You know the housing market is lousy when the only positive comment one of the nation’s leading experts on property values can come up with is: “prices can’t keep declining at this rate forever.”

That assessment was courtesy of Robert Shiller, co-creator of the Case/Shiller Home Price Index, which recorded the worst price declines on record in January. The 20-city index slid 19% from a year ago and 2.8% from December 2008. The index now sits at levels not seen since late 2003.

All 20 cities recorded price declines, with Phoenix and Las Vegas faring the worst. Dallas and Denver held up the best, or least bad as it were, registering year-over-year declines of 4.9% and 5.1% respectively. Notably, a few cities actually reported declines that were less severe than last month: Boston, Denver, Los Angeles, San Diego and Washington D.C.

The Case/Shiller Index is viewed by many as a more accurate representation of property values than measures of median (or average) home prices. The index measures “paired sales,” or homes that have recent sales to compare against. This allows statisticians to compare apples to apples, where as median price data can be skewed by the mix of homes sold in a given time period. If more cheap homes are selling, while expensive ones are sitting on the market, median price data will show price declines that may not be representative of true property values as a whole.

For more on this scintiliating statistical debate, check out Austin Nelson’s “Deconstructing the Average.“

By ANDREW JEFFERY

This post first appeared on Minyanville.

With mortgage rates at historic lows, housing prices plummeting, and Washington throwing billions at housing-market recovery efforts, why is it still so damn hard to get a loan?

And while the easy answer is that banks are flat-out broke, the real answer may lie in an esoteric corner of mortgage finance which has all but disappeared: warehouse lending.

In the heyday of the housing boom, small mortgage companies were able to compete with huge financial institutions by tapping so-called warehouse lines of credit. Using cash from their warehouse lender to fund loans at the closing table, as big banks do, these smaller mortgage shops could often provide better service than their bigger competitors, though at the same low rates.

Warehouse lenders, often big banks themselves — remember Washington Mutual and Countrywide (Bank of America (BAC))? — held onto loans until they were sold in the secondary market. Turnaround time could be anywhere from a few days to a few months for larger, more complex transactions.

The benefits to being able to finance one’s own loans rather than just acting as a broker were numerous. Having a warehouse line gave mortgage bankers better control over the closing process, enabling them to beat out big banks in terms of response time and customer service.

By aggregating loans on a warehouse line, bankers could bundle them together and sell packages at a premium, rather than selling them off one by one. And since they could sell loans to any bank on the street, most such originators offered loan programs just as varied as those of even the biggest institutional lenders.

At the height of the boom, it was estimated that almost half of the over $3 trillion in annual loan production was first funded on a warehouse line.

As the mortgage market began to collapse, big purchasers stopped buying, and warehouse lines filled up with unwanted loans. Warehouse lenders began margin-calling clients, cutting off funding capacities, and capturing every penny they could from the few sales that actually went through.

The result, which can be plainly seen on websites like The Mortgage Lender Implode-o-Meter, was that hundreds of small bankers closed up shop.

Now, as banks scramble to handle the flood of requests for refinances at super-low interest rates, the mortgage industry is once again facing a credit crunch. By one estimate there’s only $25 billion in available warehouse lines to support the $2.8 trillion in mortgages expected to be written next year.

Mortgage bankers I speak with say the only thing holding them back from giving out more loans is a lack of warehouse capacity.

According to the Wall Street Journal, one solution being floated by the Mortgage Bankers Association (or MBA) is for Fannie Mae (FNM) and Freddie Mac (FRE) to provide government-backed warehouse lines to the few intrepid mortgage bankers still eking out a living in this nightmarish market.

The MBA argues that, since big banks like JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) don’t need access to warehouse lines, they’re pushing out the smaller guys and stymieing competition. There’s little incentive for a Chase or a Citi to reopen its warehouse lending group, since the move would just allow competitors to grab market share from the very profitable business of originating loans.

While it makes logical sense for regulators to allow Fannie and Freddie to prop up this segment of the market, it may run contrary to other bank-friendly initiatives. Fees generated by writing new mortgages may be the only thing keeping the likes of Bank of America and Citigroup from tapping even more government support to stay afloat.

The Top Ten Stories YOU Need to Read This Morning

10. Amazingly, unaffordable housing continues to be in the news.

9. Good quick hits from our favorite cartoon characters.

8. REITs are in good-bad shape.

7. London bankers remind you - Do not get married unless you understand that it is forever because it will cost if it isn’t!

6. Just in case anyone is still paying attention, home prices are wayyyyy down again.

5. The view from Arroyo Grande is bullish.

4. Nothing says efficient warehousing like Fannie and Freddie.

3. GM will make your car payments if you lose your job. Do you think they are going to make payments for people that get laid off by GM?

2. BREAKING NEWS: Broker Price Opinions are biased.

1. The newspaper business is broken. Seriously!

Yahoo Finance’s coverage if the financial markets is low quality at best, dangerous at worse.

