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.

The Obama administration is busy touting the burgeoning success of its mortgage modification program. Unfortunately, it’s a farce: Out of one side of his mouth, the President touts a dedication to the besieged middle class, while from the other, lauds a loan modification program which steals money from struggling homeowners in favor of banks — already the recipients of billions in taxpayer-funded bailouts.

The ploy would be amusingly hypocritical if it weren’t so sad.

According to the Wall Street Journal, the Treasury Department claims that the Home Affordable Modification Program, or HAMP, has begun more than 650,000 so-called “trial modifications” since its inception this February. The commonplace explanation for the latest in a host of failed mortgage modification schemes is that it’s a natural first step to getting struggling borrowers back on the regular monthly payment track.

HAMP mandates that in order to qualify for a permanent loan modification, borrowers must first complete a trial period of three months with lower payments, in addition to submitting the proper documentation required for a more permanent solution. On the surface, this seems logical, even fair: Only after a show of good faith should homeowners be allowed a second chance.

Lenders like Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Citibank (C), however, are required to show no similar evidence of good faith.

And I’ve yet to read a news story that accurately describes how this program works: Even as banks ask borrowers to cough up monthly payments on a house that’s likely to be hopelessly underwater, the foreclosure process continues.

Notices of default turn into notices of trustee sale, which turn into trustee sales, which turn into repossessions and eventually evictions. Meanwhile, as the homeowner is given a false sense of security that scraping together payments each month could save his house, lenders are under no obligation to grant a stay of foreclosure.

In other words, banks determined to take a loan through the foreclosure process can easily — and with Washington’s blessing — grant a trial modification which allows them to pinch a final three months of payments from homeowners already on the verge of financial insolvency, while offering nothing more than an empty promise in return.

To be sure, many of these homeowners got themselves in over their heads by overextending their debt load on an overpriced home. Foreclosure, in some cases, is a reasonable solution.

But an initiative touted as a long-awaited success in the battle against foreclosures is in fact just another way for Washington to redirect money from the pockets of ordinary Americans — however economically downtrodden — to big banks surviving solely by suckling the government teat.

This post first appeared on Minyanville.

It seems that with each passing month, the data gods deliver more and more evidence that the woe begotten US housing market may finally be emerging from its years-long doldrums.

Existing home sales: Up.
New home sales: Up.
Pending home sales: Up.
Home prices: Down, but at a slower pace.

Even a relic from the booming housing markets of yesteryear has reappeared: Bidding wars.

To be sure, multiple-offer situations are concentrated in lower priced markets, but some sales are simply mind-boggling. Here’s a sampling of just how out-of-whack supply and demand truly are in some of this country’s real estate markets:

Costa Mesa, California: Home gets a whopping 68 offers and sells for nearly $100,000 over asking (list price of $399,000, sale price of $495,000).

Manatee County, Florida: Home gets 27 bids, list price $124,000.

Phoenix, Arizona: Home gets 11 offers, sells for 50% above list price (listed at $70,000, sold over $110,000).

Even Canada is getting into the act: A bidding war in Vancouver drove one home up to $1.1 million — almost $300,000 above its asking price.

Talk to most real estate professionals and it’s the same story: Cash-flush investors and first-time home buyers armed with a federal tax credit, low interest rates, and 3% down-payment loans courtesy of the Federal Housing Administration are bidding up properties with reckless abandon.

So it’s settled then — we’re at the bottom, right?

Unfortunately, probably not.

Before we get too excited about these bidding wars indicating a bottom for the broad housing market, it’s important to consider that these situations are heavily concentrated in areas where home prices are low. The trend is far from prevalent in mid-tier and high-end markets.

Lower priced homes are typically easier for investors to flip into juicy returns and require a smaller cash outlay, which opens the playing field to those without deep pockets. Further, cheap homes attract first-time buyers, who can be more easily swayed into bidding above list by commission-hungry Realtors.

