This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

There is no ambiguity about the goal of current US government policy when it comes to housing: Prevent home price depreciation at all cost.

As such, this month’s State of the Markets was going to discuss shadow inventory, diving into the numbers to see just how long we’ll have to live with looming supply of bank owned homes. At current repossession rates (around one million per year according to Lender Processing Services), it will take around four years to work through all loans that are more than 90 days delinquent. Morgan Stanley agrees, pegging 47 months as the time required to work through the backlog of distressed loans. And those figures assumes no additional loans get added to that severely delinquent bucket.

Sobering stuff, and evidence that foreclosures are going to be a dominant market force for the foreseeable future.

But as we dug through the data, something wasn’t adding up. Many are fearful that supply will flood the market as banks push through foreclosures. Housing bears often cite this inevitable inventory spike as evidence housing is in for a second leg down.

This is a very valid concern, and in order to remain ahead of the curve, Cirios closely monitors real time foreclosure and new listing data, watching out for early signs of a supply shock.

Our antennae were tripped in April as Trustee Sale activity began to ramp up and repossession levels began rising. Nervously, we waited for the natural increase in listings that were sure to follow. It never came. It still hasn’t come. Something isn’t adding up.

When banks take back homes, the next step in the process is to list those homes for sale. But that wasn’t happening. Banks were foreclosing on more homes but the trail stopped there.

So we went to the tape. Since 2000, the average increase in new listing activity from April to May was 2.9% on the Peninsula and in the South Bay, while over in the East Bay, new listings rose almost 5.5%. During good times, the typical increase is a bit higher, while during bad times new listings in May can actually decline. In fact, they have declined in each of the past three years.

But this year, throughout the Bay Area, new listing activity in May plummeted relative to historic norms. East Bay new listing activity fell 15.8% while Peninsula and South Bay activity dropped 12.8% - both the highest on record. So what gives?

Without sounding like conspiracy theorists, we’d like to put forward the following, very logical thesis: Imagine you are the government. The tax credit expires, the economy starts to sputter, Europe begins to melt down, the Gulf is literally full of oil and the job market turns out not to be on the mend after all, and you have a stated policy of propping up home prices, what would you do?

The barrage of positive housing data continued yesterday as April Pending Home Sales — which measure contracts signed for new purchases — jumped 6.7% from a month ago. The index, which is viewed as a leading indicator for future sales, was also up 3.2% from this time last year, according to Bloomberg.

Sales continued to be the strongest in regions dominated by foreclosures, as “bargain” prices, low interest rates and first time homebuyer tax incentives encouraged buyers to step back into the market. Lawrence Yun, the National Association of Realtors’ perennially optimistic Chief Economist, said “The market has already bottomed in some areas, but this is an unusual housing cycle with some areas improving rapidly while others languish or decline.”

In other words, the guy who is supposed to know more about the state of the US housing market than anyone else in the country appears confused by the fact that real estate, in fact, is local.

As reported here at Cirios Real Estate for months, home price trends are becoming increasingly localized, as supply/demand fundamentals down to the street levels drive property values. It’s no longer sufficient to say that home prices in X city, or X county, or even X zip code have done Y. Only analysis down to the neighborhood level can give you an accurate picture of where prices are going for an individual house.

And as housing data steadily improves, it is all the more important for buyers to have price trend experts like Cirios on their side.

The National Association of Realtors, or NAR, released its Pending Home Sales Index today, which showed continued strength in broad housing market data. The report, which measures signed contracts — often viewed as a leading indicator for future sales — came in at 84.6, up from 82.0 last month and the 83.7 reading in March 2008.

Low supply, largely due to banks holding back foreclosure inventory from the market, helped drive buyers to seize on what appear to be the only deals in town.

For the past 2 months, housing market data has gotten less bad, leading many optimistic “experts” to assure the country that the worst is over, and that real estate will be back on its northward way in short order. Nowhere in the carefully-worded press releases from the NAR, however, is mention of the actual cause of dropping supply. The real estate lobby is assuring us recent market “strength” has been caused by tax credits, low interest rates and increased affordability.

And while those factors are indeed driving the demand side of the equation, the supply side of the picture is still being driven by the market for bank owned homes. As lenders are now free, after the lifting of a series of foreclosure moratoria, to release their latent supply of homes onto the market, the true strength of this data–and the alleged green shoots of a recovery–will be put to the test.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Despite recent reports to the contrary, the impending stabilization of the housing market is a myth. While declines in certain markets are coming to an end, real estate, in general, is still in freefall.