Today, in running a Business Week story on the coming housing bottom, their assessment of the housing market is downright inaccurate: “In ZIP codes across the country, as once-inflated property prices bottom out housing sales are increasing dramatically”

Bottoming? How exactly is a sharply downward sloping line “bottoming?”

Below is a graph of Fairfield, CA — their number one housing market in terms of a rebound in sales.

(Click to enlarge)

Beware of Realtors baring gifts of a bottom.

The Top Ten Stories YOU Need to Read This Morning

10. In the most newsworthy story of the year, if you price your house correctly, it will sell.

9. Winner = Ford, Loser = GM

8. Fannie and Freddie might be changing … for the better?

7. Time to go to Spain.

6. First reported by our own Andrew Jeffery over a year ago, the mortgage crisis has finally become a prime problem.

5. Cartoon characters giving more valuable insight into the markets.

4. Contrary to what most real estate agents say … renting is still a good idea in many markets.

3. Now rich people can go green too.

2. Former KB Home CEO is loved by some … not sure why.

1. If you are sick of living in the United States, maybe this home in Thailand is the place for you.

By ANDREW JEFFERY

This post first appeared on Minyanville.

After nearly 3 years of bleeding cash, US homebuilders are on shaky ground.

The market for new homes is being decimated by rampant overbuilding during the boom, and by the flood of bank-owned properties now being sold on the cheap. Prices remain in free fall. Even as labor expenses and materials costs hover around recent lows, the business of building new homes is still broken.

But after 2 “positive” datapoints last week, and KB Home’s (KBH) narrower-than-expected loss, many are wondering if the worst is now behind the beleaguered industry. Government-backed efforts to keep mortgage rates low and encourage home buying could save the builders. Maybe.

New home construction, for all its complications and intricacies, is a rather simple business: Sell homes for more than it costs to build them.

New homes have traditionally carried a premium to “used” ones; the median sale price of a new home is currently about 20% higher than that of one that’s been previously owned. Builders relied on this premium to cover their construction and financing costs, not to mention to generate a healthy profit. But now that buyers can buy barely used houses at fire-sale prices, the allure of the brand-new is on the wane.

Here in the San Francisco Bay Area, banks are said to literally be giving land away for free: Builders will have nothing to do with it. The costs associated with owning improved lots (in other words, lots ready for the construction of a house) are too high for - even if they’re offered for free. Building just isn’t an economically viable option - and it won’t be until housing prices rebound.

And that could take years.

Meanwhile, homebuilders like KB Home and rivals Centex (CTX), Lennar (LEN) and DR Horton (DHI) are struggling to rid themselves of unsold homes. Builders large and small are slashing prices, trimming staff, hawking vacant land for pennies on the dollar, and doing anything else they can think of to stay alive.

Many face an additional headwind this year: Tax rebates from previous operating losses will be drying up. Debt remains high, and cash is barely trickling in.

Ultimately, some big builders won’t make it. The market, both for equities and default protection in the form of credit default swaps, is betting on Hovnanian (HOV), Beazer Home (BZH) and Standard Pacific (SPF) to be the first of the big dogs to fail.

Those hoping to survive are rapidly adjusting their strategies to adapt to the changing demands of the American homebuyer. As Minyanville’s Terry Woo noted on Friday, KB Home’s better-than-expected earings were partly a reflection of a switch to smaller, cheaper homes.

This is a positive trend: it’s yet another indicator that Americans have a newfound love affair with thrift. And while we may lose a few builders along the way, I doubt we’ll miss all those identical, pre-fabricated houses that had come to litter our landscape.

This week’s House of the Week takes us down to the South Land, to Santa Ana and the land of endless strip malls and condo complexes. For under $1000 per month in mortgage, tax and insurance payments (assuming 20% down), you can be the proud owner of a 2 bedroom, 2 bathroom condo. The price: Just $139,000. (click images to enlarge)

Condos are cheap - but are they cheap enough? Sure, you can save a couple hundred bucks a month in rent, but is that worth it to risk owning a condo in a lousy real estate market?

WHAT WOULD YOU PAY FOR THIS HOME?
Post a comment below to guess!

Address: 2511 West Sunflower Ave. T15, Santa Ana, CA 92704
Status: ACTIVE
Bedrooms: 2; Bathrooms: 2
Living Space: 875 square feet
Lot Size: N/A
List Date: 3/14/2009
Original List Price: $139,000
Current List Price: $139,000
Average School API: 737
Zip Code Sales Last 3 Months (year-over-year): +166.0%
% Homes in Foreclosure in Zip: 4.6% (High)
% Housing Inventory For Sale in Zip: 1.1% (Moderate)

By ANDREW JEFFERY

This post first appeared on Minyanville.

This week, 2 data points led optimistic market-watchers to declare the bottom in the housing is nigh: Indeed, one widely read trader-writer proclaimed, “The oversupply of housing that so plagues the market at present will be a figment of our memory a few months hence.”

