This post first appeared on Minyanville.

There’s a good amount of buzz surrounding the Wall Street Journal’s piece on the staggering number of homeowners underwater on their mortgages. This, on the same day the Case-Shiller Home Price Index posted its fourth consecutive month-over-month increase.

Mixed signals? Possibly. But in reality, these two seemingly disparate data points suggest that even as foreclosure moratoria continue to keep bank-owned properties off the market — which is artificially limiting supply and creating the illusion of a tight housing market (the supply of existing homes is back to historical norms) — behind the scenes, more and more borrowers are falling behind, and staying that way.

The number of mortgages in the “90+ delinquency but not yet foreclosed” bucket is still growing and the rate of change is yet to slow. The looming backlog of foreclosures not yet completed is growing much faster than banks can (or are allowed to) push them through the system. Lender Processing Services (LPS), a spinoff of Fidelity National Information Services Inc. (FIS) estimates that 710,000 mortgages are more than six months delinquent but not yet in foreclosure. A year ago, that number was “just” 203,000.

So what does all this mean?

While another leg down in housing is certainly in the cards, another cliff-dive isn’t the likely scenario. Rather, a continued slow bleed, with increasing localization as certain markets recover while others languish. Second home and jumbo markets are still under pressure, even as investors feast on low-priced homes in some of the country’s seedier neighborhoods. But as long as the US government dominates the secondary market for mortgages (FHA/Fannie Mae (FNM)/Freddie Mac (FRE)/VA, etc), mortgages will be available to qualified (and unqualified, in the case of the FHA) buyers.

Betting on another all-out collapse in residential housing prices is akin to betting on the bankruptcy of the US government. Could it happen? Sure, but that certainly isn’t the base case.

A much more interesting (and profitable) bet is to find areas that have fundamental (ie, demographic) drivers for demand, and looking for affordable submarkets where demand is strong and not driven by the FHA. Are there a ton of these neighborhoods around? Nope, but they’re out there if you know how and where to look.

This post first appeared on Minyanville.

Where have all the flowers gone, long time passing?
Where have all the flowers gone, long time ago?
When will they ever learn, when will they ever learn?
- Peter Seeger

There’s an odd refrain cropping up in some of the nation’s most troubled housing markets — those where real estate professionals can’t help but raise their pom-poms in unison and declare this “the best buying opportunity, maybe ever.”

Here’s how it goes: Where have all the houses gone?

For months, buyers have been told the time to buy is now, what with interest rates at all-time lows, prices down in some markets more than 50%, and generous tax credits for first-time home buyers. These factors — along with aggressive advertising by the National Association of Realtors — have driven up demand, even as prices kept falling. Supply, meanwhile, has been severely limited for the past 6 months by foreclosure moratoria that were enacted at the end of 2008.

And as tends to happen when demand outweighs supply, many homes have been selling above their list prices as multiple-offer scenarios led agents around the country to wax lyrical of the boom days of yesteryear.

This cursory analysis of the nation’s housing market — while sufficient for the financial punditry complex, eager to call a bottom (again) and certain real-estate agents looking to make a quick sale — is woefully inadequate for any buyer interested in buying an actual home rather than a data point.

Take these 2 California markets for example — a pair that couldn’t be more different if one were located on the moon:

Bakersfield, a central-valley farming and oil town best known for jockeying with Fresno for the right to be called “the armpit of California,” was besieged by the housing-market crash early on.

Subprime lending flourished here during the boom as home builders like Lennar (LEN), Centex (CTX), and DR Horton (DHI) showered once-quaint communities with sprawling suburban developments. The town made national press for one of the worst real-estate markets in the country — prices have fallen an astounding 48% since just last year.

In Bakersfield, the above characterization of the housing market isn’t altogether inaccurate. Prices have fallen far and fast, and homes bought by all-cash investors can offer a tidy return as rentals. Three-bedroom homes for $40,000 will do that to a market. And with inventory constricted by foreclosure moratoria, properly priced homes don’t stay on the market for long.

