A few weeks ago when I did an REO update I mentioned that I thought that one of the sources of upcoming REO's in our market was some potential "strategic defaults". And sure enough, a day later I saw this article about the topic, which I followed up with the next day. At the time I thought that I'd be through with that topic for a while.
Well, not so fast there, sport. Last week we saw this announcement from Fannie Mae on the topic. It pretty much echoed and drove home that CNN article from a few weeks ago. And I don't think we've heard the last of these types of announcements.
Let's back up here a little bit. What is a "strategic default" anyway? What we're talking about here are homeowners who can afford to make the payments on their mortgage, but choose not to as a calculated financial decision. Let's say someone bought a house in 2006 for $450,000, but now that house is worth around $230,000. They financed it 100% like so many people did in that period. They make good money, and their payments aren't outside the affordability range for them, although they are much higher than the guy down the street who just bought a very similar house. They're probably twice as much as it would cost to rent a similar house. There's a school of thought that says that if you find yourself that far upside down in a loan, you should just stop paying your mortgage, let the bank take the property back in foreclosure eventually, and take your lumps on your credit. You'll save up a bunch of money, and in a few years it'll all blow over, and you can buy another house like it for less money.
I'm not a subscriber to that theory. First of all, we aren't talking about a few years. We're talking about 7 years now before Fannie Mae guidelines - the guidelines that are followed by most conventional lenders - will allow a borrower who has defaulted on a mortgage without a demonstrable hardship to qualify for another loan. It appears that the lenders are talking about some leniency for those who had a legitimate financial hardship that caused a foreclosure. Fannie is talking about as little as 2 years for borrowers who try to work things out via a short sale or deed-in-lieu. So if you think that you will want to own a home again before 7 years, this may not be a good choice for you.
The second reason I think that this could be a bad idea for a lot of borrowers is the potential of a deficiency judgment. In some states that's a very real possibility regardless of the type of loan, and regardless of the reason for the default. In California, the laws are a little different, and purchase money loans are typically protected from a deficiency judgement. But if you refinanced that loan somewhere along the line, that protection goes bye-bye. There's a bill going through the Legislature that will extend that protection to refinanced loans with some limits, but it's not through yet, and the banking lobby is fighting it. So we'll see what happens there.
Proponents of the strategic default route say that this isn't a moral issue - it's simply a dollars and cents decision. There is a contract between the borrower and the lender, and the contract lays out what happens if the borrower doesn't perform. True enough. But the way I look at this is a little different. I don't want to get on my soapbox here, but I don't think you can divorce this decision from the bigger picture. More strategic defaults means more foreclosures. More foreclosures are bad for us in a lot of social and economic ways, and the longer we go through this cycle, the more painful this is going to be. None of us likes to have the neighbor that drags down our property values by parking five cars in the driveway (and on the lawn) and letting his yard get overrun with weeds. By the same token, none of us are going to be fond of the neighbor who abandons a home and lets it go to foreclosure when it could have been prevented.
Bottom line here is that the powers that be in the mortgage world are taking a hard line on strategic defaults. They may be cutting some slack to the borrowers that legitimately had a hardship and couldn't afford their payments. But if you can afford to make your agreed payment and choose not to do so, they're not going to be so forgiving. If you ask me, that's as it should be.
Wednesday, June 30, 2010
Monday, June 28, 2010
Monday Morning Numbers 6/28/10
Hope everybody had a good Flower Festival weekend. I hadn't made mention of it here, but the Lompoc Valley Association of Realtors had a float in the parade this year for the first time in a long, long time. I spent a little time on it running up to the big push on Friday, when we were putting fresh flowers on. And Friday was a long day of gluing flowers. We had a big crew of agents, escrow officers, lenders, and other affiliate members of our association out working on it. Big congratulations and thanks to our friend and colleague Connie Barlow at Century 21 for heading this up and working like a maniac on the project for months to make it happen. It turned out to be really cool - maybe you saw it. The one with the octopus. We got beat out for first place by the Elks, but we had a huge crowd pleaser.
