This post first appeared in: Cirios Trends – March 2011

Thus far, 2011 has been nothing if not newsworthy.

Economic data, financial news and even foreclosure scandals have been supplanted as headline fodder by the historic events taking place in North Africa and the Middle East. It is an exciting, if not somewhat terrifying time to be alive.

Yet even as news breaks around the world, most people wake up, shower, grab a cup of coffee and go about their lives. They drive to work, answer emails, surf the Internet and go back home, taking the inevitable curve balls that life throws in stride because, well, its what we have to do. The economy, however smarting, rumbles on.

Recent jobs data would even have us believe that the recovery is gaining steam. Data, however, can be misleading. The underemployment rate, measured by polling company Gallup, has essentially remained unchanged since this time last year, painting a bleaker picture than government employment data. Meanwhile, certain industries like technology and renewable energy are hiring at a brisk pace, muddling the employment picture even further.

And then there’s oil.

Unrest in the Middle East and the impending summer driving season have pushed prices at the pump up to more than $3.50 per gallon nationwide, and over $4.00 at some Bay Area stations. So much for that road trip.

So what does this all mean for the housing market? We continue to see the localization trend take shape. That is, fundamentally strong markets are outperforming those that are further from job centers or otherwise less desirable in a challenging economic environment. This is a trend we have discussed for months, and one that is now showing up in the data. (We discuss this further in our City Spotlight on Redwood City).

We view this as a healthy market development, one that indicates a market that is getting better, not worse. Price declines are still on the horizon in many areas, but the sky is no longer falling (in the housing market, anyway).

Lastly, we’d like to address a frequent question we have been receiving from the real estate investor community: “Where are all the REOs?” There is a distinct shortage of new bank owned homes (or REOs) coming to market. Investors are getting antsy.

From November of last year through January, there was effectively a nationwide moratorium on foreclosures. The robo-signing scandal coupled with a seasonal freeze around the holidays meant
foreclosure proceedings were delayed almost across the board.

It takes around 90 days for the average property to go from foreclosure sale to listed REO, so properties (not) foreclosed on during the recent moratorium would have been coming to market now. Most banks restarted the foreclosure machines in February, so a normal flow of REO listings should come to market by April.

Sound far-fetched? The 2008 moratoria led to an inventory shortage in early 2009 and a market low that April. The question then becomes whether history will repeat, rhyme, or something else altogether in the coming months.

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?