In addition, big banks like Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C) are still holding back the majority of their foreclosure inventory from the market. This is partly due to the “soft moratoria” ordered by the White House along with banks being reticent to take big losses on homes that have tumbled in value. This is keeping supply low, frustrating would-be buyers into bidding aggressively with so little inventory to choose from.

Meanwhile, as readers of this column should know all too well, higher-end markets continue to struggle, as jumbo mortgages remain a chore to qualify for and down-payment money is nigh impossible to scrounge together for all but the most qualified buyers.

This dichotomy in the marketplace means now more than ever, anyone considering buying a home should live by the over-used adage that real estate is always local. Markets adjacent to one another, separated by nothing more than a school district line, could be headed in opposite directions — and it may be that the “good” area is far riskier than the “bad” one.

Lies, damn lies and (NAR) statistics.

Indeed.

The National Association of Realtors (or NAR) released data today showing that sales of existing homes crept up in June, the 3rd consecutive up month. While sales were a touch lower than they were a year ago, the annualized, seasonally adjusted sale figure was up 3.6% from May. (For more on seasonal adjustments, please read The Magic of Seasonal Adjustments)

This positive data led many pundits and so-called experts to reiterate calls for a bottom in the broad housing market.  “We have finally bottommed out,” Stuart Hoffman, chief econmist at PNC Financial Services told Bloomberg. Hoffman was referring to sales, not necessarily prices, but conventional widsom says that prices follow volume.

Others, like the popular economics blog Calculated Risk, did some actual analysis of the data and came to a different conclusion about the fundamentals of the market:

“It’s important to note that the NAR says about one-third of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is much lower.”

The key takeaway is not whether or not the housing market has “bottomed,” but that markets are still being enormously impacted by government backed foreclosure moratoria, first time buyer tax credits and efforts to keep interest rates low. With unemployment stubbornly high, the true outlook for a housing recovery remains uncertain.

Wondering where your market sits on the path to the bottom? Contact Cirios today and we’ll disect your local market like you wouldn’t believe …

This post first appeared in the July edition of Cirios Trends: Getting to the Bottom of the Housing Market

It’s everywhere these days: In the news, on the streets. The “bottom” is coming. We have toiled long and hard through the dark days of this “Great Recession” and are now coming to the bottom of the housing slump. Well, we’ve got bad news.

Not only are we not yet to the bottom, there is no such thing as the bottom. But, as it turns out, the “bottom” doesn’t actually matter, at least not to today’s savvy home buyer.

In mathematical terms, a bottom would represent the lowest value that some function worked out to as it moved its way along one axis or another. In our world, really the only axis that means anything is the axis of time. Everything moves inexorably towards the future, sometimes plodding, sometimes sprinting, but always forward. So why can’t we find a bottom to the function of the housing market?

Isn’t there a given point in time where the market reaches the lowest level it can reach and only heads up from there? Nope.

The problem — as we try to hammer home over and over again here at Cirios Real Estate — is that there is no single “function” that can describe a real estate market. As the old axiom goes, all real estate is local. And indeed it is.

Therefore, the function that describes what home values are going to do over a given time period in one area can be completely different than the function describing home values just a few miles away. The real kicker is that even these simple, very localized functions are so unimaginably complex that their ability to tell us the future through a simple calculation is nil.

So what’s the solution? Why does Cirios keep coming out with all these data and articles about learning housing by the numbers if the numbers can’t give you the answer you’re looking for? The response to that is simple: While we can’t predict the future by using some magical formula — no matter how hard we try — today’s information age allows us to get an accurate picture of what is happening RIGHT NOW, not to mention make a sensible stab at what will happen in the very near term.

While there’s no mathematical function for a home’s future value (despite attempts by myriad websites, the latest of which is called smartzip.com, which tries to assign a 10-year future value to each house in California), there is a light at the end of this algebraic tunnel. The calculations for each of us PERSONALLY are straightforward.

The most important equation is the one that looks at your individual finances and decides whether its right for YOU to buy a home. And fortunately, Cirios can help with it all. We can help you decide whether buying a home is right for you, what kind of home you should buy and when the right time will be.

