Housing in For Long Road to Recovery

From San Francisco Fed President John Williams: The Outlook for the Economy and Monetary Policy

Some excerpts on housing: 

One of the most important currents holding back recovery has been housing. The collapse of the housing market touched off the financial crisis and recession. In most recessions, housing construction falls sharply, but then leads the economy back when growth resumes. As you well know, that snapback hasn’t occurred this time. Before the crisis, residential investment as a share of the economy was at its highest level since the Korean War. Today, housing construction remains moribund and residential investment as a share of the economy has fallen to its lowest level since World War II.

On one level, that’s not surprising. We simply built too many—in fact, millions too many—houses during the boom and we are still feeling the effects of this overhang. Consider housing prices. From their peak in 2006 until early 2009, home prices nationwide fell by nearly a third. When you exclude distressed sales, prices appeared to bottom out in 2009 and early 2010. New housing starts also appeared to stabilize in 2009, after plummeting some 75 percent during the housing crash. ...

The $64,000 question is when will the housing market finally recover? One daunting challenge for such a recovery is the huge number of homes in foreclosure. Almost 7 million homes have entered into foreclosure since the first quarter of 2008 and some 2 million are still in the foreclosure process. In addition, there is a shadow inventory of homes currently owned by delinquent borrowers. When you add up unsold new houses left over from the boom, homes for sale by owners, foreclosed residences for sale by lenders, and the shadow inventory of houses at risk of distressed sale, you come up with a massive supply overhang.

Over time, more reasonable prices and an improving economy ought to bring buyers off the sidelines and set the stage for recovery. But high unemployment and anemic wage gains are leaving people worried about their income prospects and cautious about buying homes. Also, the dramatic plunge in home valuations since 2006 has made some first-time homebuyers wary about entering the market because of worries that prices might fall further.

These are key points: Usually housing is a key engine of recovery, but not this time because of the massive supply overhang. And looking forward: 

It’s only a matter of time before we work off the inventory overhang and construction picks up. How much time it takes will depend in part on what happens with foreclosed properties. If we begin making progress on working down the foreclosure inventory, then single-family housing starts could plausibly rise from their current level of about 400,000 per year to an average level of perhaps 1.1 million per year in three or four years, according to research at the San Francisco Fed.⁴ To put this in perspective, such an increase would boost real gross domestic product, or GDP, by at least 1 percent.

⁴ By contrast, if we can't work down the foreclosure inventory, then a return to normal construction levels could be delayed several more years. 

Housing Bubble: Winners, Losers and the Aftermath

http://marketplace.publicradio.org/features/anatomy/foreclosure/

Marketplace has a special report on the housing crisis through the lens of one house that fell into foreclosure. There is an interactive version of the story, and links to audio version and the companion 30-min documentary:

SoCal Connected and the acclaimed public radio show Marketplace have teamed up to take a tough look at the housing market crisis through one Los Angeles home. This special, reported by Marketplace’s Kai Ryssdal, traces the property from savvy investment boom to foreclosure bust and back again. We’ll meet the couple who bought the home low in 2002, improved it, and sold it four years later at almost triple the price; the couple who bought high and lost the home to foreclosure; and the couple who bought it this year at a fraction of the price it sold for in 2006.
The story of Lot 354 reflects the lending practices that contributed to the crisis in America’s housing market, how economic forces led to the housing crisis and what the future may hold for both buyers and sellers.

Listen to the radio program

Global Housing Bubble

We found a beautiful interactive chart from the Economist, comparing Houses prices in 21 countries. Looks like the housing bubble was mostly global (Canada being one of the notable exceptions as they have a much different mortgage market).  Click here to visit Economist site.

http://www.economist.com/displaystory.cfm?story_id=14438245

Housing, More Pain to Come:Shocker!

I meant to get to this last week, but the day it came out, I was mostly enjoying the sites and vino of Italy. Largely without 3G access(everything is slower in Italy), and I somehow missed it:

“Despite some tentative signs of recovery, the U.S. housing market remains vulnerable to further price drops—especially in areas where large numbers of mortgages are headed toward foreclosure over the next few years.

