MBA: 4Q 2017 delinquency rates for commercial property remain low

Based on the unpaid principal balance (UPB) of commercial loans, delinquency rates for each group at the end of the fourth quarter were as follows:

• Banks and thrifts (90 or more days delinquent or in non-accrual): 0.51 percent, a decrease of 0.02 percentage points from the third quarter of 2017;
• Life company portfolios (60 or more days delinquent): 0.03 percent, an increase of 0.01 percentage points from the third quarter of 2017;
• Fannie Mae (60 or more days delinquent): 0.11 percent, an increase of 0.08 percentage points from the third quarter of 2017;
• Freddie Mac (60 or more days delinquent): 0.02 percent, unchanged from the third quarter of 2017; and
• CMBS (30 or more days delinquent or in REO): 4.08 percent, a decrease of 0.52 percentage points from the third quarter of 2017.

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November foreclosure rate down 0.1 percent year-on-year to 5.1 percent

Nationally, 5.1 percent of mortgages were in some stage of delinquency (30 days or more past due including those in foreclosure) in November 2017. This represents a 0.1 percentage point year-over-year decline in the overall delinquency rate compared with November 2016 when it was 5.2 percent.

As of November 2017, the foreclosure inventory rate, which measures the share of mortgages in some stage of the foreclosure process, was 0.6 percent, down 0.2 percentage points from 0.8 percent in November 2016. The foreclosure inventory rate has held steady at 0.6 percent since August 2017, the lowest level since June 2007 when it was also at 0.6 percent.

This past November's foreclosure inventory rate was the lowest for the month of November in 11 years, since it was also 0.6 percent in November 2006.

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CoreLogic: August foreclosure inventory rate dips to lowest rate since August 2006

Nationally, 4.6 percent of mortgages were in some stage of delinquency (30 days or more past due including those in foreclosure) in August 2017. This represents a 0.6 percentage point year-over-year decline in the overall delinquency rate compared with August 2016 when it was 5.2 percent.

As of August 2017, the foreclosure inventory rate, which measures the share of mortgages in some stage of the foreclosure process, was 0.6 percent, down from 0.9 percent in August 2016. This was the lowest foreclosure inventory rate for the month of August in 11 years since August 2006 when it was 0.5 percent.

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CoreLogic: July serious mortgage delinquency rate at 10-year low of 4.6 percent

According to CoreLogic, 4.6 percent of mortgages were in some stage of delinquency nationally (30 days or more past due including those in foreclosure) in July 2017. This represents a 0.9 percentage point year-over-year decline in the overall delinquency rate compared with July 2016 when it was 5.5 percent.

As of July 2017, the foreclosure inventory rate, which measures the share of mortgages in some stage of the foreclosure process, was 0.7 percent, down from 0.9 percent in July 2016 and the lowest since the rate was also 0.7 percent in July 2007.

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CoreLogic: Delinquent mortgages fell to 4.5 percent in May

Nationally, 4.5 percent of mortgages were in some stage of delinquency (30 days or more past due including those in foreclosure) in May 2017. This represents a 0.8 percentage point decline in the overall delinquency rate compared with May 2016 when it was 5.3 percent.

As of May 2017, the foreclosure inventory rate, which measures the share of mortgages in some stage of the foreclosure process, was 0.7 percent compared with 1 percent in May 2016. The serious delinquency rate, defined as 90 days or more past due including loans in foreclosure, was 2 percent, unchanged from April 2017 and down from 2.6 percent in May 2016. The 2 percent serious delinquency rate in April and May this year was the lowest since November 2007 when it was also 2 percent.

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2012 in Review: All Signs Point to a Rebounding Market

Last year at this time, I wrote about a housing rebound that had been delayed due to a combination of poor consumer confidence, tighter credit standards, stubbornly high unemployment and foreclosures that continued to hammer prices.  Yet what a difference a year makes!

To be sure, we do continue to muddle along with a level of economic growth that is much lower than what we’d expect, but that’s largely because of the cuts in the public sector.  And yet, contrary to what you might have heard in this year’s election season, growth in the private sector alone continues more or less at an average pace – it only seems slow because it grew much faster following previous recessions.

Fortunately, the housing market itself seems to be on its own trajectory, and continues to heal after the worst downturn since the Great Depression. For the month of September, seasonally adjusted annual new home sales rose by 5.7% over August totals to 389,000 units, and are up by 27.1% year-over-year.  At the same time, median prices are up by 11.5% over the last year, while inventory fell from 4.7 to 4.5 months.