And while there are no magic formulas that predict the home market’s future, Cirios has the tools and skills that can clear the confusion around today’s confusing market conditions.

This post first appeared on Minyanville.

It appears even the embattled homebuilding industry is getting rosy-eyed, finding enough “green shoots” of economic recovery to stick their shovels back into the ground.

In May, US builders broke ground on 17.2% more projects than in April, far exceeding analysts’ expectations. Work on new apartment buildings leaped, while single-family starts continued what’s now become a 3-month rally.

Although the aggregate figure is still well off last year’s rate, economists are breathing a sigh of relief that the worst of the housing market swoon could be behind us. Skeptics, however, are quick to point out that any recovery could be muted, as high levels of inventory, a weak labor market, and mortgage rates that just won’t seem to stay down, could forestall any recovery.

As Kenneth Simonson, chief economist for the Associated General Contractors of America, told the New York Times, “There’s a real possibility [housing starts] will just stall at a low level. If the recent jump in interest rates is sustained, that could choke off buyer enthusiasm for new homes.”

For nearly 4 years, the business of building and selling homes has been, in a word, lousy. As home prices tumbled, the likes of KB Home (KBH), Toll Brothers (TOL) and Lennar (LEN) slashed prices, offered generous incentives, and otherwise bent over backwards to unload inventory. Building all but stalled, jacking up unemployment — particularly in exurbs and sprawling communities whose economies were largely based on the construction trade. An industry that grew fat during the boom was forced to slim down, lay off workers, and hibernate, while the market’s violent correction ran its course.

And although a host of small builders have closed up shop, to date, no major US homebuilder has gone under. Consolidation, too, has been scant. The only merger of note was Pulte Home’s (PHM) purchase of Centex (CTX), a marriage that, once consummated, will create the country’s largest builder.

The outlook for those builders that remain — builders that are bleeding cash while pleading with creditors to extend loan terms and waive busted covenants — is bleak. Last week, the National Association of Homebuilders/Wells Fargo Builder Sentiment Survey ticked down after rising far more than expected the month before. Higher interest rates are mostly to blame, as the specter of bigger monthly payments is quelling optimism that the housing market is on the mend.

The reality — an unfortunate one for builders and their employees — is that for the foreseeable future, their services aren’t needed in this country; we have too many homes as it is. Demand for new ones remains weak as communities just a decade old slip into disrepair, and shoddy craftsmanship and half-finished developments scare off prospective buyers.

Builders are also fouling up the nascent housing “recovery” by turning recently completed condominium units into rentals. Even as demand wanes thanks to job losses and tighter budgets, rental inventory is rising. Rents, as a result, are falling. This is great news for tenants, eager to jump on affordable apartments, but bad news for landlords and even homeowners.

One of the most popular arguments posited by housing-market-bottom callers is that in some of the hardest hit areas, prices have gotten so low that investors can scoop up cheap homes and rent them for an attractive return. What they neglect to mention, however, is that this sort of market-clearing activity also increases the supply of rental units, further pressuring home prices. Even in the worst, most washed-out areas, a bottom remains elusive.

This post first appeared on Minyanville.

In early 2006, when subprime powerhouse New Century went bust, vulture investors began to salivate at the opportunities a collapsing mortgage market would offer up like manna from the trading gods. They started raising money. And lots of it.

Billions were poured into so-called “mortgage opportunity funds,” which planned to pick through the wreckage of the once-high-flying housing market. Some investors aimed to focus on mortgage-backed securities, hoping to buy in at pennies on the dollar so just a few bond payments would reap sizable returns. Others, however, delved into the realm of whole loans, buying troubled mortgages from floundering banks.

As noted in the Wall Street Journal this morning, an investment strategy that seemed like a slam dunk on paper — buying distressed mortgages on the cheap, and working out equitable arrangements with borrowers — has proven extremely difficult to execute.

The prevailing wisdom was that, as delinquencies rose, and banks amassed a seemingly limitless portfolio of troubled loans, the likes of JP Morgan Chase (JPM), Bank of America (BAC) and Citigroup (C) would be forced to unload assets at firesale prices. Because they were buying at super-low prices, investors expected to have the necessary cushion to forgive principal, lower interest rates, or otherwise get borrowers back on track. They would, of course, earn a hefty profit for the effort.