The Wall Street Journal’s quarterly survey of housing-market data in 28 major metro areas shows sharp drops in the number of homes listed for sale across the country. But the potential supply of homes is far larger because banks are likely to acquire significant numbers of foreclosed homes in some areas, notably Las Vegas, Atlanta, Detroit, Phoenix, Miami and other parts of Florida, and Sacramento, Calif., over the next few years.

Sales of those homes may depress prices further. By contrast, metro areas with relatively low foreclosure and mortgage-delinquency rates include Boston, Denver, Minneapolis, San Francisco, Seattle, Raleigh, N.C., and Portland, Ore., making them less vulnerable.

Homeowners and potential buyers have been whipsawed by conflicting signals about the state of the market in recent months. Ulani and Mike Thiessen found the market surprisingly hot when they went shopping for their first home in Las Vegas during the summer. With the help of Kim Kelly-Reed, an agent from One Source Realty & Management, the Thiessens finally bought a foreclosed house in September for about $136,000—but only after being outbid on three other houses.”

chart courtesy of WSJ

Millions of home sellers failed Econ 101?

We are going to keep this simple because millions of people must have failed Econ 101 or missed the month of supply/demand charts and it's influence on prices.

If you had a car dealership full of cars that weren't selling what do you do?Hey maybe have an enormous sale:

This is the current for sale inventory of existing single family homes in the U.S.:

from our friends at Calculated Risk.

Maybe the millions of sellers should pore a huge cup of coffee and wake up to today's market. But, who am I to judge that asking prices are too high? Maybe these sellers are aware of 5 million wealthy Asian and Arab buyers that are dying to move in and pay full sticker price. Sure and Santa Clause hangs out with the tooth fairy in the Cayman Islands during August summer break.

The way this standoff resolves itself is with declining prices to meet the available buyers or staying stuborn and waiting for the market to rise up to the current asking prices. Homes are selling every day... that are priced right. And now for a laugh from my favorite newspaper comic when I was a kid. Calvin and Hobbes.

Larger Version of comic.

Don't Let Fear Blind You

FEAR is ruling the financial markets. Billions of dollars have been lost in mortgage-related investments. The Federal Reserve worked madly over the weekend to engineer a takeover of Bear Stearns and avert a systemic meltdown. But the big fear remains. How low will house prices go?

If prices continue to fall, mortgage defaults will move well beyond the subprime sector. Trillions of dollars in losses for investors are not impossible. But that doesn’t mean they are inevitable.
In 1997, inflation-adjusted house prices were close to their average levels over the previous half-century. Only four years later, the price of the average home nationwide exceeded anything ever seen before in the United States. Prices continued to rise for another five years, peaking in 2006 at nearly twice the average price in 1997 (as can be seen on the graph on the bottom right, which is based on data collected by the Yale economist Robert Shiller). If house prices are heading back to the levels seen in 1997, then we are facing catastrophe.

But there are good reasons to believe that much of the increase in prices was a rational response to changes in fundamental factors like interest rates and supply. The deeper fundamentals continue to suggest strong housing prices for the future.

Sure, speculation did run rampant toward the end of the housing boom. (The debut of the reality television show “Flip That House” on Discovery Home Channel, followed shortly by “Flip This House” on A&E, was a clear sign that the boom’s end was near.) Prices will fall further, especially in the speculative developments built on the outskirts of the major cities. So yes, we overshot the fundamentals.

Still, especially in coastal areas where zoning regulations have restricted the supply of land that developers can build on, house prices were driven up by increasing population, low interest rates and strong economic growth.

More and more people want to live on the coasts, but land is hard to come by in places like Manhattan and San Francisco. Cities and regions built on ideas — like Boston, Los Angeles, New York and the San Francisco Bay Area — have grown even as areas built on manufacturing, like Detroit and the Rust Belt, have declined. And of course, government isn’t getting any smaller, so Washington and its suburbs, another hot spot of rising house prices during the boom, will continue to grow.

Even in places where land seems plentiful, zoning and other land-use regulations have made it scarce. To meet demand, we should encourage high-density development, but homeowners fought to restrict housing supply when house prices were increasing. Now that house prices are falling, the incentives of owners to restrict supply are even stronger.

Several studies estimate that the average house prices of 2004 were close to fundamental levels, so we may see prices stabilize near that level. Just like any market, bargains are to be had for the careful buyer. Did you know that on days when the stock market is down, often half the stocks are up for the day? You can't paint an entire market, let alone state or city with the same brush. Pasadena Real Estate is very different than Hawthorne yet they are both in LA County. Good deals are to be had by the prudent and patient.

