If you bought a house in February, it’s a 50/50 bet you picked up a foreclosure.

The National Association of Realtors released data this morning indicating almost half of all transactions last month involved a bank owned home. Sales jumped 5.1% from January, to an annualized rate of 4.72 million. Prices, however, continued to decline as first time home buyers snapped up foreclosed houses on the cheap. Prices slid 15.5% compared to last year, the second biggest drop on record, according to Bloomberg.

This price drop, however, also reflects the mix of homes being sold, not just declining property values. What the heck does that mean? Find out here.

Of note, volatility continues in the Northeast. Last month, Cirios readers will remember we pointed out that sales dropped by a whopping 14% month-over-month. In February, the Northeast saw a strong rebound, with transactions up 15.6%. So, we’re about back to where we were at the beginning of the year.

The lesson here is illustrative of the dangerous of relying on monthly data, which can be significantly impacted by short-term affects like weather or government intervention.

So, be skeptical about the resounding calls for a bottom in housing pundits are likely to glean from this one, better than expected data point. Stay tuned for next month’s release when we find out if, as the saying goes, one month does not a trend make.

Conditions in the world of building new homes remains poor to quite poor. The National Association of Homebuilders (or NAHB), the industry lobbyist group, released its monthly builder confidence index this morning, which registered a near-record low reading of 9. Sentiment was unchanged from last month, which matched analysts expectations.

The builder group is hopeful the market loosens up in the coming months, ending almost 4 years of rotten building conditions. Likewise, I am hopeful to find a bag full of money on the streets of San Francisco, somehow passed over by the swarms of transient, unemployed investment bankers scrounging Market Street for scraps, ending almost 4 years of rotten personal financial conditions.

The NAHB also made the bold statement that they believe the housing market will bottom around the middle of this year. This estimation is based primarily on the aforementioned statement that they hope the market will loosen up. There is little evidence the housing market is approaching a bottom, as prices are now tumbling in virtually every region of the country.

Anecdotal evidence of the challenges facing homebuilders mirrors the industry’s sentiment reading.

Banks are literally giving land away for free, but the economics of new construction are so upside down that builders are turning it down. The carrying costs – primarily fees paid to municipalities – are so high the land isn’t worth the price: Nothing.

One of the first signs of a housing turnaround will be when builders begin acquiring vacant land. Until this very modest indication of confidence is seen, the bottom will remain elusive — hope notwithstanding.

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.

There isn’t an economic forecaster or media pundit alive who isn’t angling to be the first to (correctly) call the bottom in housing. Many have tried; they all have failed.

But what happens when one’s right?

At some point in the future, broad home price indicators will cease to slide, then stabilize and even begin to move back up. When, and in what shape that trajectory will be, of course remains a mystery. As I’ve written in the past, the eventual recovery in housing will be a prolonged, localized event. The rising tide will not lift all boats, as the fundamentals of the old cliché “location, location, location” will be truer than ever.

And although predicting the date of this event is a fool’s errand, savvy home buyers will be ready to jump in ahead of those who remain in their shells long after the best bargains are behind them.

Here are 5 simple things you, the future home buyer can do now, without putting your nest egg at risk, to be ready for the coming opportunities in real estate:

1. Have patience.

There will be false bottoms, dead-cat bounces and treacherous pitfalls on the path to a recovery in real estate. Be patient. Don’t believe the hype – a couple months of strong sales numbers don’t foretell and imminent rebound in prices. Let the beginnings of a trend develop before you begin your home search in earnest. Future appreciation will come slowly, as tightened mortgage guidelines and fear of the collapse we’re now experiencing will not be soon forgotten.

2. Find a market, do your homework.

Had your eye on that classic Victorian around the corner from your kids’ future grade school, and hoping the elderly couple living there knock off just in time for you to swoop in at the estate sale? Expand your search.

Pick a couple of areas you could be happy in – look in multiple cities even. By focusing too narrowly on a single street, or even a single neighborhood, you could be missing out on what could be a fantastic opportunity on the other side of town. Don’t compromise, but play with your list of priorities to give yourself the most “exposure” to localized markets that may become increasingly attractive.

Tour the schools, scope the neighbors – hang around on Halloween to see who gets egged. RealtyTrac.com is a great resource for watching foreclosure activity all over the country and in your backyard. Their free site provides a great overview of cities and neighborhoods, but you have to pay for the house-by-house detail. Unfamiliar with an area? Use RealtyTrac to eyeball major neighborhood dividers (railroad tracks, highways, main roads, etc.) and examine foreclosure activity on either side.

3. Find a broker and start a housing “tracker”.

Real estate brokers can be a valuable tool in your home search – use them.

An aside: The commonly used term “realtor” denotes an association with the National Association of Realtors, or NAR, the lobbyists who have been predicting a bottom since the downturn began over 3 years ago. Tread carefully with anyone proudly bearing an NAR pin. Contrary to what many tell you, you don’t need to be a realtor to have access to MLS. But I digress.

