion quarterly loss is an improvement from the previous quarter in which the company lost $23.2 billion.

Fannie Mae's non-performing loans, much like those of Citigroup, Wells Fargo, and Bank of America, are on the rise.

According to the article, "The value of non-performing loans on its books increased to $171 billion as of June 30, compared with $144.9 billion on March 31 and $119.2 billion on December 31."

These non-performing loans are the numbers that are keeping Timothy Geithner and bank CEO's awake at night. While the media is ready to call a housing bottom due to a modest increase in demand for real estate, what most "analysts" continue to overlook is that the pace of loans defaulting is surging at a greater rate.

According to the NAR, while existing home sales have risen for four consecutive months on a seasonally adjusted basis, they are still down -0.2% from June of 2008 to June of 2009. On the other hand, according to RealtyTrac, foreclosure filings are up 33% year over year in June.

Bank of America Disappoints On Their Loan Modification Efforts

Mark MacKenzie Real Estate Planning — Sun, 09 Aug 2009 08:32:30 -0500

According to a recent CNBC article by Albert Bozzo, participation by banks in the governments$75 billion program to modify home loans has been off to a slower start than expected.

Interestingly, Wells Fargo and Bank of America, both of whom have had significant increases in their non-performing assets, are two of the most reluctant banks to modify loans.

Wells Fargo has extended loan modifications to just 12% of eligible borrowers.

Bank of America has extended loan modifications to just 13% of eligible borrowers. One would think because of the TARP money as well as billions in loan guarantees Bank of America has received from the government that their participation rate would be higher.

On the other hand, "Nationstar Mortgage ranked first with a 45-percent offer rate. Saxon Mortgage Services (37 percent) and Aurora Loan Services (36 percent) were next".

Additionally, JPMorgan has extended loan modifications to 30% of eligible borrowers.

Citigroup has extended loan modifications to 21% of eligible borrowers.

Interestingly, the article goes on to say that of the 117,259 loans that JPMorgan has attempted to modify, only 20% of those borrowers are actually participating.

Bozzo states, "In all, the government hopes to assist as many as 7 million to 9 million needy homeowners, through loan refinancing or modification to prevent foreclosures. About 85 percent of the estimated 55 million outstanding mortgages are covered under the program."

The lackluster performance so far continues to bring into question as to whether it is even in the loan servicers financial best interest to modify loans. According to a recent New York Times report, Goodman makes the case that loan servicers actually financially benefit when borrowers go into default.

AP: "Welcome to the bottom: Housing begins slow rebound"

Mark MacKenzie Real Estate Planning — Sat, 08 Aug 2009 17:16:13 -0500

For those of you who read my last post and disagreed with Deutsche Bank's report that nearly 50% of all mortgages will be underwater by 2011, a recent AP report may be more up your alley, so long as you don't think a rising tide of foreclosures will negatively impact property values.

The AP writes, "It was - note the past tense - the worst housing recession anyone but survivors of the Great Depression can remember."

The recent AP article goes on to say, "By every measure, except foreclosures, the housing market has stabilized and many areas are recovering, according to a spate of data released in the past two weeks".

"By every measure, except foreclosures"?

Are foreclosures no longer responsible for driving home values lower?

Are foreclosures no longer an integral part of that pesky supply and demand relationship which drives home values?

How is it possible to determine the health of the housing market without considering the volume and direction of the number of foreclosures?

If there are more foreclosures than there are buyers entering the market, isn't this something that should be considered?

AP: Government Tax Receipts On Pace For 18% Decline This Year

Mark MacKenzie Real Estate Planning — Sat, 08 Aug 2009 09:01:05 -0500

The AP is reporting that government tax receipts are on pace to decline by 18% this year, the most significant decline since 1932 during great depression.

According to the article, "Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever."

The tax receipts paint a more accurate picture of the economy than perhaps the GDP report or the unemployment report which are influenced by government spending and selective polling criteria respectively. While GDP appears to be stabilizing, and the most recent jobs report was "improved", what millions of Americans and small businesses are still struggling with is a loss of income, this loss of income is most accurately represented by the decline in government tax receipts.

These declines in tax receipts point to a need not for higher taxes, which would negatively impact already financially strapped American families and small businesses, nor more government spending. This report underscores the need for massive tax cuts, both in the form of individual and small business, but also for capital gains and the Tax Reform Act of 1986. The government needs to put more money back into the economy by cutting taxes and providing incentives for Americans to invest in their businesses, the stock market, and the housing market.

Deutsche Bank: Half of All Mortgages To Be Underwater By 2011

Mark MacKenzie Real Estate Planning — Fri, 07 Aug 2009 04:19:29 -0500

According to a new report put out by Deutsche Bank, half, or approximately 25 million homeowners will be underwater with their mortgage by 2011, the year in which Deutsche Bank expects home prices to finally stabilize.

Les Christie and CNNMoney.com are reporting that the Deutsche Bank forecast goes further than any other estimates that have been calculated to date, "First American CoreLogic estimated 11 million homeowners -- and rising -- were underwater by the end of 2008. Moody's Economy.com estimated 15 million at the end of March and projected 17.5 million by early 2010. Zillow.com reported that 20 million were already underwater at the end of the first quarter 2009".

There are two reasons this phenomenon of being underwater with a mortgage, also known as zombie homeowners, is significant. First, owing more than the house is worth will negatively impact consumer behavior and spending. We are seeing this already.

And second, home value declines lead to more foreclosures, and more foreclosures lead to more losses for the banks. According to Christie's article, "Currently, 26%, of defaults are classified as strategic, according to a recently published paper by Paola Sapienza, a finance professor with Northwestern University, and Luigi Zingales, a finance professor at the University of Chicago." In other words, the homeowner voluntarily walks away from the property rather than continuing to pay interest on a loan that far exceeds the value of the property.

So while Wall St. and Jim Cramer celebrate the fact that home sales may have bottomed, the much bigger problem is that the strained relationship between the demand and supply for real estate means that home values are still falling. There is insufficient demand for real estate to stop home values from deteriorating further.