Waking Up to The Problem Most Americans Face

Mort Zuckerman of U.S. News and World Report gave a gloomy assessment of the housing market yesterday: he gets it. This is a housing depreciation problem not a "contained subprime" issue.

How much longer will house prices keep falling? That collapse is a larger threat
to our economic well-being than even the headline-grabbing problems of our
increasingly frozen financial system. We’ve had half a century of rising home
values, capped by an inflation-adjusted rise of 85 percent from 1997 to 2006.
Now the loss of value tops $1 trillion, and the financial world has incurred
hundreds of billions of dollars of losses on the premise that U.S. home prices
would never fall. The median price of a new home is at $206,500, receding to
where it was in November of 2003, thus wiping out more than three years of price
appreciation. It takes 6.3 months to sell a finished home compared with 4.3
months a year ago. The ratio of inventory to sales is the highest since October
1981—there’s an unsold extra backlog of a million single-family homes and
condominiums. Builders have cut their housing starts by approximately 40 percent
over the past year. David Rosenberg of Merrill Lynch estimates construction will
fall from a million units to approximately 700,000 units, an all-time low since
World War II.
House prices, though, haven’t fallen enough to tempt buyers,
despite sales incentives and rebates. According to the Conference Board, fewer
Americans plan to buy in the next six months than at any time since 1994. The
decline in conventional mortgage rates has failed to spark sales because it has
been trumped by tighter lending standards. Speculators, who helped fuel the
bubble, have virtually disappeared from the market.

The rest of the article is also interesting, and he did a good job of discussing the problem of fighting a deflating bubble with lower interest rates:

Lower rates can help those with adjustable-rate mortgages, but they cannot stop
the deflation of the housing bubble or prevent a tidal wave of mortgage
defaults. This is partly because mortgage rates reflect the 10-year treasury
bond yield more than the federal funds rate. That rate has dropped, but the
spread of both fixed- and adjustable-rate mortgages over treasuries has widened,
which means smaller declines in mortgage rates. Then there are those many
borrowers who got mortgages in 2003 and 2004 when the federal funds rate was 1
percent; they’re not going to get a better deal than that. And if they now have
zero or negative equity in their home, they won’t be able to refinance in any
event.
Zuckerman made this recommendation:
There is no time to delay in
combating the trends. Monetary policy cannot make bad investments turn good.
Cheaper mortgages won’t cure the market where properties are plunging so much in
value. The collapse of value will affect all homeowners and, through them, the
whole economy. It’s bound to be the most pressing issue in this presidential
election year. Voters in the primaries and general election should look to
candidates with credible policies in mind to address this downturn.

Too bad "candidates with credible policies" are in short supply. Too many of our politicians seem to believe that government can somehow stop the trainwreck if enough money is thrown at the problem. The FED and ECB have injected north of $500B into the markets in the last few weeks and mortgage rates have gone higher in the last few days. The FED is pushing on a string. Don't wait for the FED or a politician to handle your mortgage situation. Be proactive and review your options today as the programs, rates and/or your home value may be much worse tomorrow. We have spoken to dozens of people recently who can't refinance because they have little or no equity. The recent bill passed does nothing for these folks. The effects of the downturn can be addressed, but the downturn itself cannot be stopped. Policy can’t combat gravity.

GOV:Worst is yet to come in housing and foreclosures.

From today's Lifeline Meeting In Washington.


Remember for every distressed seller there is an ecstatic buyer that is getting a bargain.

Recession and possible depression. Can I get some prozac with that?

Finally the "recession" talk is making headlines. The only thing right now that drives me wild is that there is still a discussion that the US will face a recession.... If the US would use a more "realistic" formula I assume that the recession is already here.... The clearest sign might be that Starbucks reported the first decline ever in customer visits. Hmm, five dollar coffee is a necessity right? Watch for 7-11 to pick up all the old Starbucks customers who downgrade. The good old substitution effect. Take a look at the warnings we have seen from Coach, Kohl's, JC Penny, etc. They are all reporting sharp drop offs in traffic YOY. Walmart is reporting various signs of consumer downgrading as well. But Ferrari is sold out for the year. So at least the rich are still doing well. I know you were worried for a minute that we were in serious trouble.


IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort Recession in America / America's vulnerable economy

Also in case you think BusinessWeek and The Economist forgot to take their anti-depressants I would encourage you to think about what the CEO of the one largest banks in the US said today:

Wells Fargo CEO John Stumpf dropped the "D" word today: "We have not seen a nationwide decline in housing like this since the Great Depression," Stumpf said at a banking conference in New York. Stumpf said the second-largest U.S. mortgage lender and fifth-largest U.S. bank was "not immune" from the storm, but was well-positioned to ride it out, despite expectations for "elevated" credit losses from home equity loans into 2008. Are we in a recession? Post your thoughts or anecdotal evidence. Free speech still works here.

September Southland home sales lowest in more than 20 years

September Southland home sales lowest in more than 20 years
by Real Estate Analyst John Karevoll-->October 16, 2007

La Jolla,CA----Home sales in Southern California plunged to the lowest level in more than two decades, as financing with "jumbo" mortgages dropped by half. The median price paid for a home dropped sharply as a result, a real estate information service reported.
A total of 12,455 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in September. That was down 29.9 percent from 17,755 for the previous month, and down 48.5 percent from 24,195 for September last year, according to DataQuick Information Systems.
Last month's sales were the slowest for any month in DataQuick's statistics, which go back to 1988. The previous low was in February 1995 when 12,459 homes sold. The September sales average is 25,258.
"Some of last month's drop was part of the longer-term slowing trend, but most of it was due to mortgage market turbulence and difficulties in getting jumbo financing. There's a good chance there will be some "catch-up" sales activity between now and the end of the year as jumbo loans become more available. Still, we can't expect the market to re-balance itself until sometime in 2008," said Marshall Prentice, DataQuick president.
The number of Southland homes purchased with jumbo mortgages dropped from 5,359 in August to 2,681 in September, a decline of 50.0 percent. A jumbo mortgage is a home loan for $417,000 or more. For loans below that threshold, the sales decline was 19.3 percent, from 9,237 in August to 7,459 in September. Historically, sales drop by about 10 percent from August to September.
The median price paid for a Southland home was $462,000 last month, down 7.6 percent from $500,000 in August, and down 4.0 percent from $481,000 for September last year. If the jumbo-financed portion of the market had remained stable, last month's median would have been $487,000.
DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,198 last month, down from $2,422 the previous month, and down from $2,295 a year ago. Adjusted for inflation, current payments are about the same typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 11.7 percent below the current cycle's peak in June last year.
Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages is flat, financing with multiple mortgages has declined significantly. Down payment sizes are stable, flipping rates and non-owner occupied buying activity is flat, DataQuick reported.

My comments:

For every foreclosure and distressed seller there is a happy buyer waiting for the right price/home. Prices will drop to levels that can be supported by the down payment and income of the borrower(s) using sensible mortgage financing. Every market is different. Every city and block has micro markets. I have always thought the national figures were meaningless. Comment as free speech is still in effect. You won't be carried out of the debate and pepper sprayed.

Why bubble home values may decline for years.

This is a weighted chart of home values in Irvine, CA which is a thriving high job and income growth area of South Orange County,CA. Many law firms, accounting, biotech, and tech companies have offices in Irvine. By way of Irvine Housing Bubble Blog you can clearly see the individual distressed homeowners. I think Irvine is a good community to consider in terms of its broad mix of housing. You have entry level starter homes/condos and you have luxury developments approaching $3M.

In a classic credit crunch the weakest borrowers are hit first. I think we have seen that wave in the last year and the subprime/ALT-A credits will continue to unwind and result in an increasing pace of foreclosures over the next two years. The larger concern would be the wave of ALT-A and prime loans resetting to market rates over the next few years. Millions of homeowners purchased or refinanced with 5Y interest only ARMs between 01-04. These loans were at rates of 4-6%. Depending on loan to value, credit, etc. Their first reset if they don't refinance or sell will be 2% higher. Most luxury homeowners can stand a reset but would want to consider getting another ARM or a fixed rate. Of greatest concern is the middle income homeowner who can't afford a mortgage at today's market rates. Remember the creative exotic financing is gone for all but the lowest loan to value scenarios. These folks are looking at regular loan structures and likely because of loan to value will be forced to prove their income and reserves. Remember in a survey over the summer brokers said 57% of clients couldn't refinance, loan to value and insufficient income were the primary reasons.

