Well, it’s Friday again, and as one of the few remaining Fridays of the summer, I hope you can get out and enjoy the weekend (and hopefully the weather where you are will allow you to!)
So what’s been happening in the mortgage market this week? This week it’s been all about inflation and housing statistics…..
Inflation – the Consumer Price Index grew by a much faster than expected .8% during July. Normally, that would send the markets into “freakout” mode but the markets didn’t really react all that much. Why? A couple of things: 1) A huge amount of the increase was due to the rising costs of energy and that has dropped quite substantially since the first of August, thereby easing the risk of inflation. 2) There has been quite a bit of “noise” lately on how the slowing of the economy both here and internationally will become, eventually, anti inflationary. How does that work? In a nutshell, if there aren’t many people shopping at Best Buy, they can’t very well raise prices, can they?
Housing Statistics – I’m not going to get into the itty bitty details of the housing statistics that have been released lately but I’m going to give you a bit of an overview of the reports and try to focus on the bigger picture rather than get stuck on details:
1. Foreclosures are rising – the number of homes that have been foreclosed on in July vs. last year is a LOT higher. In some areas of the country, it’s a staggering percentage higher, in others, just higher. But it’s up. What does that mean? It means that the troubles in the housing and credit markets are still going on and are potentially getting worse.
2. REO – Real estate owned by a bank or financial institutions. According to one report issued this week, banks and financial institutions now own over 750,000 homes throughout the United States. What does that mean? Essentially this, if we had to relocate the entire city of Chicago, we could find a bank owned home for every resident of Chicago and there would be no more than 4 people per home! That’s a lot of inventory already and if you look at #1, it means that there is going to be more.
3. The effect of REO on housing prices. Another report was issued that showed that on a national basis (your mileage may vary) approximately 20% of the sales that have been done in the last period of time (I believe it was the last quarter) were bank owned properties. What does that mean? It means that as long as there is a significant (and in many areas growing) inventory of bank owned properties, we’re going to see pressure on housing prices. Obviously, it’s different area to area and it doesn’t take a rocket scientist to know that some of the areas that are worst are in the sunny states of California, Nevada and Florida.
4. A sign of stabilization? One remotely good news item (and I said remotely) is that it appears that in some areas the rate of price declines is stabilizing. Now read that carefully. I didn’t say the price declines are stabilizing (meaning leveling off). What I said was that the report makes it appear that the rate of price declines is stabilizing. Let’s pick on Sacramento California as an example (my brother lives there, so I like to pick on them). If the price dropped from April to May by 20%, May to June by 22%, and June to July by 18%, the prices are still dropping, but the rate that they are dropping is stabilizing. Now one month does not a trend make, but it certainly is worth watching.
5. Cleveland – leading the pack down and back? I read a report this morning which said that Cleveland was actually seeing some price appreciation in their real estate. In many ways, Cleveland was one of the cities that lead the pack in the downward trend, so it is encouraging to see that they might be seeing a bit of a rebound starting. It’s early to tell, but it might mean a bottom in the Cleveland market. That’s the good news. The bad news? Prices had to drop 37% before they hit the point at which people in Cleveland felt it was worthwhile to jump in and buy again. That’s a long ways down.
6. Greenspan again – Greenspan spoke up and didn’t do his credibility any favors. He said that he’s certain the housing market will hit bottom in the first half of 2009. All of the “other” experts looked at each other and said, “Huh? What’s this guy thinking?”
7. Credit market pressures – in light of all that’s going on in the housing market, there are a lot of “rumblings” about additional problems in the credit markets. No major bank failures this week, no major bank bailouts (or Fannie or Freddie) but a lot of “slightly below the surface” rumblings that all is not well in credit world.
8. Tax loss – I read a report that said that the City of New York is looking at a substantial (multi million dollar) loss in taxes due to the lack of income at the financial institutions based in New York. It’s going to be “interesting” to see how that ripple plays out.
In light of all of that, the mortgage market has moved around a bit but has been remarkably steady. A few minor fluctuations, but nothing major.
I’ll continue to keep you informed, if I can be of help, let me know.
Sean Purcell says:
A sign of stabilization?