Indeed, supply of unsold homes sits at a mere 2.6 months, according to a local appraiser group — a far cry from the nationwide level of around 10 months. That’s not to say, however, that imminent appreciation is on the horizon: A flood of foreclosures looms, threatening to further depress prices.

Kissed by a gentle sea breeze and the Midas Touch, Laguna Beach, California is a seaside town 164 miles to the southwest and best known for hidden surf breaks and snobby adolescents.

The setting for the once-popular TV show The OC, Laguna was also the locale-du-jour for mortgage brokers and real-estate agents who struck it rich during the boom. Nearby Irvine — once the mortgage-banking capital of the world — made Laguna’s palatial cliff-side homes ideal for brokers eager to solidify themselves in the Orange County mortgage scene.

Prices rose to absurd levels for what were, to be sure, beautiful homes in a pristine location.

Laguna is now crashing back to earth.

Supply of homes above $1 million now stands at an astounding 24 months, as just 49 have sold this year with a whopping 313 currently on the market. List prices are gapping down as buyers struggle to find jumbo loans. Big banks like JPMorgan (JPM), Citigroup (C), and Bank of America (BAC) won’t touch the stuff, since they can’t unload them onto Fannie Mae (FNM) and Freddie Mac (FRE). So desperate sellers are being forced to get creative with their marketing.

One recent sale included a 350 Ferrari Modena, and a short sale less than a mile away is being offered for $8,995,000 — nearly $3 million below its original list price of $11,990,000.

These 2 wildly divergent markets are a microcosm of the country’s current real-estate dilemma: While low-end markets grope for a bottom (hoping the aptly described “pig in the python” of shadow supply doesn’t derail their nascent recoveries), high-end markets careen back to earth.

And as price discovery works its way through well-to-do areas, the mix of homes sold will continue to shift back towards more expensive sales, pushing up median and average-sales-price data. This dynamic will present the misleading conclusion that the country’s housing market is recovering, even as actual prices continue to fall.

Indeed, as many frustrated buyers wonder where all the houses have gone, most would be wise to sit tight for a few months until banks get around to unleashing a mountain of supply back onto the market — they’ll soon find out.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Simply put: There are too many homes in America.

Travel to the outskirts of Phoenix, California’s inland empire — or even suburban Washington, DC — and you’ll find scores of vacant homes, for-sale signs, and soon-to-be ghost towns. Sprawling Lennar (LEN) cookie-cutter developments, Pulte Home (PHM) condos jammed against freeway sound barriers, mostly vacant strip malls - these are not the relics of dynamic social progress.

There are many who believe that superfluous developments in the so-called exurbs must be razed for housing supply to return to anything like sustainable levels.

But few expect the bulldozers to reach the urban downtown. Just as the “subprime” mortgage problem began in areas where economic fundamentals fell hopelessly out of sync with home prices, so too will urban renewal rise from the ashes of these communities.

Take Flint, Michigan, a city looking to shrink itself just to stay alive.

This once-proud industrial town 65 miles north of Detroit is embracing a trend which may eventually spread to cities throughout the United States: In response to seemingly endless economic woes, government officials in Flint are considering hastening the town’s decline in order to rebuild anew.

The New York Times reports that city leaders have floated a plan whereby certain dilapidated neighborhoods would be razed to the ground, consolidating residents and businesses closer to downtown. The aim is to reorganize the population around fewer, more sustainable communities, thereby pushing run-down homes and empty lots to the outskirts of town.

While uprooting citizens is a prickly political topic, the county Treasurer and advocate of the shrinking of Flint grimly noted that “Not everyone’s going to win. But now, everyone’s losing.”

Foreclosures, the latest in a series of economic epidemics to sweep Flint, are causing formerly vibrant communities to turn to dust. Genesee County, of which Flint is the largest town, in addition to Indianapolis and Little Rock, Arkansas, are tackling the foreclosure issue with county land banks. These publicly-funded institutions buy unwanted properties and rehabilitate them before squatters and vandals can take over.