Not surprisingly, builders are in a very good mood over this trend, with the NAHB Housing Market Index (HMI) rising for the sixth month in a row through October to 41 – the best showing since June of 2006.  They should be happy:  according to the Wells Fargo/NAHB Housing Opportunity Index (HOI), a combination of lower prices and rock-bottom interest rates meant that 74.1% of potential homebuyers nationally could afford the median-priced home during the third quarter of 2012, up substantially from the last trough of 40.4 noted in the same quarter of 2006.

The number of markets on the First American/NAHB Improving Markets Index (IMI) rose for the third straight month in November to 121 versus just 30 a year ago. The stock market has certainly taken notice, with the Dow Jones U.S. Home Construction Index, which tracks seven public builders, rising by 80% from January through November of 2012 and by 134% since August of 2011.

Existing home sales are also on the mend, dropping slightly in September from August totals, but still up by 11% year over year.  With fewer distressed sales in the mix, prices have also rebounded by 11%, while inventory has fallen to 5.9 months – the first time in several years that this index has fallen below 6.0 months.  Even better, the average time it takes to sell an existing home has fallen from 101 to 70 days.

Of course builders are celebrating by pulling permits and starting new homes.  In September, they pulled a seasonally adjusted annual total of nearly 895,000 units, for an increase of 11.6% over the previous month and 45.1% over the same month of 2011.  Housing starts also rose impressively to 872,000 units per year in September, for an increase of 15% since August and by about 35% year over year.

It’s certainly not just home builders who are more confident, it’s the entire construction industry.  Through September 2012, construction spending in the U.S. rose by nearly 8% over the past year to an annual total of $851.6 billion – the highest level in almost three years.  And, according to the findings of the most recent Emerging Trends in Real Estate 2013 report issued by PwC US and the ULI, modest gains in leasing, rents and pricing will gradually extend across all U.S. market for all sectors.

To be sure, there remain some considerable concerns and uncertainties which lie ahead, most of which are not under the control of builders and developers.  While half the country licks its wounds following the latest Presidential election, all of us hope that we can avoid the much-discussed ‘fiscal cliff’ (which is actually more of a hill because the impact to the recession would be gradual and not sudden should Washington gridlock continue through January).  Still, given that 70% of U.S. construction spending is for non-residential projects, any abrupt pull-back in government-funded projects or immediate tax increases could have an outsize impact on the industry.

For now, there are multiple signs pointing to the long-awaited housing rebound.  During their years in hibernation, most builders had to improve their designs and green building techniques in order to compete not just with cheaper and older homes, but even the homes they built themselves during the boom years. Despite the pain and toil that entailed, something tells me they’re now more than ready to put those lessons to good use.

BuilderBytes' MetroIntelligence Economic Update for 11/14/12

Please click here to see the edition of BuilderBytes for 11/14/12 on the Web.

In this issue of the MetroIntelligence Economic Update, I covered the following indicators:

• Mortgage delinquency rate declined for third consecutive quarter in Q2 2012
• Buyers of foreclosures can expect a 7.7% discount according to Zillow analysis, down from a peak of 23.7% in 2009

Want to advertise in the newsletter and reach over 130,000 readers? Contact National Sales Manager Nick Cosan at nkosan@penpubinc.com.

Want to make sure your company or event is included in the events calendar? Contact editor Dani Smith at dsmith@penpubinc.com.

The case for principal reductions

These days, it's hard to find a more emotionally charged issue than the idea of a principal reduction for underwater borrowers. The problem is that arguments such as "Not fair!" "No taxpayer-funded bailouts" and "You made your bed -- now lie in it!" do nothing to address the larger, macroeconomic issue of foreclosures or short sales that might be unnecessary if lenders wrote down the principal to current market value.

What's to be gained by forcing people to refuse jobs in other locations because they can't sell their (underwater) homes -- especially when a lender will still have to write down the principal owed with a short sale or a foreclosure? It just seems nonsensical to me to do so if the borrower has the financial means to continue making payments on a reduced mortgage.

But rather than listen to me, listen to real estate columnist and "Real Estate Professor" George W. Mantor, who provides an excellent overview of the subject and the benefits of principal reductions. From the article:

...as continuing price declines push more and more homeowners deeper and deeper underwater, we are going to see a second wave of defaults. And, this one is not only going to swamp the market, it’s going to take the future with it when it recedes.

The employment numbers don’t mean anything. They don’t count failed business owners and other self-employed, and there are a lot of them, who are not entitled to unemployment insurance. There are those who have simply given up looking for work or those who have “graduated” and have maxed out their benefits.

Without substantial job creation, more homeowners will lose their grasp on their finances as unemployment insurance, savings, and retirement accounts are depleted.

Then there is the thorny issue of deferred interest loans made between 2005 and 2007, the peak of the market, that will adjust upwards in the months to come. Property values in some cases have fallen by as much as half, making the possibility of a refinance remote and increasing the likelihood that the borrower will exercise a strategic default...