But the housing market, which tumbled further and faster than all but the most pessimistic experts thought possible, had other plans.

Throughout 2007, any player that dipped a toe into the market lost a foot. Property value declines accelerated, securities prices tumbled, and economic conditions continued to deteriorate. Sellers, hoping for a rebound, were reluctant to accept lowball prices. Few trades were executed, and the lack of liquidity drove the market to new lows.

Then, in 2008, as delinquencies began to spread from the subprime to the prime market, home prices continued to slide, and it became clear there would be no easy fix to the housing market’s woes, big banks recognized their need to raise capital by selling assets.

The market for distressed loans began to flourish as liquidity entered the market: Sellers accepted painfully low prices, and investors started deploying more capital. Prices for pools of mortgages in various stages of default began to stabilize, typically around $.50-$.60 on the dollar.

As 2008 rolled along, the wheels of the financial markets truly lost their grip on the road, Washington stepped in with the Troubled Asset Relief Program (or TARP) in October. In the distressed mortgage market, uncertainty became the rule of the day, as buyers and sellers alike ceased trading in expectation of new clearing prices created by an asset purchase program that never came.

Traders then sat on the sidelines as the election played out, waiting to see how front-runner Barack Obama’s promised foreclosure moratorium would impact the housing market.

Meanwhile, Uncle Sam poured capital into banks to try and jumpstart lending. With taxpayers bailing out the market’s most leveraged players, Morgan Stanley (MS), Goldman Sachs (GS) and other Wall Street firms got a reprieve from bets gone awry.

Distressed investors hoped banks would finally be willing accept low prices for their assets. Not so. Just when it looked like a few select sellers were going to test the waters of the distressed market, the new Treasury Secretary Tim Geithner announced the Public-Private Investment Program (or PPIP).

The PPIP — a bastardized version of TARP that employs leverage, and is purported to profit both taxpayers and private investors — is yet to materialize.

The distressed whole loan market remains largely frozen, as sellers hope for higher prices from buyer’s backed by cheap government money. Buyers, meanwhile, remain cautious, since, despite recent “positive” datapoints coming out of the housing market, real-estate prices remain volatile in most markets.

The private market for delinquent mortgages once held the potential for a market-based solution to the country’s housing woes. It was no magic bullet, to be sure. But by fostering an environment where private capital could seek out advantageous investments, housing markets would have started down the path towards true price discovery.

As it happened, however, massive government intervention into the market via TARP, the foreclosure moratorium, the PPIP, and other programs forestalled the inevitable, pushing the date of the eventual recovery years into the future.

This is good news for banks that survived the maelstrom of financial market turmoil, albeit based largely on trumped-up earnings and unrealistic asset prices still on their balance sheets. For homeowners, consumers, and the public in general, however, true hope for a legitimate stabilization in housing markets, and the economy in general, has been pushed further along the curve.

This post first appeared on Minyanville.

Despite the best efforts of the Federal Reserve and the Treasury Department, the free market is winning the battle over mortgage rates. Tens of trillions of dollars in support for the financial system can’t change the stark reality: Giving out home loans remains risky business.

Borrowers looking to take advantage of rock-bottom interest rates are seeing the opportunity slip through their fingers, as rates have risen by more than 0.50% in the past few weeks.

According to the Wall Street Journal, the pop in rates is due to expectations of economic recovery, combined with fears that the mounting pile of debt incurred by Washington’s central economic planners may not be sustainable. As the government prints money and plunges the country into an ever-deeper deficit, holders of US Treasuries (e.g. China) are getting skittish. These investors are quietly demanding a higher return on their bet that our economy will pull out of its current tailspin.