Contrast this government-led form of community development with the policies now operative at Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) to leave bank owned homes vacant and ripe for vandalism, and you have an example of government policy that can speed up the recovery of a local real estate market.

And while Flint’s situation may be unique in that it faces the twin headwinds of the auto industry’s demise and the ongoing housing market collapse, it’s root troubles are emblematic of towns across the country: Cities, expectant of growth that never came, supported development that proved unsustainable.

Myriad solutions have been proposed to solve this country’s housing nightmare, but the simplest, and indeed the most effective may be to simply reduce supply the old-fashioned way, with bulldozers.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Residential real estate is about to get very weird.

In the coming months, housing-market data is likely to show price stabilization in many of the country’s hardest hit areas. Pundits, government officials and real-estate professionals will loudly proclaim the worst of our real estate woes are behind us. Back in reality, however, this data will simply reinforce the axiom that there are lies, damn lies, and statistics.

The lion share of home price declines have, thus far, been focused in low-end markets -areas where property values became the most detached from housing-market fundamentals. Even though the high end is now declining, sales activity is still heavily concentrated in the country’s most distressed markets.

Taking a look at the data below compiled by my firm, Cirios Real Estate — which depict sales transactions for the part of the San Francisco Bay Area between San Francisco and San Jose known as the Peninsula — one can see how rising home prices from 2003 to 2007 shifted sales transactions towards more expensive properties. This makes intuitive sense, and should naturally push up both average and median home prices.

Click to enlarge

Since the market peaked, however, notice how the percentage of sales of homes under $400,000 shot up to more than 50% of sales in the first quarter of this year, from as low as 9% in 2007.

Conversely, sales over $1,000,000 that accounted for almost a quarter of transactions in 2007 now make up less than 9% of total sales so far in 2009.

This heavy concentration of sales in low-end markets is skewing home price data to the downside, exaggerating the impact of depressed markets on broad measures of prices.

As the foreclosure epidemic spreads outwards to more well-to-do areas, and job losses force previously stable homeowners to sell into a weak high-end market, more expensive homes will begin to make up a greater percentage of total transactions. This dynamic — not an overall rise in property values — is likely to push up average and median home price measures.

In other words, high-end markets will be falling as price discovery rears its ugly head, while low-end markets are flat at best, as price declines reach exhaustion levels and investors step in to buy. High levels of supply and looming shadow inventory of foreclosures will prevent meaningful appreciation in these distressed areas for the foreseeable future.

Meanwhile, data will show a housing market on the rebound.

No doubt, banks like Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) will cheer the end of the real-estate slump. Real estate professionals will pound the table that now’s the time to buy (just like they said back in 2007). Government officials will proudly assert their mortgage-relief efforts were a success.

Nothing, however, could be further from the truth.

By ANDREW JEFFERY

This post first appeared on Minyanville.

For almost 2 years, we’ve been told government-backed loan modification efforts and foreclosure moratoriums would help ease the pain of the ongoing housing crisis. It’s not working.

Despite recent calls to the contrary — this morning’s came courtesy of real-estate mogul Sam Zell — residential home prices are still in free fall, and the bottom will remain elusive.

Picking up a trend noted weeks ago by housing blogs and other real-estate analysts, the Wall Street Journal reports banks and mortgage-servicing companies are pushing through foreclosures at the fastest rate in more than a year.

JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC), 3 of the country’s biggest loan servicers, scaled back foreclosure efforts in recent months at the request of the Obama Administration. Now, with the bans lifted, a new wave of repossessions are simply a matter of time. In California, notices of default and trustee sale, which precede foreclosures, spiked in March as moratoriums expired and lenders returned to “business as usual.”