The only way to avoid more and deeper pain across all sectors of the economy is principal reduction to market value. What is a short sale but a principal reduction for the new owner? How does that solve anything while getting us to the same place?

Obviously, the banks will resist and not just so they can collect on the default swaps. Principal reduction would require bringing the borrower and the true holder of the note, the investor, to the same table. The last thing the banks want is for borrowers and investors to come face to face.

The investors would realize that half of their money was skimmed off the top and that the value of the security is only a fraction of what they were led to believe.

As investors, they understand the difference between a 75% loss of value and a 100% wipe-out. Sooner or later, these assets have to be corrected on someone’s balance sheet. Not only would they more readily agree to mark to market rather than lose everything, but in most cases, these are the only people who could legally agree to a permanent loan modification or a short sale.

The upside for them is that the revenue stream is restored. Once the pools are in default, they get nothing, even though there may be performing loans within the pool.

Foreclosing and reselling in most markets is done at a price that represents the true market…what a willing buyer will pay tempered by what a willing lender will appraise the collateral for, often, some tentacle of the foreclosing lender. In this scenario, the financial intermediary also gets any proceeds from the foreclosure, not the investor.

These are extraordinary times and they call for extraordinary approaches. Here are 10 reasons why reducing loan balances and restoring lost equity is the best approach now.

1. What we are doing to address the problem isn’t working.

It isn’t going to work and, in fact, the longer we pretend that there will be significant loan modifications, the worse things are going to get.

2. Everyone who is upside down should get relief.

By “re-equifying” those households, we free up consumer spending, stimulate lending, and start putting people back to work—everyone wins.

3. It will cost less.

By keeping people in their homes, we reduce the costs of social services that are breaking the budgets in every community.

4. We were all gamed by the system.

Some worse than others. Here is just one little trick that even the smartest know-it-all usually wouldn’t catch in their loan documents. It is in the disclosure of Yield Spread Premiums. Most of us are used to seeing four percent written as either 4% or .4. But financial intermediaries express it this way, .04. The way we might express four tenths of a percent. On a $500,000 loan, it’s the difference between $2,000 and $20,000.

5. It will happen anyway.

The equity is gone; the loss is real. Foreclosure is the most expensive, least desirable way to bring the property back to its true market value

6. We all win if we do and we all lose if we don’t.

I’m sure that a handful of people who haven’t felt some real pain may be taking some perverse pleasure in watching their neighbors pack up and leave, but when you hear the stories of some of the homeowners who have stayed in vacant neighborhoods, the actual cost to those who remain is probably greater.

7. Borrowers and investors both gain.

Securitized loans put the investor and the borrower in same boat. Both were defrauded by the financial intermediaries and neither has received any remedy for their losses.

Trillions for financial intermediaries and nothing for the parties that were scammed. Instead of giving the money to the financial intermediaries that perpetrated this Ponzi scheme, it should have gone to the investors who were willing to accept the reduction in value of the pool. Instead, we give the money to the financial intermediaries who conceal the values of the assets. It’s a game.

8. We can afford to do it; we cannot afford not to.

Since the start of the meltdown, the Fed has amassed a whopping $9 trillion in loans to foreigners, but they will not say and, apparently there is no record of, where the money went. That’s $30,000 for every man, woman and child in America. That’s our money and right now, we need it.

At the moment, Congress is pushing for an audit of the fed, something that hasn’t been done in over ninety years. You would think everyone who is working for the taxpayer would want the taxpayer to know where their money is going, but this is shaping up to be one heck of a fight.

9. Some players in the mortgage arena are starting to get it.

Wilbur Ross owns American Home Mortgage Servicing, Inc. the third largest mortgage servicer in the country and he recently became one of the leading advocates for principal reduction. His reason, loans with significant principle reduction that give the owner equity in the property stay current.

In an interview with HousingWire he said, “The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way.”

This was demonstrated in a study by investment firm Ellington Management which showed that every month, 8% of homeowners whose mortgages were 160% of the value of the home became delinquent while only one percent of those with loans that were 60% of value become delinquent.

10. It would jump start the economy.

Uncertainty isn’t good for the economy. Not knowing how far values will fall, not knowing when job losses will abate, and seeing no light at the end of the tunnel are paralyzing. Not just to consumers, but also to small business owners who are the hiring engines we need to pull us out of this recession. They need to know that consumers can and will spend before they start rehiring.

By restoring the lost equity in homes, we immediately stabilize real estate prices by establishing a “floor” and the true market value of property.

By stopping foreclosures, communities start to see their tax basis improve. They can start to rehire laid off workers such as teachers and emergency responders.