Tom! You have me choking on my Cheerios this morning. Was that a glimmer of optimism offered up by my favorite pessimist? You caught me completely off-guard. 🙂
I can barely bring myself to offer a different view, but I will soldier on…
Foreclosures are rising, but isn’t that kind of a lagging indicator? By the time foreclosures happen the damage is already done. I know it affects the supply and I’ll get to that in a moment, but the key to economics is always perception. That is one thing I found missing when I studied under the egg-heads toiling away in the ivory towers. They theorize with the best of them, but they leave out what actual “people on the gound” think is happening. My perception from my little corner of the world is that people are beginning to come out from under their shell. Their is a glimmer of light around the edges; it hints at a belief that the worst is over. Is the worst of this actually over? I don’t have the foggiest; nor does it matter. What matters is what people believe is happening.
I wrote a post a while back (and followed it up here) that mentions the psychology of the press and how it would affect normal people (which I define as people not in the abnormal world of real estate 🙂 ). I think it is happening, even if only in drips and drabs.
As for supply and REOs, the total volume of REOs only matters in relation to the total volume of buyers. If buying demand increases at a rate greater than REO supply (or any supply) then we will begin to see stabilization if not appreciation. The percentage of homes for sale that are REOs matters even less. I know all real estate is local and many areas are still on the downslide, but some areas are beginning to blossom. Here in San Diego we are beginning to see a lot of activity. Not enough to create appreciation and I don’t think quite enough to completely halt depreciation across the board, but certainly enough to drop our inventory noticeably. Could be a “dead cat bounce” but it doesn’t feel like it. San Diego often leads the nation in and out of these troughs so we can hope right… right?
BTW, I think Mr. Greenspan’s reputation will be just fine. Earlier this year Sam Zell, by many accounts the most successful real estate investor in the land, called the bottom as the spring of this year. Now we have one of the most astute observers of economic cycles calling it in the first half of next year. Between the two I am feeling pretty confident. Certainly those two voices carry more weight than the so-called “experts” who predict every possibility, thus making themselves heard and saying nothing all at the same time.
I am going back to my Cheerios now. Please give us a little more warning next time you plan to veer form your normal gloom and doom. Consistency is the cornerstone of mental health and expectation is its basis. I believe this was articulated best by the great philosopher Homer Simpson when he said: “You know me Marge, I like by beer cold, my TV loud and my homosexuals fuhlaaaming.”
August 15, 2008 — 10:38 am
Tom Vanderwell says:
Sean,
You know, when I wrote that, believe it or not, I was thinking about you! 🙂
I prefer not to think of myself as a pessimist, but more of a straight shooter. If I see things going well, I’ll talk about the good stuff, if I see things going badly, I’ll talk about the bad. I will, however, remember to preface future glimmers of optimism with a warning about Cheerios.
Now a couple of thoughts in response to your comments:
Are foreclosures a lagging indicator – on the real estate side, I can agree with you, on the credit side, I’m not so sure. There are 750,000 REO out there that are not yet realized losses on bank’s financial statements. If you assume an average loss of $50,000 per home (don’t argue about where that number came from, I just made it up for example sake), that is an additional $37,500,000,000 worth of unrealized losses that have yet to hit the financial system. Does that make sense?
#My perception from my little corner of the world is that people are beginning to come out from under their shell.
and my perception from my little corner of the world, which I’m trying to make more national, is that most people have their shells firmly pulled over their heads around here……
Now we have one of the most astute observers of economic cycles calling it in the first half of next year.
I think history won’t be a very kind judge to our dear friend Uncle Alan. We might have to agree to disagree with this one, but I have problems with two things with him: 1) I think that he’s going to be seen as the man who fueled many parts of the housing bubble by making money too cheap for too long and 2) I don’t like the way that he keeps trying to “stick” his nose into Bernanke’s business by means of the press. He retired, he should stop dealing with things like this.
I’m not even going to touch your favorite philosopher. 🙂
The longer we “hang out” together, the more I think you’ll understand that the only agenda that I have is helping people, Realtors, consumers etc. understand the mortgage world better, oh and writing a few loans every now and then. 🙂
I do have one question for you. According to this, you wrote your comments at 10:30. What were you doing eating breakfast at 10:30 in the morning?
