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Foreclosures Drop Is Just a Drop in the Bucket

Michael Feder — 2011-03-14T11:20:00 00:00

The headlines blared last week about a 27 percent drop in foreclosures, after RealtyTrac released their U.S. Foreclosure Market Report for February. On the surface, it looked like maybe it was positive. And most journalists covered the release as good news for the housing market. But when examined closely, it is perhaps just the opposite: another sign of how depressed the housing market really is.

To their credit, the professionals at RealtyTrac went on to give what seems to be a real analysis of what is going on: "Foreclosure activity dropped to a 36-month low in February as allegations of improper foreclosure processing continued to dog the mortgage servicing industry and disrupt court dockets," said James J. Saccio, chief executive officer of RealtyTrac. "While a small part of February's decrease can be attributed to it being a short month and bad weather, the bottom line is that the industry is in the midst of a major overhaul that has severely restricted its capacity to process foreclosures. We expect to see the numbers bounce back, but that will likely take several months."

So, what exactly does that mean?

First, it means that the drop in the actual number is more a reflection of delays in the legal process

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than it is a suggestion that the malaise is over. Second, it means that the pipeline of new 'foreclosed' homes for sale, so called REO inventory at banks is not really slowing down. That pipeline is a big part of what we call shadow inventory, the size of which is getting bigger as home values continue to drop. And that shadow inventory is a big problem for home prices. Simply put many more sellers than buyers. Not the environment in which prices will naturally go up. But to us, the real key is that this is another example of how homeowners, homebuyers and everyone else who wants to know what the real story is need to be careful about how they interpret what they read and hear.

In my last column, I pointed out that there are a large number of data released about housing and that, unfortunately, more often than not; the headlines that accompany the data do not capture the whole story. Now as we head into the spring, the normal start of home buying season, it becomes crucial that participants pay close attention to the details, not just the headlines. No one wants to buy a house in a neighborhood where it looks like foreclosures have stopped coming, only to find out they were not going away, only being delayed. Without a close look, everyone is at some risk of being drawn to the wrong conclusion.

We will continue to call the market as we see it. And we hope that will help.

Michael Feder is CEO and president of Radar Logic Inc., a New York-based data and analytics company that produces the RPX value for housing markets in the United States.

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Housing Market Data Doesn't Tell the Whole Story

Michael Feder — 2011-02-28T10:39:00 00:00

Over the past two weeks we have been bombarded with housing market data, much of it seemingly contradictory.

o. On February 15, the National Association of Home Builders released their Housing Market Index for February. The Index measures confidence among home builders, where 50 is neutral, higher is positive, and lower is negative. The index was 16. Clearly the folks who build homes think the market is in trouble.

o. On February 16, the U.S. Census Bureau released housing starts and permits for January. Starts were up 14 percent, having been down 5 percent the prior month, but permits fell 10 percent. What's more, the increase was apparently fueled by multifamily dwellings (read apartment houses) not single-family homes.

o. On February 22, the S&P Case-Shiller Home Price Index for December was released and showed declines across the board. By the way, Radar Logic had correctly predicted this the week before.

And then last week, two of the big guys started debating the accuracy of their numbers in the media. Even the father of housing metrics, Dr. Robert Shiller, spoke up. Unfortunately, none of these experts has really zeroed in on the point: Housing markets are "busted," and the reasons are not going away.

As we pointed out in our RPX Monthly Housing Market Report, released on February 17, the RPX Composite price for the 25 major MSAs we publish was 3.6 percent below its level from a year

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ago. In fact, this was the fourth year in a row when the year-over-year comparison was negative.

So, it seems that whether or not we are in a technical "dip" we clearly remain in a falling market. Dr. Shiller said yesterday that the Case Shiller Index is still above its low point, so we are not in a "double dip" yet. Come on, Bob. Isn't it time to tell it like it is? Housing is not poised to recover. As we have been saying for months, there is simply too much inventory relative to too little demand. And as housing is a market, a fairly sophisticated one at that, such imbalance can only help prices fall. Let's look at the pieces.

On the supply side, inventory continues to grow. And as we noted above, it is not because builders are putting up new homes. It is because there are millions of homes for sale due to financial distress, many of which have been foreclosed and are being offered by the banks that own them. According to the administration's Housing Scorecard for January 2011, there are roughly 3.5 million homes for sale and another 3.5 million homes vacant, but not on the market.

This was a decrease of roughly 4 percent from the prior period, but an increase of almost 7 percentfrom a year ago. And it's within 1 percent of the level from December 2008. In addition, there were approximately 4.2 million seriously delinquent mortgages in the most recent period.

On top of that, according to the same HUD report, the number of underwater borrowers was fairly steady at 10.8 million. While there likely is some double counting, back-of-the-envelope calculations suggest there are between 10 million and 22 million homes either for sale or at risk of being for sale. Based on the most recent seasonally adjusted annual rate of existing home sales (a number that is being contested by another data provider) of approximately 5.5 million homes a year, that means that the actual supply is between 2 years and 4 years. And most TV economists are suggesting supply is 7 to 8 months. A disconnect if ever there was one. By the way, if prices continue to fall, the number of underwater borrowers goes up and the problem gets worse.