As distasteful as this may be to some people, it’s time to admit that there are no other solutions. The value is gone, never was really there, a few people got rich, a lot of people got poor, and now we have to fix it.

Banks finally seeing short sales as cheaper than foreclosures

For a few months now I've been hearing rumblings that many of the non-foreclosure sales out there are actually short sales since lenders have, after needlessly losing more money than necessary to the (old-fashioned) foreclosure process, realized that short sales are faster, easier and prevent angry borrowers from trashing the place when they leave.

So what took them so long? Well, I can only speak from personal experience, but my very first job out of college was for a mortgage company that was associated with a (now-defunct) S&L, and rocket scientists they weren't. From an L.A. Times story:

In a short sale the lender lets a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn't worth what the owner paid for it after more than two years of falling real estate values.

Such deals are appealing to struggling homeowners because they escape weighty house debts -- but they don't get away unscathed. Their credit scores will be damaged, perhaps less severely than in foreclosure, but still badly enough to limit for years their ability to borrow money. There may be tax consequences. And any money invested through down payments and renovations will be lost.

Lenders, which can withhold approval of a short sale if they don't like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure...

Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.

Late last year, the Obama administration added incentives to get short sales done if a borrower is unable to qualify for a modified mortgage as part of the government's $75-billion effort to help troubled homeowners. Starting in April, the government will pay incentives to lenders and borrowers when a sale is completed.

Many economists view short sales as a way to address a problem that mortgage relief hasn't fixed: properties that are "under water," carrying more debt than the home is worth....

Short sales remain difficult. Uncertainty over home prices makes properties hard to value, lenders are understaffed and multiple loans on a home can trip up negotiations among creditors...

One factor motivating banks to go along with short sales is that foreclosures typically cost more. Foreclosed properties often sit vacant, susceptible to damage from neglect or vandals. A study by Amherst Securities Group found that prime loans took an average loss of 45% in a foreclosure as opposed to 35% in a short sale...

Then there's the problem of second mortgages, which have proved to be a thorny impediment to the housing recovery. The loans were widespread during the boom years as people tapped rising equity or financed a down payment.

Of the 1.2 million U.S. properties in foreclosure, about 34%, or 403,670, have a second loan, according to RealtyTrac. In California, with 280,023 properties in foreclosure, about 46%, or 128,800, have a second loan.

Some outlying areas of SoCal down to 1989 price levels

There's an interesting story in the L.A. Times about prices in certain outlying submarkets -- such as Lancaster/Palmdale or Hemet/San Jacinto -- falling to levels not seen since 1989 (and that's not even adjusting for inflation). Although many investors have been swarming into flip for a quick profit, those who bought a year ago have still taken about a 10% haircut, and more price declines may follow as the second and third waves of foreclosures (related to Option ARM re-sets and job losses) take hold later this year. In some cases, however, these prices are so low that if your home caught fire and you had to re-build, you'd pay twice as much. From the story:

Properties in several areas are selling for less than they did 20 years ago, and that's not even counting the effects of inflation.

The reversal is a bonanza for some first-time buyers. They're nabbing houses for less than what their parents paid in the late 1980s, jumping into a real estate market that has become a kind of economic time machine...

Home prices across most of Southern California have not fallen nearly as far. The median price in the six-county area was $247,000 in April, about what it was in 2002.

But in 14 Southland ZIP Codes, mainly desert communities in the Antelope Valley and Inland Empire, median prices have fallen below levels recorded in April 1989, according to MDA DataQuick, a San Diego real estate information service.

That means thousands of homes in those neighborhoods -- even houses barely 20 years old and in decent shape -- have lost every dime of their appreciation, giving back not just the gains of the recent bubble but steady increases logged over a generation...

Prices also tumbled below 1989 levels in neighborhoods in Palmdale, Hemet, Barstow, Desert Hot Springs, Victorville, Highland, Santa Ana and Oxnard, according to DataQuick. Several other inland communities, including parts of Moreno Valley, Banning and Rialto, had median prices that were only slightly above 1989 levels and below the April 1990 median...

Foreclosures jump even over March numbers

After rising to a new high in March, homes going through various stages of foreclosure rose even higher in April, although repossessions fell by 11%. From a CNN story:

Foreclosures in April exceeded even March's blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.

One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping...

There were 63,900 bank repossessions, the last stop in the foreclosure process. More than 1.3 million homes have now been lost to foreclosure since the market meltdown began in August 2007...

Ten states accounted for 75% of all foreclosure activity, and they fell generally into two categories: one-time bubble markets and the Rust Belt.

California easily outpaced every other state with with 96,560 filings. Other hard-hit former boom states were Florida, Nevada and Arizona.