Let's take a look at this week's market stats:
Active Listings: 111
No big change in the numbers this week. Our inventory has jumped up after month of being nearly non-existent, and pending sales have dropped off a bit. It's probably an indication that the third quarter is going to see some decline in sales this year unless we start to see a jump in pending sales pretty soon.
Later this week I'm going to go back into strategic defaults. I had made a mini-post about it a few weeks ago, but there's some new information that has come out recently.
Let's take a look at this week's market stats:
Active Listings: 111
Contingent Listings: 46
Pending Listings: 43 (21.5% of the inventory)
New listings: 11
Months of inventory: 4.4
Click here for the updated price per square foot chart.No big change in the numbers this week. Our inventory has jumped up after month of being nearly non-existent, and pending sales have dropped off a bit. It's probably an indication that the third quarter is going to see some decline in sales this year unless we start to see a jump in pending sales pretty soon.
Later this week I'm going to go back into strategic defaults. I had made a mini-post about it a few weeks ago, but there's some new information that has come out recently.
Wednesday, June 23, 2010
Focus on Equity
I've been telling you that I had a short sale update on tap for this week. As I've thought more about what I'm about to share with you, I've realized that this really isn't so much a short sale update. It does affect what we could have coming down the road in terms of short sales, but it's bigger than that. So it's more of a look at what our market looks like in terms of homeowner equity.
I had said some time last year (I can't remember which post) that I wanted to get a good source of data on loan activity on a local level. It's critical information to knowing what is coming in our market, especially in terms of distressed property activity. Well, I've found a couple of good resources. One of them I used a few weeks ago to project upcoming loan resets. There's another source I found, REiSoucre.com that also has some good numbers from public records. I'm using them here because of technical reasons having to do with the way they lay out their data.
The peak years for price in our market were very active years for mortgage activity. Part of the reason for that was robust sales activity, but a larger factor was the boom in refinancing. Interest rates were very good, and a lot of homeowners started to look at their property with dollar signs in their eyes. This didn't just happen in Lompoc - this was a national phenomenon. Freddie Mac estimates that we as a nation took out $75-80 Billion per quarter in 2006 & 2007. Some of that went back into homes in upgrades and maintenance, but a lot of it went to pay off consumer debt and to buy expensive toys and vacations.
I'd better not get derailed on that topic, we'll be here all day...
So let's look at what we know about the Lompoc Valley. I've seen a few different numbers for the total number of houses and condos in the Lompoc Valley, ranging from about 10,000 to 12,000. REiSource.com says it's 10,787, so let's use that number for this purpose. I took a look at the outstanding first trust deeds that are recorded against properties in our market by recording date. A couple of technical points here: These are first trust deed recordings only, no second mortgages or equity lines. They include both purchase money and refinance loans. And they don't include loans that are no longer active - either having been paid off or foreclosed. And with all of that said, here are the numbers for our peak years:
2003 - 1102
2004 - 815
2005 - 1290
2006 - 969
The total here - 4176 active first trust deed mortgages in the Lompoc Valley that were recorded during that peak 4 year period. That's about 39% of the total number of households in our market.
Not all of those loans are upside down. Most of them maybe, but not all of them. Another tool that REiSource has is a way to look at properties that they thought had negative equity - more debt than value on a property. They do this with an automated valuation tool that they have. Now I'll tell you up front - I'm not a big fan of automated valuation tools. I think that they miss the mark a lot of the time in our market, and can be wildly off value in some cases. But I think that they are too high at least as often as they are too low. REiSource estimates that we have 4410 houses and condos in the Lompoc Valley that have more debt than value. That's 41% of our market area. And I think that might be a conservative estimate.
So why is this important? Well, it tells me that distressed property sales are here for the foreseeable future. Approximately 4 out of 10 houses and condos in our market won't sell right now for enough to pay off the liens. Until we get property values back up, distressed property sales are here to stay. We'll get there, but it's going to be a long, bumpy ride.
I had said some time last year (I can't remember which post) that I wanted to get a good source of data on loan activity on a local level. It's critical information to knowing what is coming in our market, especially in terms of distressed property activity. Well, I've found a couple of good resources. One of them I used a few weeks ago to project upcoming loan resets. There's another source I found, REiSoucre.com that also has some good numbers from public records. I'm using them here because of technical reasons having to do with the way they lay out their data.