On the demand side, the numbers are a bit suspect so let's look at the drivers. Interest rates have moved up, though only a little. A bigger issue is that lenders are requiring much larger down payments. That makes sense if they think housing values are going to fall. It is the underwater borrowers who are at some risk of what's called strategic default: the walking away from a loan that's bigger than the house is worth. And then there is the very simple psychology of many buyers who think the market is still moving down, so they can afford to wait. When there is so much for sale, why not wait until the big "discount" signs appear. In simple terms, it is a buyers' market. And more supply will only make it more so.

So, where is the silver lining? Well right now there isn't one. As we come into the spring, the traditional beginning of the homebuying season, we likely will see some glimmers of "good news." Activity likely will accelerate a bit, and as a result, sellers will stand a bit firmer on their asking prices, so deals will look like they are happening at higher values. Beware that this may be noise in the face of oversupply. No doubt, the media will be filled with all the "good" news. From our point of view, it likely will appear fleeting and until there is a real effort to reduce the enormous shadow inventory, the decline will continue.

Michael Feder is president and CEO of Radar Logic Inc. Radar Logic is a New York-based data and analytics company that produces the RPX value for housing markets in the United States. Unlike most econometric measures of housing, RPX is produced daily, based exclusively on data related to actual closings. It is designed to provide a contemporaneous measure of housing values at the point of sale. For more information, please visit www.radarlogic.com.

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Housing Market: Worse Than You Thought

Michael Feder — 2011-01-26T15:50:00 00:00

Filed under: News,Economy

Get ready for some more bad housing market news: For the past three months, both Radar Logic's Residential Price Index (RPX) housing values and RPX transaction count have declined significantly year over year. Prices have declined an average of 2.2 percent from the prior year.

That may not sound like a lot, but for values that are down as much as 40 percent from their peak, continued declines are meaningful. The Case-Shiller November Index release indicated a continuing decline, albeit somewhat modified. One expert observed that the numbers likely would cause economists to predict a "second leg down" in the housing market.

We at Radar Logic disagree. This is not a second leg. Rather it is a continuing deterioration of value which could continue for some years to come.

At Radar Logic, our goal is to discover the value of housing as a consistent asset -- in other words, to see through the specifics of individual homes and learn what the underlying value is really doing. To this end, we focus on actual transactions; the value established when a buyer and a seller actually agree, and, as importantly, the velocity with which buyers and sellers agree: the volume of transactions. Both are critical as the ultimate drivers of value are the balance between supply and demand and the volume of transactions in the market. Over time, these data allow us to identify trends and drivers in housing value. Here's the bad news: Both the trends and the drivers are negative; much worse than most will admit.

Stability would be a far more welcome trend, but clearly it is not there. Leaving seasonality aside (we are approaching the seasonal low point for housing values), the year over year declines suggest that values are under downward pressure and it is important to understand why. Over the same period, volumes, as tracked by RPX transaction counts have declined an average of 22.5 percent on a year over year basis and the rate of decline is accelerating. In

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other words, fewer transactions are occurring, and the pace is continuing to decline. This suggests that fewer buyers and sellers can agree on a price and the obvious reason for that is just that, price. Sellers are hopeful that values are stabilizing, or in many cases, cannot afford to pay back the loan not covered by the sale price and buyers clearly think prices should and will decline.

At best, this is a pause in the housing value cycle. At worst, it is a standoff. Either way, it would suggest that prices need to fall further to bring back the buyers.

But the one element that none of the pundits want to discuss is the inventory of unsold homes. And from our perspective, this is the key point. There are simply too many homes for sale, either listed or "available" and with so much inventory, any savvy buyer has to ask themselves the critical question: Will I get a better deal if I wait? As long as they feel that way, the cycle will only get worse. The more buyers hold back, the more prices fall. The more prices fall, the more homes go underwater. If we assume that defaults on mortgages are correlated to the relative value between the home and the loan, then this will only lead to more bad debts, more foreclosures and more inventory. And the cycle goes on. With due respect to the experts who do not see it this way, we pose one simple question: Can you name one market with a heavy imbalance of supply relative to demand where prices actually went up? We can't.

As this cycle worsens, it likely will lead to more foreclosure activity. The losers in foreclosures are the homeowners who lose their homes and the lenders who typically lose 50 cents on each dollar outstanding in loans. Too bad for the banks most people say. But it's not the banks this time. It's us, the American people. Most of the loans written during the boom were backed by some form of government guarantee. And while the government is trying to get banks to "buy back" loans that were originated improperly, the numbers are tiny compared to the overall problem.

In its monthly housing scorecard, HUD makes reference to "homes for sale, homes vacant but not for sale, delinquent loans, and homes worth less than their mortgages." When one adds all this up, one gets to numbers of 10 to 12 million homes for sale or potentially for sale. If those homes go into default and are foreclosed the losses to the lenders could approach $1.25 trillion at today's values. And the lender in a vast preponderance of cases is the U.S. government, meaning the American people. This problem is much worse than it looks.

There is hope, of course, as there is always hope. First, home prices are flirting with levels we have not seen since 2002. Making them very attractive to people who sat out the boom. Second, while employment is not getting better fast, at least it is not getting worse. Third, there are a number of ideas being offered to Washington as to how to help fix the problem. Some of them are pretty good, and some of them clearly would help. The question is: Is anybody listening?

In the coming weeks, I hope to explore some of these issues in more detail in this space. I encourage you to respond with your comments.

Michael Feder is president and CEO of Radar Logic Incorporated, a real estate data and analytics company.

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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