Those Rust Belts states with the most filings were Illinois, Ohio and Michigan.

Georgia, Texas and Virginia filled out the rest of the top 10 list...

Five other California metro areas ranked in the top 10: Modesto was fourth, Riverside-San Bernardino fifth, Bakersfield sixth, Vallejo seventh and Stockton eighth. Miami and Orlando rounded out the list.

Most of those pending sales? Still driven by foreclosures.

Although the recent uptick in pending home sales is good sign for the housing market and overall economy, our sources at Credit Suisse indicate that it's still largely due to the end of the temporary moratorium on foreclosures and lower mortgage rates. Over the last several months, foreclosures have accounted for 50% (and rising) of overall home sales, which means a declining portion of sales for market-rate home sales. The largest gains were noted in the South and West, which is also where we've seen the largest percentage of distressed home sales. In the Northeast and Midwest, pending sales fell by single digits.

The reliance on discounted sales also puts continued pressure on new home sales, especially as the total volume of foreclosures continues to rise. Given the price premium for new homes in many places, the pace of new home sales will pick up only in those areas in which the supply of decent foreclosures has waned.

Looking ahead to future data releases, existing home sales should also continue to rise to an annualized rate of about 4.75 million.

Plunge in housing starts: good news or bad?

Lately, it seems that trying to figure out the health of the housing market from the most recent stats on starts, sales and prices is a lot like reading tea leaves. The latest bit of news is that housing starts fell sharply in March, although starts for single-family homes has remained constant. According to the L.A. Times, that could mean good news:

Groundbreakings on single-family homes held steady for the third month in a row in March, even as the number of condominium units and apartments under construction fell sharply, according to federal data released Thursday.

Economist Edward Leamer, director of UCLA's Anderson Forecast, said the stability in single-family home construction is a positive sign.

"The downward trend we've been seeing for a long time isn't evident anymore," Leamer said. "We won't know if we've really hit the bottom for a couple of months, but this is certainly consistent with being near the bottom."

But not all the news was good. Construction began on 152,000 apartment buildings nationwide in March, down nearly a third from the previous month and 51% from a year earlier. In the West, builders began work on just 10,000 multi-family buildings in March, a fourth of those that were started in February and down even more from the previous year.

That, along with the fact that there's still less construction going on now than there was last year, brought the overall numbers for new housing down 48% nationwide over the same month in 2008.

Over at the New York Times, they're painting a slightly different picture:

“There’s still no clear indication that the construction market is coming back,” said Mike Larson, a housing analyst at Weiss Research. “Even if companies want to start projects, they’re having a harder time getting the money to do so. We’re being overwhelmed by distressed inventory as well as regular sellers trying to get out of their homes. There’s not a heck of a lot of incentive for builders to ramp up construction.”

Still, some housing experts say the decline in home building was a crucial step toward lowering the glut of unsold houses and condominiums on the market so that housing supply once again lines up with demand...

And what about foreclosures?

Also on Thursday, the data firm RealtyTrac reported that foreclosure filings surged 9 percent, to 803,489 properties, in the first quarter of 2009. RealtyTrac said that foreclosure notices increased 17 percent in March from February.

“We saw a record level of foreclosure activity,” James J. Saccacio, chief executive of RealtyTrac, said in a statement. He added that foreclosures would probably increase in the next months as temporary halts to foreclosures expired at banks and agencies like Freddie Mac and Fannie Mae.

The flood of cheap foreclosed homes and distressed properties has helped push home prices lower across the country, especially in areas hit hardest by the housing downturn, like Southern California, Arizona and Florida...

SoCal home prices stabilizing?

The latest numbers from MDA/Dataquick are out, and show that the median price for an existing home in Southern California remained stuck at $250,000. What makes this interesting is that this is the third month in a row that it's remained stable, although that's really due to the huge influence of foreclosures (mostly in the Inland Empire). So if one month does not make a trend, does three?

I discussed this subject for local station ABC7 on their 5:30pm newscast, and whereas prices for entry-level homes have already fallen by 40% to 50%, those for move-up and luxury homes have fallen by 30% to 40%, so I would expect to see further price declines throughout 2009 and into early 2010 for higher-priced homes. However, in terms of the level of overall median price declines, I think we're past the 7th inning stretch.

Also, from an L.A. Times story:

The median sale price for a Southern California home remained the same in March for the third consecutive month, indicating that the housing market may be stabilizing for at least starter housing.

The median price paid for a home in Los Angeles, Orange, Riverside, San Bernardino, Ventura and San Diego counties was $250,000, the same as it was in January and February, according to MDA/DataQuick information services in La Jolla.