Last November, amidst a great deal of media fanfare, Fannie Mae (FNM) and Freddie Mac (FRE) enacted a temporary foreclosure moratorium, angling to give renewed loan modification efforts a chance to work. All the major financial news outlets jumped on the story, loudly proclaiming the mortgage giants were doing their part to give the housing market a chance to lick its wounds.

Then last week, without so much as a nod from the Wall Street Journal, Bloomberg or CNBC, the foreclosure ban was quietly lifted, right on schedule. A nod to the Washington Independent and Calculated Risk for picking up the story.

This is a not-insignificant development in the round of bottom-calling that’s gripped the world of real-estate punditry and prognostication.

Two datapoints are to blame for this misplaced optimism: A month-over-month increase in February new home sales, and one in existing home sales. In addition to rising transactions in the most depressed markets, many cite the eagerness of big banks like JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) to get foreclosed properties off their books a a sign supply is quickly being eaten through.

Meanwhile, reality tells a very different story.

In yesterday’s San Francisco Chronicle, Carolyn Said revealed a phenomenon familiar to real-estate insiders, but little appreciated by the financial world at large: phantom supply. Also known as “shadow inventory,” phantom supply represents homes banks have repossessed, but have yet to sell. In other words, it’s the pipeline of foreclosures still to come on the market.

According to data from RealtyTrac, a foreclosure monitoring service, banks are selling less than half the homes they take back from borrowers. This analysis is echoed by courthouse auction results, which show the vast majority of foreclosures are delayed, rather than being taken back by banks. Even fewer are being sold to third parties, which means asking prices are still too high.

Couple banks’ unwillingness to take back, market and sell properties with Fannie and Freddie’s recent lifting of their foreclosure ban, and improving housing data could prove to be short-lived. As one well-informed California real estate broker and Minyan writes, ”There is a huge logjam [of foreclosures]. With Fannie and Freddie’s recent announcement, the logjam may be coming undone.”

To be sure, being negative on the housing market is beating a very, very dead horse. However, with the spin experts at the National Association of Realtors flooding the market with ads — and with media cries of “stabilization” – prospective homebuyers should be skeptical of anyone who says the best deals will pass them by if they don’t act now.

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.

While pundits and politicians debate the various aspects of President Obama’s $275 billion housing bailout, one piece of data proves just how misguided federal efforts to revitalize the housing market are: $275 billion could buy more than half of all American homes already in foreclosure.

Such an undertaking would remove distressed homes from the market and spur community revitalization efforts throughout areas desperately in need of the hope they were promised in November.

According to real-estate analytics website Realtytrac.com, foreclosures were filed on 2,330,483 homes in 2008, up 83% from the year before. The median home price in the US is $180,100 - which means 1,526,929 of those homes could be bought with $275 billion. And since foreclosures are centered primarily in areas with low home values, the true number of properties the bailout money could be used to buy is likely much higher.

While the logistics for such an outrageously common-sense solution to the nation’s housing woes are daunting, they’re no less challenging than the massive loan modification efforts already in place. And their results continue to prove underwhelming, at best.

Such a solution also addresses the rapidly mounting discontent over bailing out those homeowners who made bad decisions. Distressed borrowers wouldn’t directly receive any taxpayer money - though they would indirectly benefit from the massive government expenditure in their community.

Cash would be funneled down to the local level, where cities and counties could more effectively distribute it. To be sure, local governments can be as bureaucratic and inefficient as Washington — not to say corrupt – but by allocating capital to localities, each community would be responsible for its own clean-up efforts.

Private investors, developers, nonprofits and real-estate professionals could compete for business, adding a free-market component to rescue efforts - and even spurring a little sorely-needed economic activity.

Some cities aren’t content to wait for federal money to trickle down from the White House. Menlo Park, California, best known for its devotion to the bubble lifestyle, is considering using city money to buy and refurbish foreclosed homes.

The town, like many others in America, is split by a highway that acts as a major dividing line between the haves and the have-nots. While there are just 97 homes in foreclosure in Menlo Park, the vast majority are on “the other side of the tracks,” away from the mansions and quiet, tree-lined streets of West Menlo. The proposal will use money from a $2 million fund already seeded by developers who opted not to allocate units for low-income housing.