I believe we will continue to see downward price pressures on residential real estate in areas where the incomes don't support traditional mortgages. The loose money is long gone and with it the candy land values. What are your thoughts? Post your comments. We still have free speech when I last checked.

CNBC's Maria Bartiromo/Bill Maher Housing Bubble Video

Here is a clip from Real Time with Bill Maher which aired Friday September 28th. I have never heard the housing slump sound or look this good.

Incredible Price Cuts for Countrywide REO

Have you seen the CA Countrywide REO list recently? Wow, some huge price cuts in the last two weeks. I can't even imagine what is going on in some of these neighborhoods with home prices on their REO getting dropped by 15-20% since they were listed just 6-8 weeks ago. On most of these Countrywide is taking a bath. Your thoughts if you know these areas well would be appreciated. National list here.

Why it all matters.

It is well understand that the credit crunch has effected real estate in the last six months and especially so with the tightening of programs for the jumbo market. The impact of the dramatic change in the mortgage industry will have far reaching effects on clients now and for years to come. Many people don't think they have any involvement with the 'Subprime' problem as the media likes to refer to the credit situation within real estate. The effects are wide ranging and people won't realize the impact on their own pocket book until they have to sell, refinance or purchase. For people looking to sell now or anytime in the next few years need to face the reality of today's market not the fantasy land of what a friend sold for in May. I believe values in bubble markets will continue to adjust lower each month as the inventory increases, closed transactions decline, and the tight money environment reduces the available pool of buyers. As an example, a client could have perfect credit, excellent income, but 100% financing for a purchase over 417k on a single family home is no longer available. That could delay the purchase as the client has to save the minimum 5% down payment, plus have six months of PITI on deposit as well. Every purchase scenario is different as you have people upgrading, downgrading, first time home buyers, and investors all within the marketplace buying/selling homes. But, overall you can see the stress the market is under with the changes that occurred since April when all the subprime lenders began to fold. The impact of the changes in prime mortgage lending really has just begun as it wasn't until the first week of August that the jumbo mortgage market began to change guidelines and move up rates to compensate for the added risk. This won't be seen in the numbers until the Sept numbers are reported in Oct.

Make no mistake, this isn't a liquidity crisis. Money is available to lend, but its available at lower risk levels or much higher rates than the public has become accustomed to over the last few years. In looking at listings throughout the hot areas you can start to see the smart sellers capitulate and move their asking prices down. Buyers are searching for a deal and seem to think prices will move lower so they are very patient. They often are bidding well below asking prices because they are conditioned by watching listings fall in price throughout the bubble markets. We have moved into a period of slowly declining prices in the hot areas, notice the deals that are closing are priced right for today's market. Not what a neighbor sold at in July. The market is different and once all participants understand the changes that have occurred you will see inventory decline and sales volume pick up. This could take several years. A lot of mortgage debt is resetting to higher(unaffordable) rates in the next two years. This could put a lot more homes on the market further pressuring prices. Homes are selling on their fundamentals and buyers are not counting on property appreciation to bail out a poor decision. So they are buying carefully and are often requesting very safe 30Y fixed loan scenarios.

In my next article I will highlight why falling real estate prices will have an enormous effect on people refinancing. After all, one of the tenants of mortgage lending is loan to value. If your neighborhoods values are falling, that will absolutely have an effect on the rates available come the time to refinance. Has the real estate environment changed your plans for selling, buying or refinancing? Please comment.

Property Speculators first to default.

The Mortgage Bankers Association (MBA) has released a report showing that as many as 1 in 5 mortgages currently in default in California belongs to borrowers who are not living in the homes with the defaulted loans. The default rates for investor loans were even worse in Nevada, Arizona and Florida, where one-quarter to one-third of all defaulted mortgages as of the end of June were related to investor loans, according to the report. The MBA defines "defaulted mortgages" as those that are 90 days or more past due or in foreclosure. The rapid rise in default rates has led some members of Congress to call for urgent action to aid borrowers who are threatened with the loss of their homes. But the MBA report suggests that some of these borrowers do not deserve to be helped. Many of the vacant foreclosed homes popping up throughout the U.S. these days were bought by speculators who planned to "flip" their investments for a quick profit but got trapped with the market took a sudden down-turn. "Defaults are on the rise in most parts of the country, but it should be recognized that it is not always the case of a homeowner losing his or her home but is often the case of an investor gambling on a continued increase in home values and losing that gamble," said Doug Duncan, the MBA's chief economist. Many of these investors have "simply walked away from the mortgages," Duncan said.