The median sales price had not held steady for two straight months since it peaked in 2007, the firm's data shows. The March sales price median was down 35% from a year ago. The $250,000 median price is down 51% from the peak price of $505,000 in mid-2007.

Foreclosed homes accounted for 55% of homes sold during March...

But the robust sales activity has been concentrated on lower-priced homes, DataQuick said. The firm estimates homes in more costly neighborhoods have dropped in value by only half as much as homes in lower-priced areas.

Sales at the high end "are dormant right now," said DataQuick president John Walsh. The median sales price will rise if activity picks up in that segment. But mortgages of more than $417,000 -- even those that do not meet the definition of a jumbo loan in states like California -- remain more difficult to obtain, Walsh said. A jumbo loan is a mortgage that is too large to be backed by the federally chartered mortgage giants Fannie Mae and Freddie Mac.

For now, the median prices are "simply a reflection of what is selling -- mainly distressed properties in the more affordable neighborhoods," Walsh said.

Signs of life in the hardest-hit housing markets

Over the last year, it's been so hard to find the kernels of good news regarding the housing market and economics, but recently more positive stories have been emerging, including a cover story entitled "Signs of Life" for the 4/13/09 edition of BusinessWeek. Even the bear-est of the housing bears, Christopher Thornberg, is sounding encouraging. So is this simply an alternative universe or the start of an actual rebound? From the story:

Frenetic buying in a few depressed areas doesn't mean the national bust is over—far from it. But it does herald the start of a new phase in the boom-and-bust recovery cycle. Economists might call it equilibrium: Prices have fallen so much in some areas that shoppers are getting interested again, improving the balance between buyers and sellers. That doesn't mean prices will surge anytime soon. But heavy buying should at least begin to put a floor under prices. "Are we at the bottom?" asks Christopher Thornberg, an economist with Beacon Economics. "We are getting close."

If Thornberg is right, one might expect other markets to begin the bottoming out process in the coming months. Just as California, Florida, and Las Vegas led the nation into the housing bust, those areas could provide the template for a national recovery. "One of the big problems we have across the nation is a lack of confidence," says Adam York, an economist with Wachovia (WFC) in Charlotte, N.C. "As these former bubble markets bounce off the bottom in terms of sales, it could give some hope to [other markets] that the declines are going to end."

Plenty of caveats are in order, because there are peculiar bear-market factors at work. The fact that inventories are falling precipitously in California—to just 6.5 months' supply from 15.3 months a year earlier—would seem to augur well. Historically, "prices respond very dramatically to inventory," says William C. Wheaton, director of research at the Massachusetts Institute of Technology's Center for Real Estate.

But inventories are falling fastest in markets where speculators and first-time buyers are driving the action. Those parties don't have to put their own homes on the market to make a deal. It remains vexingly difficult for home-owners who have bought in the past five or so years to sell one property and buy another.

On top of that, government incentives of up to $8,000 in tax credits for first-time buyers and low mortgage rates engineered by the Federal Reserve are luring shoppers who otherwise would be sitting out. If the government were to take away the punch bowl, markets that seem to be bottoming could well turn down again..

Click here for full story.

Zillow suggests that Case-Shiller numbers mis-state the market

For those homeowners who think Zillow's "Zesimate" is not an accurate barometer of their home's value, the company's VP of Data and Analytics, Stan Humphries, argues that their regional stats are better than Case-Shiller's because by including both market-rate homes and foreclosures, Case-Shiller both understates the pricing decline among foreclosed homes yet over-states the decline for homes not in distress. From his blog (hat tip: L.A. Land):

According to Standard & Poor’s, the Case-Shiller Index is “designed to measure increases or decreases in the market value of residential real estate.” It’s important to note, however, that “market value” according to Case-Shiller includes all arms-length sales of homes, even those of foreclosed homes.

It’s really an indicator of the change in prices of homes regardless of the circumstances under which they are sold. What won’t surprise many people, however, is that there’s actually a very large difference in prices between foreclosure and non-foreclosure homes...

Unfortunately, in combining both foreclosures and non-foreclosures into a single metric, you’re not really getting a good insight into either market. In the current climate, you’re underestimating the decline in value of foreclosed homes and overestimating the decline in value of non-foreclosure homes.

More importantly, from a consumer perspective, homeowners probably infer that home price indexes are a general indication of the real estate appreciation that they might realize if they were to sell their own home...

For homeowners thinking in this way, Case-Shiller is not a good measure for them to use because the assumptions used to interpret the data do not match the assumptions used to create the data...

Click here for entire post, which includes graphs and tables to make the point in greater detail.