Today, with transactions down in all but the most distressed areas, any broker worth his (or her) salt should be out prospecting for future clients, not proclaiming the time to buy is now. Collect referrals, test drive a broker or 2 and find one you’re comfortable with. Your broker should not just understand the local market but be up to speed on the macro-level events affecting the real estate and mortgage markets. Ask him what a CDO (collateralized debt obligation) is – watch for a flinch. For better or for worse, understanding the state of Wall Street is as important these days as understanding the state of your street.

Ask your broker to help you develop a “housing tracker,” a simple tool that allows you to watch homes as they come on the market to see when and for how much they sell. Watching the life cycle of homes in a given market will give you a sense of how desperate sellers are, when asking prices drop and what concessions buyers are able to receive from sellers. As concessions begin to swing in favor of the sellers, the bottom may be nigh.

4. Start saving money.

If there’s one sure bet in the housing market, it’s that mortgage requirements will remain tight for the foreseeable future. Banks — Citigroup (C), Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC) being the obvious examples — are hoarding cash and reticent to lend even to the most qualified buyers. Unless a loan falls within guidelines set by Fannie Mae (FNM) and Freddie Mac (FRE), rates remain elevated and approvals elusive. This isn’t likely to change any time soon.

Save for a down payment and be able to point to liquid reserves (i.e. money in the bank) during the application process. Think about this as the lender’s cushion should you fall on hard times – and banks will need all the cushion they can get.

5. Think of your home as an investment, not just a place to raise your kids.

This may seem counter-intuitive, since speculation on housing prices played a huge role in creating the recent housing bubble. But speculating and investing are not the same thing.

A home, in addition to being a place to raise kids, is a massive financial obligation. Becoming emotionally attached to a house, rationalizing the financial realities away and hoping paychecks keep coming simply isn’t a viable home-buying strategy. As un-romantic as it may be, treat a home as you would a stock: Examine it, turn it upside down, run the numbers. Love it every day you’re there, but financial responsibility and emotional attachment don’t need to be mutually exclusive.

The time to buy may not be today — and it may not be tomorrow — but we’ll be closer to that day tomorrow than we are today. However, just as prices overshot to the upside, they’ll likely overshoot to the downside – be ready when that day comes.

Preparation, not hoping, will be the key to taking advantage of the opportunities that will present themselves on the other side of this mess.

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.

Ocean Beach, or OB, is located just north of the Point Loma Naval Base in San Diego. OB is about as far from Laguna Beach as a Southern California beach town could be. It’s grungy, dirty — it’s awesome. Apart from the main beach, where crowded, competitive SoCal surf is personified both off the pier and out at the Jetty, cliffs and quiet streets wind their way south, as the largest kelp forest in the world (yes, the world) hangs around just off shore.

Northern OB is home to small houses and apartment complexes, about as cheap as you can find a few blocks from the beach. Head south or up the hill and the homes get progressively larger, more expensive and the median age of the inhabitants rises in kind.

Our subject is a new home, built in 2008, with a small lot as a result of a lot split. MLS denotes the home a condo, but it is much more of a cottage than a true condo. There aren’t a ton of true single families around the subject, as the area is spattered with apartments and condos. This makes the subject desirable, if small. However, the market for small homes and condos is very slow right now in OB — lots on the market, not much selling. Prices are falling. REOs are inching upwards, further hurting property values.

The list price of $625,000 is aggressive, but based on the price the builder likely paid for the land, the cost of the tear-down and the lot split, plus the new construction, he or she probably doesn’t have a lot of room to lower the price and still make money. It will be very telling to watch if, and when, the owner bites the bullet.

Address: 4844 Coronado Ave, San Diego, CA 92107
Status: ACTIVE
List Date: 11/10/2008
List Price: $625,000
Cirios Value: $550,000
List Price vs. Cirios Value: 12.0% over-listed

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

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

Breaking a trend of rising Pending Home Sales, the index of signed purchase contracts fell in January, down 7.7% from December, according to the National Association of Realtors (or NAR). The drop was more than twice as bad as economists’ expectations — and by “expectations” we mean wild stabs in the dark.

Pending Home Sales, which measure contracts signed in a given month, are considered a leading indicator of actual sales, which typically close 1-2 months later.

Notably, a trend discussed for the past few months here at Cirios persists: Sales activity in the West continues to outperform the rest of the country. In January, signed contracts dipped 13% in the Northeast and 12% in the South, but ticked up 2.4% in the West. New England is being hit particularly hard as Manhattan reels from the meltdown on Wall Street, sending home prices in the concrete jungle off the proverbial cliff. This shouldn’t be news to avid readers of this site — we’ve been on this trend for months.

Nevertheless, despite dour economic news and sickly data, the spin doctors over at the NAR remain hard at work. Lawrence Yun, living proof that being wrong for 1000 days running qualifies you to head up the biggest real estate lobby in the country, postulated that he “[expects] similarly soft home sales in the near term, but buyers are expected to respond to much improved affordability conditions.”