This is the moral hazard regulators and bankers speak of. People don't want to bail out property speculators that are a large part of the foreclosure problem in the previously hot markets.

FHA Plan:Bring a water gun to fight a fire.

The markets waited with baited breath for the announcement of the Bush adminstration's plan to rescue subprime home owners from foreclosure:

"Traders seem to have packed away concerns regarding a speech by Federal Reserve Chairman Ben Bernanke, focusing instead on aid for subprime lenders being hinted at by the Bush administration. According to The Wall Street Journal, about an hour after Bernanke's speech, Bush is expected to announce plans for a change in the Federal Housing Administration mortgage insurance program to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages. The change would allow 80,000 more homeowners in 2008 to receive federally insured mortgages on top of the 160,000 projected to use the insurance, the Journal reported."

This helps very few people in California, Nevada, Florida, etc. The states most affected by the resetting of subprime loans and the rising wave of foreclosure filings. As an example visit the Countrywide Foreclosed Home Blog. Notice how many foreclosed homes are above the FHA limit of 417k? Another point is that these folks could have received a number of different mortgage loans from Fannie Mae and FHA over the last few years but they wouldn't have qualified because their debt to income numbers are too high. The mortgage payment with taxes, insurance and all their debt(cars, credit cards,etc.) can't be over 50% of their gross income. They couldn't make the payments on time with a 5-6% 2Y or 3Y adjustable rate mortgage with interest only in the majority of cases. What makes people believe these folks can be helped? This is political grand standing at it's finest. This isn't a rescue plan nor should we allow one to happen. Unless fraud was involved on the part of the mortgage bank or lender these folks signed loan documents and commited to house payments that were beyond their means. They had ample opportunity to refinance throughout the last two years when subprime and ALT-A was available. They received an unbelievable amount of calls and junk mail to refinance.

More often than not they were hoping against hope that they could refinance into even lower rates. The back up plan was to sell the house and pocket 100-200k of their "equity" that they had earned for being a home owner in the great housing boom. Believe me, you couldn't get these folks to get a fixed rate mortgage during the boom years of 03-06. Because the rate was .25-.50% higher. All the subprime shops offered a 30Y fixed, and even had an interest only option available. They all qualified for it. They always opted for the cheapest payment. People need to downsize their home and/or lifestyle, work more or relocate to a city or state with more affordable housing. Taxpayers shouldn't bailout the home owners and the lenders who made foolish decisions.

Don't believe for a minute that all subprime borrowers were screwed over. Sure just like anything their was fraud and ignorance. But, in California, I witnessed a lot of people driving Hummer's and buying plasmas at Best Buy with the cashout from their Ameriquest ineterest only 2Y fixed adjustable rate mortgage. I work in the industry and have a million stories. What's your take, it might be your money on your 2008 or 2009 taxes?

A Distorted View:Existing Home Sales.

Today we received the existing home sales from the National Association of Realtors and I wanted to comment on these a bit. The headline numbers are off 9% from last year and the median price is down only 0.6% nationally. The median is being distorted by sales volumes above the median in each area propping up what would otherwise show falling home prices in these areas. The greatest decimation in the market has been in middle class housing. Homes priced below 500k have seen the largest price declines and volume decreases. Sales at the high end of the market continues to stabilize the median value. The western region has a median home value of $349,400. The median in Los Angeles for example is about $575k. I think median values are pointless as a forecasting tool. What would be the point of knowing the median price of stock on the NYSE? What's the point in knowing the median price of gas nationally? The price of gas in CA is higher than most other markets because of taxes and a lack of refining capacity boosting the price at the pump. The price you pay in your market matters. Real estate is a locally priced good. It doesn't matter if a similar home is $250k in Chicago and $400k Los Angeles. A home is only worth what a buyer in that local market is able to pay vs other comparable properties in that immediate surrounding market. This is largely dependent on available financing. As the financing has become tighter and more expensive because of higher rates across the board the volume has dramatically declined from prior years.