Have a great weekend!
Tom
August 15, 2008 — 11:34 am
Sean Purcell says:
Tom,
the only agenda that I have is helping people, Realtors, consumers etc. understand the mortgage world better, oh and writing a few loans every now and then
I appreciate that you like helping people and I hope you don’t ever stop. As for the rest of your comment, I will have to put on the pessismistic glasses now. If you want to write loans I think you may have a tough row to hoe in your neck of the woods. (This may contribute to the view point you have, as national as you try to make it.)
As for breakfast… besides being a Real Estate Renaissance Man I am an Ironman triathlete and I train in the morning. “Breakfast” is actually my second or third meal of the day at that point. (How’s that for a gratuitous self reference? 🙂 )
August 15, 2008 — 12:00 pm
Thomas Johnson says:
Here’s a glimpse from my part of the world. The REO situation is hugely understated by all the pundits. Our REO inventory is not priced to move-quite a bit of it is priced to sit and hang as unsold inventory. My take is that as long as it is unsold, it can be carried in the balance sheet as some pie in the sky valued asset, much like a CDO marked to model. Should we call these assets marked to CMA? With the increase in foreclosures, we should have seen BPO orders from the banks through the roof. I did more BPO’s in 2006. The banks nromally want a current BPO so they can unload their REO’s. I am seeing none of that. Some of these so called REO asset managers at the banks are in for a little surprise when Texas property taxes are due in December. We have no income tax, so our property taxes are going to be quite a shock when the bill come in. The tax escrow accounts will be dry and it should be interesting. I have a suspicion that the regulators are complicit in this little sham, as well, as the FDIC is making noises about needing more cash- an indication that all is being papered over.
As far as Greenspan and his market predictions-look for his firm or a client of his to form a real estate vulture fund. He needs to talk up the bottoming of the real estate market now so he can attract investors.
August 15, 2008 — 1:02 pm
Robert Kerr says:
I haven’t yet seen any media outlets pick up on (IMO) the *real* statistical message in Cleveland.
37% is not the real story!
What is? Median price in Cleveland is now $117K, almost exactly 3 times median family income of $38K. 3:1 is the traditional affordability ratio for that area.
And that’s why the Cleveland market is returning to health.
It’s not because first-time buyers now think its worthwhile to buy, it’s because first-time buyers *can* buy again, without suicidal ninja financing.
FWIW, JMHO.
August 15, 2008 — 7:26 pm
Tom Vanderwell says:
I think you may have a tough row to hoe in your neck of the woods. (This may contribute to the view point you have, as national as you try to make it.)
Sean – yep, it’s a tough row to hoe right now, but when the going gets tough……
You’ll get no arguments from me about how the local market affects my viewpoint. I agree that it does.
As to the 10:30 breakfast comment, I take it back. Anyone who trains for a triathlon, let alone actually does one is unbelievable (maybe certifiable?) 🙂
Robert, I think we’re looking at the same facts from opposite sides. I presented it the way I read it which was that prices had to fall 37% for people to feel that now was the right time to buy. You are saying that prices had to fall so they were in line with what incomes are. Either way, the market had to adjust to the appropriate income to price ratio. Does that make sense?
Tom
August 15, 2008 — 7:43 pm
Robert Kerr says:
RE: Tom
Yes, exactly. We’re saying the same thing, essentially, just saying it in slightly different ways.
August 16, 2008 — 8:08 am
David Shafer says:
Robert, the median family income for a family of 4 in Ohio is $68,000. Either Cleveland is 1/2 the state average or your figure is wrong.
http://www.census.gov/hhes/www/income/medincsizeandstate.html
August 16, 2008 — 9:29 am
David Shafer says:
Robert, the median family income for a family of 4 in Ohio is $68,000. Either Cleveland is less than half the number for the state or your number is way off.
http://www.census.gov/hhes/www/income/medincsizeandstate.html
August 16, 2008 — 9:32 am
Smithers says:
“Greenspan spoke up … . All of the “other” experts looked at each other and said, “Huh? What’s this guy thinking?”
You meant “smoking” right?
August 17, 2008 — 10:03 pm