Just like they did this month Mr. Yun? Keep on spinning, sir.

By AUSTIN NELSON

Nationwide home values continue to decline into the New Year.

The National Association of Realtors (NAR) released existing home sales data today for January, indicating an overall 3.1% decline in the median sales price of US homes from the previous month. This drop follows the same national trend we have been seeing since July of last year: Prices have been declining steadily since that time at a rate of 2-5% per month.

The most interesting aspect of today’s numbers is a 5.3% drop in seasonally adjusted, nationwide sales rate. This reverses last month’s numbers, when sales had actually ticked up by 4.4%. Interestingly, the sales rate has seesawed over the past year, showing increases in Feb, May, Jul, Sep and Dec but declining in the other months. Overall, the trend has been down, with an 8.6% decrease since this time last year. The volatility of these numbers could simply be an artifact of an imperfect seasonal adjustment or cycling demand, but the long term trend is clear.

The West region showed no change in its sales rate, continuing its trend as the strongest region in terms of sales activity. In fact, the West has seen a 29% increase in sales since last year, largely due to the fact that the rate was extremely depressed in early 2008. As we have mentioned before, we expect the West to be a leader in buying trends as price declines have been most severe in that area and homes are finally becoming affordable to residents. Continued price declines (median price in the region declined 4.2% last month) will only make homes more affordable as time goes on.

The Northeast region has been the hardest hit of late, posting a 14% decline in rate combined with an 11.2% drop in median prices from December to January. That is a monster drop in a single month. Recent data indicating that New York City’s real estate market is cracking is adding to these drops. But Cirios readers knew about this trend months ago …

This month’s dismal sales numbers are likely closely related to extremely low consumer confidence, as prospective home buyers are holding off on big ticket purchases in the face of the continued and worsening economic decline. Considering that the sales included in these newest numbers were originated in November and December of last year and consumer confidence has dropped significantly since that time, we may be in for further declines in sales rate.

Even if national figures continue to decline, we would encourage readers to look beneath the data. Certain markets are still showing strong increases in activity, even as prices fall. Real estate, still, is local.

By ANDREW JEFFERY

The broken record rambles on: Home prices keep falling.

The latest reading from the S&P/Case Shiller Home Price Index showed another record decline, as prices tumbled 18.5% from a year ago. And again, the worst performing metro regions were out west, with Phoenix, Las Vegas and San Francisco leading the way to the downside. The 20-city index has now slid 27% from its 2006 peak.

The ongoing home price declines, which many attribute to steadily rising foreclosures helped spur the latest government-backed efforts to rescue the housing market. And while most commentators heavily criticized the Obama Administration’s $275 billion housing relief plan, take a read of Cirios’ Austin Nelson’s excellent take — a little optimism never hurt anyone, especially with the resounding and ubiquitous negativity we read in the daily headlines.

There isn’t much new to glean from the latest Case-Shiller Home Price Index, it’s still just bad out there. However dire the data continue to be, keep in mind home sales transactions typically bottom prior to prices. In the markets first to see precipitous declines, Cirios data analysis indicates ongoing increases in sales. And while the most distressed areas certainly show the strongest rises in transactions, mid-range areas are seeing more activity as well. Not so for the high end, where buying activity has all but evaporated.

But you, our Cirios readers, already knew that.

Far from being a bottom call, this is trend an example of the housing correction at work. While we would argue prices will continue to decline for foreseeable future, the reality is that homes are more affordable today than they were yesterday. And will be more so tomorrow. And tomorrow. And so on.

At some point in every market, prices begin to make sense again and buyers gingerly step into the water. The sharks are still circling, to be sure, but most are full and lazy, the new arrivals having more and more trouble finding a tasty snack.

By RYAN TAYLOR

The National Association of Realtors announced yesterday that the median home price in the US fell by 12% from a year earlier. Not surprisingly, the fall in prices was driven by the ever increasing number of foreclosure sales which accounted for 45 percent of all transactions.

The pressure on prices is only increasing as job losses mount around the country. The US lost 2.6 million jobs in 2008 and has lost more than 600,000 already in 2009.

While we may sound like a broken record, we continue to believe that buying a house right now is a risky proposition. Unless Washington comes up with a plan where they make housing payments for unemployed workers (not terribly far fetched given the announcement yesterday to subsidize mortgage payments), the housing market will decline because job losses equal a decline in home prices.

The reality is that the pent-up demand often cited by homebuilders and Realtors is fading due the increased uncertainty in the broader economy. A trend being seen in previously strong markets throughout California is that potential buyers are holding back to due to uncertainty about their jobs. Even those with steady jobs are content to wait — houses will almost certainly be cheaper next month, and the month after — why buy now?

Furthermore, most of the homes on the market today are listed at prices that reflect an environment where demand remains strong. By in large, it’s not strong. Sellers will be forced to recognize this and slash prices — but this takes time.

Of course, the government will be working around the clock to speed up the demand process and you can trust that Cirios Real Estate will keep you informed on the latest developments in the market.