The first: On Monday, the National Association of Realtors said existing home sales jumped 5.1% in February compared to the previous month, largely due to the high number of foreclosures being dumped onto the market by big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).

While indicative of buyers gingerly dipping their toes back into the market, existing home sales are still down 13.4% from a year ago.

The second: On Wednesday, the Commerce Department released data on February new home sales which showed a similar trend: Transactions bounced 4.7% from January, but remain a whopping 41% below sales this time last year. Nevertheless, shares of beleaguered homebuilders like Centex (CTX) and Lennar (LEN) had stellar performances this week, capping a nearly 100% gain since the beginning of the month.

Prices, however, continue to slide for both existing and new homes. And while median (and average, for that matter) price data is skewed to the downside due to the mix of homes sold in a given period — in this case, more cheap houses than expensive ones — property values remain in a decidedly downward trend.

But since transactions typically find a bottom prior to prices, the number of people who believe prices should stabilize in the near future is growing.

Examining the data, unfortunately, tells a different story. Below is a chart produced by my firm, Cirios Real Estate, showing home prices and sales transactions in for the eastern part of the San Francisco Bay Area. The East Bay is a fairly representative sample of California housing markets: A little high-end, a little middle-class and a little low-rent all mixed in.

Click to enlarge

The red line shows average home prices, while the blue line shows sales transactions, as measured by their change from a year ago. Notice how, even as sales have spiked from the previous year, prices continue to plunge.

Two things jump out at me on this graph (aside from the massive increase in transactions and precipitous decline in prices):

First, transactions began to ramp up as prices moved down toward levels where borrowers could get government-backed loans to buy homes. That means Fannie Mae (FNM), Freddie Mac (FRE) and the FHA have financed a whole swath of homes in the past 18 months that are now severely underwater.

Second, transactions bottomed in September 2007, not long after the market peaked. 18 months have passed and prices have dropped more than 50% since that time.

With that in mind, the current “euphoria” over housing data — after a single month-over-month increase in sales, when year-over-year measures remain well behind even last year’s weak totals — seems a bit premature.

This is not to say prices will never stabilize, or that increased sales are a bad thing. In fact, the more sales we have, the quicker price discovery happens and the faster a true bottom can be found. Nor is this some proclamation that this part of California is a perfect proxy for home prices nationwide.

But given the backlog of foreclosed homes sitting on the books of the major American banks, continued price declines across the country and tight mortgage market conditions, calls for the devouring of supply by voracious home buyers causing an imminent housing bottom is downright premature.

To be sure, we may be one step closer to a housing bottom, but that’s one step on a very, very long path.

The Top Ten Stories YOU Need to Read This Morning

10. Mortgage rates are low.  Can they go lower?

9. Is it possible to serve life in prison in two different countries? Madoff may have a few amazing acts up his sleeve.

8. I don’t know why, but I love reading about the train wreck which is the CityCenter in Las Vegas.

7. As more people lose their jobs, the consumers mood improves. Seems about as logical as allowing a realtor advise you on your biggest financial decision.

6. Good news in housing … a homebuilder lost less money than a bunch of Wharton MBAs thought. The recession is over!

5. Cartoon characters still make more sense than guys in suits.

4. I had to include this article because it is the kind of hard hitting real estate reporting we need in this economy.

3. Goldman Sach’s predicts the most unthinkable … more pain for banks.

2. Until the jumbo loan market loosens up, there will be very few buyers for a $150 mm property in LA.

1. Bank CEOs are headed to DC to talk to THE CEO.

This week’s House of the Week redefines the term “over-listed.”

While the house does have a number of things going for it — large living area, good curb appeal and a nice open layout, it’s just priced too high. But, like many sellers in the area, this one is yet to come to terms with the reality that home prices have dropped, even in middle class areas with good schools. The home is bank owned, and the bank is getting lousy market information from the listing agent.

Schools are very good in this area, but the subject’s street — close to the local middle school — is a bit run down and has several other properties listed on the same block. While the other houses are inferior, the a buyer would still need to put a solid $15-20k into this house just to make it livable, not to mention the kitchen needs serious attention. This fact is not mentioned anywhere by the listing agent, who, based on the comment we mentioned in the original post, doesn’t even appear to have been to the property.

This is a story we see all too often: Banks listing properties too high, with barely attentive listing agents. Unless the seller drops the list price significantly, this house will sit on the market for a long, long time.
Address: 1660 Duvall Dr, San Jose, CA 95130
Status: ACTIVE
List Date: 2/9/2009
List Price: $665,000
Cirios Value: $525,000
List Price vs. Cirios Value: 21.1% over-listed

For a complete Cirios Valuation, click here for our CLEAR report, or on the image to the right.

Have a home you’d like Cirios to use for our next House of the Week?

Make a comment below!