The city plans to tap Habitat for Humanity to refurbish the homes, using community volunteers and local experts to oversee the improvements. The president of the local Homeowners Association, Ash Vasudeva, said “When rehabilitation is going on, it uplifts the entire community.” A simple statement, but true.

And while this is one small city undertaking one small project, it could serve as a model for other communities around the country. Not to mention the fact that the mere announcement of $275 billion in real-estate investments would hasten the price discovery the housing market so sorely needs.

Furthermore, banks stand to gain little from such a use of public funds - which could be why such a plan has yet to be proposed on Capitol Hill. When a bank forecloses on a home, JPMorgan Chase (JPM), Wells Fargo (WFC) or Citigroup (C) is forced to write the asset down to at least the amount of the outstanding loan. But since most properties are worth far less than the loan amount, selling the property at market prices would require further writedowns.

So, as banks soak up billions in bailout money under the auspices of massive loan modification efforts aimed at stemming foreclosures, vacant homes lay in disrepair, vagrants loot the pipes - and communities continue to deteriorate.

But instead of allocating funds for such grassroots efforts, Washington continues to issue broad, vague orders aimed at helping many, but in very small amounts. Such programs have failed before, and they’ll fail again.

Maybe it’s time for a new approach.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Increasingly, US real estate is becoming a tale of 2 markets.

In low-income neighborhoods, overbuilt suburbs, and other areas besieged by foreclosures, home sales are through the roof.

Data released this week by MDA Dataquick, a real estate information service, show December 2008 sales in Southern California’s hard-hit Riverside and San Bernardino counties up a whopping 300% from a year ago. Southern California as a whole has seen transactions spike more than 50%, while pockets of the San Francisco Bay Area are showing similarly robust numbers.

Prices, however, continue to plunge.

Foreclosure sales are driving distressed markets, and since repossessions disproportionately affect lower-priced homes, data are being skewed downward. Record-low interest rates, bottom-fishing investors and relentless marketing efforts by the National Association of Realtors are all spurring renewed buying activity.

Lenders are so overrun with new business that Wells Fargo (WFC), which plans to cut over 10,000 jobs as it absorbs recently purchased Wachovia, is hiring hundreds of temporary workers to handle mortgage applications, according to MortgageDaily.com.

Meanwhile, buyers are on strike in high-end markets, and supply is creeping towards materially unhealthy levels.

Jumbo loans – those not guaranteed by the government via Fannie Mae (FNM) and Freddie Mac (FRE) – are nigh impossible to get, leaving would-be buyers of expensive homes in the lurch. Transactions are down in some of California’s — and indeed the country’s –  most prestigious markets, leaving a host of recently minted real estate millionaires wondering if they’re next to get stuck in the subprime slime.

Conventional wisdom among real-estate professionals is that these well-to-do areas are in “wait-and-see” mode. This attitude, while comforting to the rich, is dangerously naïve.

Transparent, real-time sales data is carefully concealed from the buying public by the country’s real estate brokers; it tells a very different story. In these illiquid high-end markets, inventory is building, forced sales are on the rise, and prices are starting to head south.

And contrary to popular belief, value drops aren’t just taking place in far-off exurbs where palatial Toll Brothers (TOL) McMansions litter flattened hilltops. Established neighborhoods — many close to job centers with top schools – are seeing home prices fall for the first time in decades.

These high-priced markets, particularly because of the troubles in the jumbo loan market, have become dangerously illiquid. In many neighborhoods, just a handful of homes are currently listed for sale. If one seller gets antsy, loses his job or otherwise jumps at a low-ball offer, the entire market can gap down. The new, lower price sets the bar at which potential buyers begin their negotiations, putting sellers at the whims of their skittish neighbors.

Due to dramatic appreciation during the boom, many wealthy homeowners are sitting on huge equity cushions. While not something they often complain about, this could encourage quick sales, as sellers don’t need to hold out for the absolute highest price like their poorer, more levered neighbors on the other side of the tracks.

All this adds up to an increasingly bifurcated market. The most distressed areas are currently going through the final, violent throws of a real estate collapse for the ages. The process could still take months to run its course and some communities, sadly, may never recover.

Previously strong areas, on the other hand, are just now beginning to feel the pinch. Many, after decades of unfettered appreciation, have a very, very long way to fall.