The peak years for price in our market were very active years for mortgage activity. Part of the reason for that was robust sales activity, but a larger factor was the boom in refinancing. Interest rates were very good, and a lot of homeowners started to look at their property with dollar signs in their eyes. This didn't just happen in Lompoc - this was a national phenomenon. Freddie Mac estimates that we as a nation took out $75-80 Billion per quarter in 2006 & 2007. Some of that went back into homes in upgrades and maintenance, but a lot of it went to pay off consumer debt and to buy expensive toys and vacations.
I'd better not get derailed on that topic, we'll be here all day...
So let's look at what we know about the Lompoc Valley. I've seen a few different numbers for the total number of houses and condos in the Lompoc Valley, ranging from about 10,000 to 12,000. REiSource.com says it's 10,787, so let's use that number for this purpose. I took a look at the outstanding first trust deeds that are recorded against properties in our market by recording date. A couple of technical points here: These are first trust deed recordings only, no second mortgages or equity lines. They include both purchase money and refinance loans. And they don't include loans that are no longer active - either having been paid off or foreclosed. And with all of that said, here are the numbers for our peak years:
2003 - 1102
2004 - 815
2005 - 1290
2006 - 969
The total here - 4176 active first trust deed mortgages in the Lompoc Valley that were recorded during that peak 4 year period. That's about 39% of the total number of households in our market.
Not all of those loans are upside down. Most of them maybe, but not all of them. Another tool that REiSource has is a way to look at properties that they thought had negative equity - more debt than value on a property. They do this with an automated valuation tool that they have. Now I'll tell you up front - I'm not a big fan of automated valuation tools. I think that they miss the mark a lot of the time in our market, and can be wildly off value in some cases. But I think that they are too high at least as often as they are too low. REiSource estimates that we have 4410 houses and condos in the Lompoc Valley that have more debt than value. That's 41% of our market area. And I think that might be a conservative estimate.
So why is this important? Well, it tells me that distressed property sales are here for the foreseeable future. Approximately 4 out of 10 houses and condos in our market won't sell right now for enough to pay off the liens. Until we get property values back up, distressed property sales are here to stay. We'll get there, but it's going to be a long, bumpy ride.
Monday, June 21, 2010
Monday Morning Numbers 6/21/10
Welcome to another edition of Monday Morning Numbers. As always, the Lompoc Real Estate Blog is 100% Vuvuzela free! Let's take a look at our market numbers for this week:
Active Listings: 109
Another pretty active week for new listings coming on the market has driven our inventory up more, and we are now over 100 active listings for the first time since last May. We're still running about the same months of inventory level that we've had all year, but the raw numbers and the declining number of pending listings makes me think that we'll start to see our months of inventory increase somewhat in the next month or two.
And remember how I had been noting that a big percentage of new listings coming on were traditional sellers in the past couple of months? Well, over the past three weeks, only about a third of the new listings were traditional sellers, and the rest were short sales and REO's. That's down a little from where it had been. I'll keep watching it to see if there is a change in that trend.
Later this week I'm going to have some loan numbers to share with you that might give us some insight into what's coming down the line in short sales. You'll want to check back in for that.
Active Listings: 109
Contingent Listings: 43
Pending Listings: 42 (21.7% of the inventory)
New listings: 14
Months of inventory: 4.0
Click here for the updated price per square foot chart.Another pretty active week for new listings coming on the market has driven our inventory up more, and we are now over 100 active listings for the first time since last May. We're still running about the same months of inventory level that we've had all year, but the raw numbers and the declining number of pending listings makes me think that we'll start to see our months of inventory increase somewhat in the next month or two.
And remember how I had been noting that a big percentage of new listings coming on were traditional sellers in the past couple of months? Well, over the past three weeks, only about a third of the new listings were traditional sellers, and the rest were short sales and REO's. That's down a little from where it had been. I'll keep watching it to see if there is a change in that trend.
Later this week I'm going to have some loan numbers to share with you that might give us some insight into what's coming down the line in short sales. You'll want to check back in for that.