Banks, especially those collecting payments on behalf of Fannie Mae (FNM) and Freddie Mac (FRE), say they’re doing everything they can to keep borrowers in their homes. But according to GMAC (GM), as few as 10% of struggling homeowners qualify for the Obama Administration’s highly touted foreclosure prevention program.

The logical conclusion is that this new wave of bank owned homes being dumped onto the market will put even more downward pressure on housing prices. And while this is true on a localized, market by market level, widely monitored home price indicators may not tell the whole story.

As noted by the Field Check Group, a real-estate analysis firm, delinquencies on jumbo loans are rising at an alarming rate. This is consistent with trends we have been seeing over the past 6-9 months as prime defaults are now rising faster than subprime.

Currently, low-end, inexpensive homes dominate sales data, dragging down median and average prices. Foreclosures, however, are creeping into high-end markets, and coupled with high levels of inventory and weak demand, prices are tumbling. As forced sales become more prevalent and transactions rise in these well-to-do areas, expensive home sales will begin to represent a larger portion of transactions used in broad measures of prices.

In the coming months, we could see home price measures falling at a less severe rate as the data mix becomes less skewed towards the low end. The bottom will be cheered, recovery will be lauded by the spin machine known as the National Association of Realtors, and buyers around the country will be lured into a false sense of security that housing has finally hit rock bottom.

Meanwhile, back in reality, property values — actual homes, rather than statistics — will keep sliding.

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!

By ANDREW JEFFERY

This post first appeared on Minyanville.

Despite herculean efforts to stop the foreclosure juggernaut, Americans are still losing their homes at near-record pace.

According to RealtyTrac, a firm that sells default data, foreclosure filings rose in February to nearly 300,000, up 6% from the month before. This figure is the third highest for any month since the housing market turned south in 2005.

As property values fall, more borrowers are finding themselves underwater - owing more on their homes than they’re worth. This, coupled with job losses, means homeowners are missing payments at an alarming pace.

Sky-high foreclosures are even more astounding when myriad loan-modification efforts and short-term foreclosure moratoriums enacted by big lenders like Fannie Mae (FNM), Freddie Mac (FRE), JPMorgan (JPM) and Bank of America (BAC) have been taken into account.

And while President Obama’s hotly debated $275 billion housing-relief package is barely a month old, its becoming clear that no cleverly worded press release or inspiring oratory can reverse the trend that’s firmly in place: Housing supply remains elevated, with buyers sitting on the sidelines awaiting better deals. Prices, as a result, will keep falling for the foreseeable future.

In fact, Rick Sharga, executive vice president at RealtyTrac, told Bloomberg he believes the country’s biggest lenders have yet to list over 700,000 bank-owned homes.

This “phantom supply,” as its known in the real-estate world, paints a bleak picture for the housing market in the near term. Even though strong sales activity in distressed markets is pushing aggregate inventory data back towards historical norms, phantom supply is patiently waiting to punish those bold enough to prematurely call a bottom.

Further, well-to-do areas, formerly immune from home price declines, are starting to follow their more bubbly counterparts over the proverbial cliff. In the San Francisco Bay Area, for example, 15 homes had sold for over $5 million by this time last year. This year: Just one.

Many of the most distressed markets are in their last gap of depreciation. And while material appreciation is simply fantasy, high-end markets will pick up where they left off and keep broad measures of property values under pressure.

But as this dynamic plays out — and the depreciation torch is passed from the “subprime” people to those who are “prime” — opportunities will emerge in markets that stabilize first. Just as housing prices overshot to the upside, they will likewise overshoot to the downside.

The opportunities are currently few and far between. But with each day that passes, the world of possibilities grows, if only ever so slightly.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Many months ago, long before bureaucrats dreamed up their massive, ill-conceived loan-modification programs, the free market found a solution to the mortgage mess.

Specialists in handling distressed debt amassed tens of billions of dollars to buy up bad loans at steep discounts. The offending institutions who had bought the stuff in the first place would be forced to own up to their mistakes, take their lumps and move on. Meanwhile, those deft enough to clean up the problems would reap their just deserts.