This, in turn, is pushing up mortgage rates, which doesn’t bode well for nascent signs of recovery. Big lenders like Wells Fargo (WFC), Bank of America (BAC) and JPMorgan Chase (JPM) — despite offloading nearly all default risk to taxpayers via Fannie Mae (FNM), Freddie Mac (FRE), or the Federal Housing Administration — are asking prospective borrowers to pony up hefty points up front to get the lowest rate possible.

And this at a time when pundits and performance-chasing portfolio managers are latching onto the absurd notion that the nation’s housing market is making some sort of fundamentally sound turnaround. A contributor to CNBC actually said with a straight face that our economy can’t grow with mortgage rates this “high,” and that the Fed is derailing the recovery by letting rates move up.

To say that our economy is undergoing some sort of legitimate recovery, and at the same time assert mortgage rates a hair above 5% are too high is to confirm that those declaring the recession in our rear view mirror are delusional at best, talking their book at worst.

As renewed fears of inflation percolate and investors begin to snatch up commodities in expectation of future prices, pressure will mount on the Fed to keep rates of all kinds low to ensure the economy doesn’t remain mired in its current malaise. This means more printing press activity, more “quantitative” easing, and more social-welfare programs packaged as “progressive” economic policy.

Battle lines are being drawn: Washington bureaucrats on one side, advancing the theory that money can be printed seemingly without limit to generate legitimate economic growth - and the market on the other. And each time the Fed takes its foot off the dollar-debasement accelerator, we get a peek into what will happen when the printing presses finally run out of ink.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Deflation, the economic beast many feared would devour the next decade, appears to have been vanquished.

Or has it?

Superficial signs of renewed inflation are everywhere: Oil prices appear to be stabilizing, and concern is growing about future supply shortages (which, by extension, could lead to higher prices at the pump). The stock market has staged an impressive rally, with expectant bulls and former bears finding for “green shoots” of economic growth everywhere. Home prices, if you look purely at the data and ignore fundamentals, are starting to slow their fantastic decline.

Even the consumer price index, or CPI, is looking tame. Well, except for last month’s drop, the largest in more than 50 years.

And herein lies the problem.

The CPI, the market’s favorite inflation gauge, has been masking the structural deflation in our midst since the housing market fell of its wheels almost 4 years ago. Given the precipitous drop in property values, one would naturally expect the housing component of the CPI to fall in kind. Not so.

The statistical alchemists, err, experts, at the Bureau of Labor Statistics use something called “owners equivalent rent,” OER, to measure consumer housing expenses. OER tries to approximate the cost to rent the country’s typical home, and according to the Wall Street Journal makes up 24% of the CPI and 31% of the core CPI, which backs out food and energy costs.

And since even as property values have slid in record-breaking fashion rents remained buoyant, OER has vastly understated the drop in home prices. This means the CPI — were it to reflect some sort of economic reality — would have fallen more than it actually has.

As the housing slump rolls on, the pain is increasingly being felt by landlords, not just owner occupiers. Rents in big cities like New York and San Francisco are already dropping, as would-be tenants demand concessions from property owners. Vacancies are increasing, as even those driven from the housing market by foreclosures and the tight mortgage market can’t fill up empty apartments, condos and track homes.

Drive around suburbia and “For Rent” signs are nearly as common as “For Sale” signs.

Rents are likely to keep falling and as a result, OER could begin to drag down the CPI. Of course, statisticians can and likely will play games with adjustments for volatile energy prices (renters often don’t pay for utilities, so energy costs are backed out of OER). Further, government bean counters are even considering adapting OER to reflect new, high levels of home ownership (just in time for a reversion to the historic mean, thanks for being ahead of the curve guys).

As long as construing economic data in a way that makes it seem more likely for effectively insolvent financial institutions like Bank of America (BAC) and Citigroup (C) to raise capital and remain in business, that will remain the status quo.

Meanwhile, back in reality, saving is now en vogue, deleveraging is ongoing and the repayment (and destruction) of dollar-denominated debt will keep inflation in check for the foreseeable future. More importantly, the recognition that smaller can be better and less can be more are becoming entrenched in the lives of ordinary Americans.

Don’t believe the hype: Deflation isn’t going away any time soon.