Saturday, June 19, 2010
Focus On North Vandenberg Village
I know, I know, it's Saturday and I should have had this done a couple of days ago, and I know that everyone has been on pins and needles waiting to see what's happening up in North Vandenberg Village. Sure... OK, for a description of the area and properties we are covering here, go back to my first post on this from last year.
Things have been generally slow up in this area in recent months. We only have 8 active listings in the area (2 REO's, 2 short sales, and 4 traditional sellers). And there are no contingent listings to report in the area as of this afternoon.
Sales have been slow as well when you look at raw numbers, but in terms of months of inventory, we're probably a little more robust there than the market as a whole. We only have 2 pending sales in the area, both traditional sellers. We've had 8 sold units there in the past three months (2 REO/1 SS/5 Trad).
It would appear that we are seeing a little less activity recently here in distressed properties, which is probably helping hold values a little bit. There aren't a lot of data points to use, but when I compare the sales over the past three months to the three months previous to that it looks like prices have been very flat recently.
Next week I'm going to go back into a short sale discussion. I know it hasn't been all that long since I covered them, but I have some new and interesting data to share with you that might give us some insight into what to expect for the foreseeable future.
Things have been generally slow up in this area in recent months. We only have 8 active listings in the area (2 REO's, 2 short sales, and 4 traditional sellers). And there are no contingent listings to report in the area as of this afternoon.
Sales have been slow as well when you look at raw numbers, but in terms of months of inventory, we're probably a little more robust there than the market as a whole. We only have 2 pending sales in the area, both traditional sellers. We've had 8 sold units there in the past three months (2 REO/1 SS/5 Trad).
It would appear that we are seeing a little less activity recently here in distressed properties, which is probably helping hold values a little bit. There aren't a lot of data points to use, but when I compare the sales over the past three months to the three months previous to that it looks like prices have been very flat recently.
Next week I'm going to go back into a short sale discussion. I know it hasn't been all that long since I covered them, but I have some new and interesting data to share with you that might give us some insight into what to expect for the foreseeable future.
Monday, June 14, 2010
Monday Morning Numbers 6/14/10
Good morning! I came in here to post my Monday Morning Numbers post and I noticed that I didn't have last week's "Focus On" post in here. I had to sit and scratch my head - I know I sat down and wrote a condo update last week. So I took a look, and there it was sitting on the list in the drafts. Go figure. I just posted it, so now we can get after this week's numbers:
Active Listings: 99
We had a very active week in our MLS. In addition to the 15 new listings, we had 15 closings and 12 price changes. We're approaching 100 active listings - we haven't been there in over a year. But because we've had a lot of sales in recent months, the months of inventory remains low. We'll see how long that holds, though, because our pending listings have been dropping. In terms of percentage of inventory, we're at the lowest level of pending listings since May of last year.
Later this week I'll take a look at North Vandenberg Village. I might even remember to post it...
Active Listings: 99
Contingent Listings: 45
Pending Listings: 44 (23.4% of the inventory)
New listings: 15
Months of inventory: 3.8
Click here for the updated price per square foot chart.We had a very active week in our MLS. In addition to the 15 new listings, we had 15 closings and 12 price changes. We're approaching 100 active listings - we haven't been there in over a year. But because we've had a lot of sales in recent months, the months of inventory remains low. We'll see how long that holds, though, because our pending listings have been dropping. In terms of percentage of inventory, we're at the lowest level of pending listings since May of last year.
Later this week I'll take a look at North Vandenberg Village. I might even remember to post it...
Friday, June 11, 2010
Focus on Condos
This week we're back around to condos on our continuing area/market segment carousel. We have some minor changes in market conditions here since I last reported on this segment back in January, but things haven't really changed a lot.
Monday, June 7, 2010
Monday Morning Numbers 6/7/10
Hope you all had a great weekend in this magnificent late spring weather that we've been having. God, I love living in this part of the world... Let's take a look at our market's vital signs this morning:
Active Listings: 92
We're down slightly for inventory this week, but nothing all that noticeable. We appear to be in a pretty stable place right now for our market by all measures that I use to track things, and I don't see anything coming that will be making any major changes. It seems like the demand side of the equation is a little lighter, with not quite as many multiple offers on properties right now, but that's kind of hard to track. And sometimes, "it seems like" can be the three most dangerous words in the English language.