You can't compare the median value in Malibu to Compton. Pointless. Those markets are at the opposite ends of the spectrum. The only value in my opinion in the NAR home sales numbers are volume and the amount of existing inventory. Volume leads price. The amount of available homes for sale allows the potential home buyer to have more choices and bargaining power. This pressures asking prices. Then as properties languish on the market sellers realize they are above the market and often lower their prices or remove their home from the market altogether. The amount of homes on the market locally and nationally leads me to believe that we will continue to see price declines across the country but especially so in bubble markets for years to come. Notice the big drop off in sales around Mar 2007. That's the start of the implosion of subprime lending. The July numbers are barely reflecting the implosion of ALT-A lending that started in mid July and ran throughout August. I believe the August numbers will post an all new low as financing has become much tighter in the last few weeks. Bar chart courtesy of Calculated Risk.

Where did the punchbowl go?

Having personally lost a small fortune in the stock market in 1999 and 2000. I can tell you that markets can stay irrational for a very long time. Any seller that has had his/her property on the market for 60-90 days and hasn't received a reasonable offer is nuts. They need to drop their price or sit out the credit crunch. The credit crunch could last many years.

The big problem I see and I speak to dozens of realtors a week; is that sellers feel that their "equity" is real money. I always have to remind people that something is worth only what another person is willing and able to pay. The ability of people to pay irrational prices for homes in bubble areas is gone for the middle class market. Remember the rich are different. Working class vs asset class. The loose financing is gone. Stated loans are on life support. Real income for middle class Americans has barely kept pace with inflation the last few years. At the end of the day Wall St can create the wildest financing known to man but it has to be repaid some day. Investors don't give money away. The market for ALT A and subprime mortgages is DEAD. In addition, a knee jerk reaction has occured in large prime loans as well requiring extreme levels of documentation and big down payments on the order of 20-25%. No stated income loans unless you are putting 20% down and have a 720 FICO. That is a generalization of course as every loan scenario is unique.
I am a very optimistic person by nature so negative views are seldom heard from my lips. I am sorry to say that we are in for a very long period of recession or stagflation(low growth with inflation i.e. late 70's). If you need a broader clue as to how bad our nation is currently behind the eight ball check our dollar vs major currencies and you will see what the world thinks of our prospects. Too much governement and household debt. The world's appetite for our excess is over. It's time to save and be prudent. Back to reality. The punch bowl of easy money is gone. Parties over it's time to sober up.

Bank of America Helps Rival Countrywide.

Countrywide and BOA are competitors across a variety of business segments. It came as a surprise to the markets that Bank of America had agreed to buy $2b dollars worth of Countrywide preferred stock. Countrywide shares rose sharply in afterhours trading, the perception is that this is the start of a move to merge the companies together. Bank of America is not a star in terms of mortgage origination. Countrywide needs a source of cheap funds and BOA has an enormous pool of savings and CD account money to tap into. On the surface it looks like a great merger. But, I think the real issue of concern is that Countrywide is going around Wall St with cap in hand to raise any money that is available. As of now the terms of the preferred stock deal are not known but this wasn't cheap money so it makes you wonder if the giant Countrywide is going to fall into another banks arms or just fall apart. Heard any news, rumors about Countrywide? Post a comment.

Musical Mortgage Chairs!

In speaking to investors, clients and realtors; I came away with the idea that the mortgage freeze is like a game of musical chairs. Some of us can remember the feeling of scrambling for that last chair as the music stopped. Many property investors that have a large number of single family home rentals(10-15 in some cases) are trying to grab at financing that doesn't exist in today's mortgage market. They will be forced to sell. Many investors are barely holding onto rentals that only made sense for the property appreciation that happened between 2001-2006. The negative cashflow was big to the tune of 1-2k a month with the taxes and insurance per house. Many of these folks took interest only mortgages or negative amortization loans because they were really betting that housing would rise in the next few years and they could sell with huge gains. Now that housing prices are falling; the music has stopped, but so many people just don't realize it yet. Did you know the music stopped a few months ago? Better find that last chair.