Alas, it was not to be.

Sometime around the middle of 2006, some regulator woke from a decade-long slumber and decided to hazard a look at the balance sheets of America’s largest financial institutions. To his horror, just about every bank in the country would be insolvent, given the going prices for delinquent mortgage debt.

He raced off to tell his boss, who alerted his superior, and so on up the chain until then-Treasury Secretary Hank Paulson got wind of the coming tsunami of losses. Paulson barely flinched, for Wall Street’s top brass was well aware their collective predicament. After all, it was the likes of his former charge, Goldman Sachs (GS), who designed and sold the toxic assets in the first place.

The choice then was simple: Step back and let markets sort out the mess, risking the lives of storied firms like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM) - or latch onto the absurd notion that these institutions were “too big to fail,” and begin a process whereby the American taxpayer’s hard-earned nest egg would be used to forestall the inevitable day of reckoning.

We now know how that sad story ends.

To prevent the market from clearing these assets at their true value — sometimes just pennies on the dollar — lawmakers, bureaucrats and big bank executives huddled together and devised ingenious schemes like the Super-SIV, HOPE NOW, Project Lifeline, TARP, and other utterly contrived “solutions” that, despite their claims to the contrary, were simply ways to extend the lives of these zombie banks.

Two pieces today, one run by Bloomberg charting the failure of myriad modification programs to address the problem of negative equity, and one in the New York Times documenting the exploits of former Countrywide executives buying distressed debt from the FDIC on the cheap, evidence the abject failure of government efforts to stem the rising tide of foreclosures.

Private investors, the ones best suited to forgiving principal or lowering interest rates to keep a family in their home, were handcuffed by political bumblings. But these programs, by preventing true price discovery in the housing market, have likely achieved their goals of their designers.

Our banking system has buckled, but not broken. The eventually recovery, however, has been pushed well down the line and the cost shoved onto future generations. Those responsible have by in large retained their posts at the institutions deemed “too big to fail,” save a couple token scapegoats tossed to the media wolves.

Meanwhile, the responsible few who did not speculate on their home, did not use credit as a vehicle for illegitimate economic growth and never thought they’d be asked to pick up the tab for those that did, have now been asked to shoulder the burden.

It should come as no surprise that housing prices keep falling — indeed they must in order for true stabilization to occur. But the slow bleed, the persistent drag on the fundamentals of our economy, is doing more damage under the hood than our wise leaders would care to admit.

Still, they insist the more economic control centralized in Washington, the better. After all, the ones that drove us off this cliff certainly should know how to break the fall.

By RYAN TAYLOR

New homes sales reached record lows in January as transactions fell 10.2% from a month ago to seasonally adjusted annual rate of 309,000. This annual rate is the lowest in the history of the reading which the government started in 1963. The median sales price for new homes also fell by 9.9% to $201,000.

The sobering reality is that jobless claims are now the biggest driver of the falling homes sales. When this downturn in housing began in 2005, creative financing had allowed people with jobs to buy houses they could not afford. But even if incomes and employment were still at those 2005 levels, that same buyer pool would not be around to buy up houses at today’s “cheap” levels. Buyers at those prices no longer exist for  three basic reasons:

1) They are still trying to stay in their current home by acquiring a modification for their loan.
2) They have been foreclosed on and their credit score is below 700.
3) They no longer have a job so they cannot afford to buy a home even if they wanted to.

These facts are especially bad for new homes sales as most new developments are located far away from job centers. Since foreclosures are now prevalent throughout the country, most people are deciding to buy homes closer to their places of employment so they can avoid the long commute. Furthermore, most of the areas that are in close proximity to job centers are more established and are generally viewed as a better investment.