Later this week I'll update our condo market.
Active Listings: 92
Contingent Listings: 46
Pending Listings: 54 (28.1% of the inventory)
New listings: 10
Months of inventory: 4.0
Click here for the updated price per square foot chart.We're down slightly for inventory this week, but nothing all that noticeable. We appear to be in a pretty stable place right now for our market by all measures that I use to track things, and I don't see anything coming that will be making any major changes. It seems like the demand side of the equation is a little lighter, with not quite as many multiple offers on properties right now, but that's kind of hard to track. And sometimes, "it seems like" can be the three most dangerous words in the English language.
Later this week I'll update our condo market.
Thursday, June 3, 2010
A followup to yesterday's REO post
Hey, a bonus post this week! Yesterday when I wrote about what we have coming down the road in terms of REO's, I mentioned that one of the big drivers of foreclosures over the next few years could be strategic defaults. And I said that I'd cover that topic sometime soon. Well, it's sooner than I thought.
If you read this blog regularly, you'll know that I don't usually link to outside sources. But today I came across this article talking about the consequences of strategic defaults, and it pretty much says what I was going to tell you. So rather than applying my usual tortured prose to the topic, I'll just let the professional journalists cover it.
'Nuff said.
If you read this blog regularly, you'll know that I don't usually link to outside sources. But today I came across this article talking about the consequences of strategic defaults, and it pretty much says what I was going to tell you. So rather than applying my usual tortured prose to the topic, I'll just let the professional journalists cover it.
'Nuff said.
Wednesday, June 2, 2010
Focus on REO's
This is going to be a slightly different take on my usual REO update. Most of the time, I tell you what happened over the past few months, and what the current inventory levels look like, and I make a stab at what's coming down the line at us.
This time that last part - what's coming - is more of the focus. I found a good data source that I think sheds some light on upcoming REO activity, and I'm going to share some data today that might surprise you. But first, let's get the usual suspects out of the way:
REO's account for about 20% of our active inventory and about 23% of our pending listings as of this afternoon. The share of pending listings has shrunk a bit in recent months, and we're down to REO's accounting for around 50% of sold units in the past three months. That's been running closer to 60% for a while, so that's a pretty significant change.
What hasn't changed a lot is the number of unlisted REO's and the foreclosure activity. You'll see from this chart that we've been relatively stable in foreclosure activity for a while now. We continue to run at about 60 unlisted REO properties in the queue at various points in the process, and we've seen a decline in recent months of unresolved Trustee's Sales.
Now for the part about what's coming. If you've been reading or watching the usual media sources out there, you've probably been hearing about two things in terms of foreclosures. First, that there is this enormous "shadow inventory" of properties that banks are holding onto for one reason or another. And if you've been reading this blog, you know that I'm not seeing that on a local level. Second, there is a lot of talk about a big wave of loan resets that is going to spur another surge in foreclosures.
Let's talk about that last one. It may be true on a national level that we are coming into a big round of mortgage resets. But real estate is primarily local, so let's talk about what's happening here in little old Lompoc. I've been looking for a good source for localized information here, and I've found a couple of data sources recently. I pulled the numbers for loan resets for the next few years, and I charted it. And I ask you - does this look like a tidal wave to you? What this looks like to me is that we'll see a pretty stable number of loan resets for the rest of the year, and then it should start to decline next year and for the next few years. I only pulled numbers through 2014 because they start to drop off so significantly.
I'll admit that there are a couple of limitations in these numbers. This data doesn't go back in time reliably, so I can't easily compare what we are seeing now with 2007 and 2008 numbers. And it also doesn't account for second mortgage balloon payments - people who bought a home with 100% financing, with a first loan of 80% and the remainder on some form of junior loan with a lump sum payment due after a handful of years. That could get interesting, but we don't often see of junior lien holders go all the way through the foreclosure process. The reason for that is, even if they take the property back, they take it subject to the first trust deed. And if the senior loan is more than the property value, it's kind of a financially pointless endeavour.