Banks now also walking away from properties

Remember how controversial it was when companies like "YouWalkAway" offered distressed homeowners expertise on how to simply walk away from their homes? Now it appears that lenders are doing the same, leaving semi-foreclosed homeowners and cities to pick up the mess.

So does that mean bail-out money is being used to increase neighborhood decay? From a New York Times story:

City officials and housing advocates (in South Bend, Indiana) and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure...

Experts suggest the bank walkaways are most visible in states where foreclosures are processed through the courts and therefore tend to be more transparent. Other states, like Indiana and New York, have court-mandated foreclosures, but roughly half of the states allow foreclosures to proceed without court intervention, making it difficult to accurately count the number of bank walkaways in recent months.

The soft housing market and the vandalism that often occurs when a house sits empty are the two main factors influencing the mortgage holders’ decisions to walk away, said Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country.

“Oftentimes when the foreclosure starts out, it’s a viable property,” Mr. Rothenberg said, “but by the time it gets to a sheriff’s sale, it might not have enough value to justify further expense. We’ve always had cases where property was vandalized or lost value, but they were rare compared to these times.”...

The problem seems most acute at the bottom of the market — houses that were inexpensive to begin with — and with investment properties, where investors and banks want speedy closure by writing off bad loans as losses. Banks and investors typically lose 40 percent to 50 percent of their investment on every foreclosure...

In South Bend, boarded-up houses for whom no one has stepped forward are dotting the landscape, adding a fresh layer of blight to communities that were already scarred from the area’s industrial decline. The city is hoping to create a new type of legal mediation process that would bring together the homeowners and the mortgage holders to settle their disputes while allowing the owners to remain in the home — considered crucial to any stabilization effort...

And then, hopefully, some form of responsibility will return from someone.

Obama announces detailed housing rescue plan

This morning President Obama announced details of his plans to help 9 million homeowners avoid foreclosure. First, a summary from the L.A. Times:

• Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions, both taken over by the government last year, from refinancing mortgages they own or have guaranteed when more is owed on a home than it is worth. The White House says this could reduce monthly payments for up to 5 million homeowners.

• Create incentives for lenders to modify subprime loans at risk of default or foreclosure. For lenders that agree to reduce rates to levels borrowers can afford, the government will make up part of the difference between the old monthly payment and the new payment. Participating lenders also will be required to cut payments to no more than 31 percent of a borrower's income. Up to 4 million homeowners could benefit.

• Keep mortgage rates low for millions of middle-class families seeking new mortgages. Using money already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to buy Fannie and Freddie mortgage-backed securities to maintain stability and liquidity in the marketplace. The department, through its existing authority, will provide up to $200 billion in capital for this purpose.

• Pursue reforms to help families avoid foreclosure. The administration will continue to support changing bankruptcy rules so judges can reduce mortgages on primary homes to their fair market value, as long as the borrower sticks to a court-ordered repayment plan. As part of the $787 billion stimulus package that Obama signed into law on Tuesday, the administration will award $2 billion in competitive grants to communities experimenting with innovative ways to prevent foreclosures.

If you missed the press conference, you can watch it below:

JP Morgan Chase steps up with own foreclosure solution

Banker JP Morgan Chase, one of the stronger banks in the U.S., launched its own counter-offensive to address soaring foreclosures on Friday, including hiring more staff, a new review process to avoid unnecessary foreclosures and a moratorium on new default filings for 90 days until its plan is up and running. So will this plan work or is simply more smoke and mirrors? From a CNNMoney.com story:

The bank will step up its efforts to offer mortgage modifications for borrowers at risk, institute an independent review process to eliminate all unnecessary foreclosures and hire and train more staff to handle the added caseload that the plan will generate.

Most important, it will not put any delinquent loans into the foreclosure process during the 90 days it takes to implement its new plan.

JP Morgan Chase expects to help 400,000 families keep their homes during the next two years by working out $70 billion worth of loans. The company says its housing rescue efforts have already helped 250,000 families holding about $40 billion in loans.

Click here for full story.

New construction and home prices fall, foreclosures rise but builder sentiment rises

Do the nation's homebuilders see something in the latest data releases that the rest of us are missing?

First, a CNNMoney.com story reveals that August foreclosures hit another record:

Foreclosures hit another record high in August: 304,000 homes were in default and 91,000 families lost their houses.

More than 770,000 homes have been repossessed by lenders since August 2007, when the credit crunch took hold...

The 27% jump over last August represents a more modest year-over-year increase than in previous months, but that's only because the housing crisis was already underway in August 2007, which saw a big spike in foreclosures...

Fannie Mae (FNM, Fortune 500) chief economist Doug Duncan isn't surprised by the swelling numbers. "It's been my view for a long time that foreclosures won't peak until the last three months of 2008," he said.