Those buyers looking to purchase homes in areas with new homes for sale have quite a few properties on the market to choose from. REO properties are becoming more popular purchases because they are frequently cheaper. As modifications become more prevalent, buying an REO in a neighborhood with few “For Sale” signs will be seen as less of a gamble because most struggling homeowners will find it easier to receive some mortgage relief from their servicer. Additionally, these buyers are avoiding new developments because there are not enough other buyers to suggest that the development will acquire the prosperous feel that is often advertised by the homebuilders.

Those who do have jobs can afford to be selective and, as a result, will most likely choose a home in an established neighborhood that is close to job centers. This home will rarely be a new home.

Until a publicly traded homebuilder is forced to liquidate their portfolio of homes, new home sales will remain at historically low levels.

By RYAN TAYLOR

Friends are people you can trust. They will come pick you up when your car breaks down. They are there to pick you up when you are down and there to celebrate when something goes right. Friends are the most valuable thing you have.

Friends do not try to hurt, deceive or manipulate you. (Bernie Madoff is not your friend).

If you bought a house in 2008, most likely your Realtor is not your friend. Almost every single person who bought a house in 2008 now owns an asset that is worth less than what they paid.

Did your Realtor at least tell you that you were making a poor short-term financial decision? Probably not, because he or she is not obligated to do so.

Realtors are not motivated to help make you a good financial decision; they are motivated to create a transaction and earn fees. If President Obama is outraged over Wall Street compensation packages then you should be outraged over Realtor commissions.

And while Wall Street may not have much of a choice about their bonuses for the foreseeable future, there is something you can do as a potential home buyer to protect yourself from making a big mistake when making the biggest purchase of your life.

Ask the right questions and demand the right answers.

Here a few questions you should ask your Realtor and the answers that are adequate and answers that are concerning:

With economic conditions continuing to deteriorate, why do you think this is the right time to buy, as opposed to 6 months from now?

Wrong Answer: Interest rates are at historical lows and sales are up, so we are near the bottom of the market.

Right Answer: Property values are not likely to rise in the next six months and in most cases it is not worth the risk to buy a house now as opposed to six months from now. However, if you have been waiting for this particular house to come on the market for a few months because it is in a well-maintained neighborhood with good schools and an abnormally large lot, it may be a good time to make an offer that fits comfortably within your budget.

What is the value trend over the last three months for properties like the one I am looking at?

Wrong Answer: Sales are up more than 100% year over year. With the increased demand, values are going to be on the rise or are already on the rise.

Right Answer: Allow me to find you 3 comparable sales from the last two months that will show you the current market trend. In addition, I will find you three comparable listings that also give you an indication of what others are asking for. Please realize that listings are very negotiable and so do not necessarily represent the value of the homes they are attached to.

When you are prospecting for homes you want to show me, how do you determine what to show me and what not to show me?

Wrong Answer: I only look for properties that have been listed within the last 30 days. Anything that has been on the market for more than 30 days must have some problem that makes it very undesirable. I also do not look for REOs as they have been neglected and are frequently sold “as-is”.

Right Answer: I apply the criteria you provided me and look at everything that is listed in the school district and city you are interested in. Personally, I like to show some homes that have been listed for a while because I know they are not generating as much interest as some of the new properties. This way we can avoid bidding wars and potentially find a truly motivated seller.

In addition, I enjoy showing REOs because I know banks continue to be strapped for cash and they are willing to negotiate over everything from closing cost incentives to repairs. Finally, I do show short sales but I realize that most end up becoming REO properties, and you as a buyer will most likely get a better deal on a home when it is REO rather than a short sale.

Please provide me with a few closings you are most proud of over the last year that you believe were really good deals for the buyers?

Wrong Answer: I got a great deal for a couple in October where they got a $5,000 closing cost credit. I also helped one of my friends get a home that they bought for $35,000 below list.

Right Answer: There are a few deals I am proud of and I will put together a report for you detailing the price the buyer paid, the closing cost incentives granted by the seller and what their home is worth now. Furthermore, I will have an independent valuation firm run values on these homes so you know you can have an unbiased opinion of value.

If you receive the right answer on your questions, you may just have a friend in the real estate business.