So what do I think we have coming? Well, we clearly aren't out of the foreclosure cycle yet, and we probably won't be for a while. But I don't think that based on the data I have that there is any reason to fear a big wave of loan resets causing more foreclosures locally. That's not to say that we couldn't still see some significant problems if the local employment picture takes a turn for the worse. In fact, I expect that the biggest driver of foreclosures in the next couple of years to be job loss and "strategic" defaults. I have some thoughts on that last one that I'll share in another post sometime soon.
I said the last time I updated REO's that I expected to see a shift in our market from REO's to short sales. I still expect that to happen, and it might in fact be starting. It makes a lot more sense for the banks to encourage and cooperate with short sales than to go the foreclosure route. Go back to the point I made on the junior lien holders, for example. Would it be better for them to foreclose just to get their pound of flesh (and spend a lot of money for no real return), or to cooperate with a short sale and get a few thousand dollars? Duh.
Bottom line here, foreclosures appear to be waning slowly in our market. And for a lot of reasons, that's good news for our market and our community.
This time that last part - what's coming - is more of the focus. I found a good data source that I think sheds some light on upcoming REO activity, and I'm going to share some data today that might surprise you. But first, let's get the usual suspects out of the way:
REO's account for about 20% of our active inventory and about 23% of our pending listings as of this afternoon. The share of pending listings has shrunk a bit in recent months, and we're down to REO's accounting for around 50% of sold units in the past three months. That's been running closer to 60% for a while, so that's a pretty significant change.
What hasn't changed a lot is the number of unlisted REO's and the foreclosure activity. You'll see from this chart that we've been relatively stable in foreclosure activity for a while now. We continue to run at about 60 unlisted REO properties in the queue at various points in the process, and we've seen a decline in recent months of unresolved Trustee's Sales.
Now for the part about what's coming. If you've been reading or watching the usual media sources out there, you've probably been hearing about two things in terms of foreclosures. First, that there is this enormous "shadow inventory" of properties that banks are holding onto for one reason or another. And if you've been reading this blog, you know that I'm not seeing that on a local level. Second, there is a lot of talk about a big wave of loan resets that is going to spur another surge in foreclosures.
Let's talk about that last one. It may be true on a national level that we are coming into a big round of mortgage resets. But real estate is primarily local, so let's talk about what's happening here in little old Lompoc. I've been looking for a good source for localized information here, and I've found a couple of data sources recently. I pulled the numbers for loan resets for the next few years, and I charted it. And I ask you - does this look like a tidal wave to you? What this looks like to me is that we'll see a pretty stable number of loan resets for the rest of the year, and then it should start to decline next year and for the next few years. I only pulled numbers through 2014 because they start to drop off so significantly.
I'll admit that there are a couple of limitations in these numbers. This data doesn't go back in time reliably, so I can't easily compare what we are seeing now with 2007 and 2008 numbers. And it also doesn't account for second mortgage balloon payments - people who bought a home with 100% financing, with a first loan of 80% and the remainder on some form of junior loan with a lump sum payment due after a handful of years. That could get interesting, but we don't often see of junior lien holders go all the way through the foreclosure process. The reason for that is, even if they take the property back, they take it subject to the first trust deed. And if the senior loan is more than the property value, it's kind of a financially pointless endeavour.
So what do I think we have coming? Well, we clearly aren't out of the foreclosure cycle yet, and we probably won't be for a while. But I don't think that based on the data I have that there is any reason to fear a big wave of loan resets causing more foreclosures locally. That's not to say that we couldn't still see some significant problems if the local employment picture takes a turn for the worse. In fact, I expect that the biggest driver of foreclosures in the next couple of years to be job loss and "strategic" defaults. I have some thoughts on that last one that I'll share in another post sometime soon.
I said the last time I updated REO's that I expected to see a shift in our market from REO's to short sales. I still expect that to happen, and it might in fact be starting. It makes a lot more sense for the banks to encourage and cooperate with short sales than to go the foreclosure route. Go back to the point I made on the junior lien holders, for example. Would it be better for them to foreclose just to get their pound of flesh (and spend a lot of money for no real return), or to cooperate with a short sale and get a few thousand dollars? Duh.
Bottom line here, foreclosures appear to be waning slowly in our market. And for a lot of reasons, that's good news for our market and our community.
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