And now that the nation in a recessionary economy, with job losses exceeding 400,000 a month, Duncan speculates that the foreclosure crisis may be drawn out even longer.

"We've been saying that the foreclosure trend has not yet peaked," said Doug Robinson, a spokesman for the foreclosure prevention organization NeighborWorks America. "Before it was a subprime problem," he said. "Now, it's everybody's problem."

Secondly, another story at CNNMoney.com tells us that new home construction is at a 17-year low (which should be good for whittling down inventory):

Construction of new homes and apartments fell to its lowest level in 17 years last month, showing the country is still gripped by a severe housing downturn that has triggered billions of dollars of losses and is reshaping the structure of U.S. finance.

The Commerce Department reported Wednesday that housing construction dropped a surprise 6.2% last month to a seasonally adjusted annual rate of 895,000 units. That's the slowest building pace since January 1991, another period when housing was going through a painful correction.

The decline is larger than the 1.6% drop analysts expected and showed weakness in all the country except the West...

For August, the 6.2% drop in housing construction reflected a 1.9% decline in single-family construction, which fell to an annual rate of 630,000 units. Construction of multifamily units fell by 15.1% to an annual rate of 265,000 units...

Building activity was down in all parts of the country outside of the West. Construction fell by 14.5% in the Northeast and was down 13.6% in the Midwest and 7.4% in the South.

All the declines left construction activity 33.1% below the level of a year ago. Analysts believe that construction will continue falling for many more months as builders struggle to reduce the backlog of unsold new homes in a market that continues to slump.

Building permits, considered a good indicator of future activity, dropped 8.9% in August to an annual rate of 854,000 units.

Thirdly, the Federal Housing Finance Agency reports via AP that home prices fell by 5.3% since last year, and are now at October 2005 levels (of course their methodology is different than that employed by the S&P/Case-Shiller Index, which compares sales of the same home over time):

Nationwide home prices in July fell a record 5.3 percent compared with a year ago, a government agency said Tuesday, and have now receded to October 2005 levels.

Prices were down 0.6 percent from June on a seasonally adjusted basis, according to the Federal Housing Finance Agency...

The housing agency’s director, James Lockhart, suggested Tuesday that mortgage finance companies Fannie Mae and Freddie Mac could loosen lending standards to help more homebuyers qualify for a loan and stabilize the market. The government took control of Fannie and Freddie earlier this month...

Lockhart explained the government had little option but to seize control of Fannie Freddie. Both companies, he said, were unable to raise money to gird against losses without aid from the government.

Without new money, the only other option was to stop doing new business and shed assets in a weak market. “That would have been disastrous for the mortgage markets and mortgage rates would have continued to move higher,” Lockhart said.

But rates are creeping back up.

The national average rate on a 30-year, fixed rate mortgage rose to 6.26 percent on Monday up from 6.11 percent on Friday as details of the government’s rescue plan remained in flux, according to financial publisher HSH Associates. The rate had fallen as low as 5.87 percent last Tuesday.

So why are builders optimistic? Because the latest survey was taken earlier in September, prior to the latest financial meltdown. From a CNNMoney.com story:

Battered housing developers are getting a bit more optimistic about their prospects for the next six months, an index of the sector's confidence showed Tuesday.

The National Association of Home Builders/Wells Fargo housing market index rose two points to 18 this month from an all-time low of 16 in July and August.

The survey was taken in the first 10 days of September, and for the most part doesn't reflect the fall in mortgage rates since the government's takeover of mortgage finance companies Fannie Mae and Freddie Mac. It also doesn't take into account this week's Wall Street turmoil, which may push rates downward as nervous investors move into government bonds...

Builders have been slammed by a combination of falling home prices, soaring foreclosures and an oversupply of unsold homes languishing on the market. But the industry is growing hopeful that consumers will finally take advantage of deeply discounted prices.

Another key reason for the improving outlook: a temporary $7,500 tax credit for first-time homebuyers passed by Congress this summer. The credit essentially works out to a 15-year, interest-free loan.

Many in the industry "are sensing that home sales are nearing a turning point," Sandy Dunn, a homebuilder from Point Pleasant, W.Va. and the trade group's president, said in a statement. New home sales likely will stabilize by year-end, Seiders predicts.

All three components of the index improved, with the largest gain in the index of builders' sales expectations over the next six months. That gauge rose by six points to 30.

Gains in builder confidence were seen across the United States, with the largest gain in the Northeast, where confidence rose by six points...

Still, many in the industry are worried about the cancellation of popular programs that let sellers channel down payment money to cash-strapped homebuyers via charities. Those seller-financed down payment assistance programs were eliminated in the housing bill passed over the summer because homebuyers who used them had high default rates.