OK, the numbers are in for calendar year 2013. In 3Q 2012, for the first time in five years, housing prices actually began to improve, month over month. The trend continued for much of 2013, although slowed during 4Q, which we might expect, given the Thanksgiving and Christmas Holidays [Memo to PC Police: Sorry for using such anachronistic and sappy terms, but I insist on preserving some semblance of our country’s Judeo-Christian heritage. So sue me!] Sorry, I got sidetracked, where was I?
Anyway, it seems the improving trend will continue into 2014. There are a few caveats, I suppose, e.g. interest rates, the Fed, employment figures, government shutdown, and, oh, yes, assuming North Korea’s portly potentate, Kim Jong-un [he’s the shorter one in this picture], doesn’t accidentally push the wrong button, thinking it’s room service. So let’s take a peek through both ends of the telescope. First, a look back over 2013, and then a look into the future.
December 2013 Activity
- Closed sales, at 1,782, were up 1.3% ahead of December 2012;
- Pending sales, at 1,484, were up 7.2% from December 2012[1];
- New listings for 2013 were 1,333, up 3.7% from Dec. 2012;
- Total market time was 87 days compared to 111 day for December 2012;[2]
- Inventory was 3.2 months for December 2013 compared to 3.6 months a year earlier.[3]
January – December 2013 Summary
- Accepted offers – 27,065, up 12.7% from 2012 [when it was 24,010];
- Closed sales – 26,782 up 12.7% from 2012 [when it was 23,438];
- New listings – 35,858 new, up 11.0% from 2012 [when it was 32,300];
- Total market time – 83 days, a 26% drop from 2012 [when it was 112 days];
- Average sales price – $310,600, up 12.9% from 2012 [when it was $275,000];
- Median sales price – $265,000, up 12.8% from 2012 [when it was $235,000]
Reading the Tea Leaves for 2014. We’re certainly going in the right direction in certain respects; we’re improving in activity, time on the market is decreasing, and prices went up about a point a month over last year. But the number that is not improving is inventory. It’s gotten worse. I have yet to see any good, cogent explanations for why. It is a national problem. As long as inventory stays low, the market remains distorted. Buyers are forced to either back away from the market, pay higher prices [frequently in a bidding war] or purchase a home not of their first choice. Selection is certainly constrained. In the vernacular, “it ain’t a healthy market.”
A healthy market is between six and eight months’ inventory. Why? Because it means that sellers and buyers each have bargaining power. If there are many more buyers than sellers, as in today’s marketplace, sellers dictates the terms of the transaction. A buyer either takes the property on the seller’s terms, or loses out to someone who will.
If the market was more balanced, i.e. greater inventory, buyers could walk away from unreasonable pricing and find comparable properties being sold at more realistic prices. This is why the small boutique clothing store, with limited inventory and higher prices, has difficulty in competing with Nordstrom’s.[4] It is when one side or the other has little or no choice that market distortions come into play. Closing prices do not represent intrinsic value, but panic buying at inflated prices.
We saw a similar problem during the 2005 – 2007/8 real estate bubble, when prices where unrealistically ballooned to unsupportable levels.[5] That price bubble was due to poor or non-existent underwriting, which inflated housing demand. Everyone was offered a slice of the American Pie, even if they could not afford it.[6] Today, prices are similarly increasing at an unsustainable rate due not to poor underwriting, but abnormally low inventories.
Although I do not expect a “crash” such as we saw in 2007-2008, I do expect to see a gradual correction, as more homes come into the marketplace. Where will they come from? Several possible sources:
- New Construction. It is improving, but not quickly, as both builders and lenders are more cautious. This will take time, but will gradually improve the inventory numbers. Perhaps over this spring and summer we will have a better idea how many new homes are added to available inventory.
- Foreclosure Inventory. Once the judicial foreclosure process has been completed and the 180-day right of redemption[7] expires, more homes should flow into the resale market. While it is true that the number of foreclosure filings are nowhere near what they were in 2013, the process is so painfully slow – approximately 12 months in the Portland-Metro area. Thus, even though the initial filings are down from 2013, many homes are still in one stage or another of being foreclosed, and have not emerged from the court process and the 180 redemption period that follows.
- Pre-Foreclosure Properties. Surprisingly, there are still many homes that have been in default for years, but have not yet entered the formal foreclosure process. The reason for the delay is impossible to know, except to surmise that the lenders or servicers simply haven’t gotten around to it.[8] Many large lenders and servicers transferred servicing rights to specialty companies such as Ocwen, who has jumped into this role in a big way. Presumably, once servicing rights are transferred it takes time for properties to work their way through the queue.
- Equity and Seller Confidence. We have seen good evidence that during the latter half of 2013, as home values increase, and negative equity disappears, more and more buyers are stepping into the market place. This trend should continue into the spring and summer of 2014.
- Shadow Inventory. Lastly, we don’t know whether the banks themselves are controlling the spigot, putting REO homes[9] up for sale slowly so as to avoid flooding the market and reducing prices. Good luck finding out if this is true; given their deceit to their own borrowers, the public, and the regulators during the financial/foreclosure crisis, circa 2008+, I would have trouble believing them if they said the sun rises in the east.
Conclusion. As we move into the spring, the stats will be interesting to watch. I am cautiously optimistic that more qualified buyers and equity sellers will enter the marketplace as confidence improves – especially if unemployment numbers improve. Despite all the handwringing about lenders tightening underwriting standards following the new QM and ATR rules, I believe that borrowers with 700+ FICOs will find purchase money funding. The $64 question is will enough new inventory come online from one or more of the sources discussed above. I think yes, but only time will tell. Stay tuned! ~PCQ
[1]RMLS™ reports that this was the best December for pending sales since 2006, which were at 1,825.
[2] Inventory in months for the entire year of 2013 was: Jan 4.7; Feb 4.5; Mar 3.2; April 3.1; May 2.5; June 2.9; July 2.8; Aug 3.1; Sept 3.7; Oct 3.4; Nov 3.7; Dec 3.2. It’s gotten worse, not better.
[3] RMLS™ explains that “Inventory in Months is calculated by dividing the Active Residential Listings at the end of the month in question by the number of closed sales for that month. This includes proposed and under construction homes.”
[4] This comment is not intended to disparage either business model – just to point up the economic reality that more competition usually means lower prices. In fact, smaller inventory and higher pricing are alive and well in the real estate market, i.e. those pocket neighborhoods, where buyers seek the exclusivity and allure of an area, and are willing to pay the premium. It is the boutique’s equivalent of “brand loyalty.”
[5] Why? Because of the easy-money policies of lenders, who cared nothing about their borrowers’ qualifications since the loans were immediately sold into the secondary market – a poorly underwritten loan was not the originator’s problem. During those years, anyone who could fog a mirror could get a loan. This heightened housing demand and prices skyrocketed. When investors in the secondary market began to see unqualified borrowers rapidly fall into default, they backed away from purchasing these poorly underwritten loans. Although this collapse began in the “sub-prime” market [i.e. the lending market reserved for – euphemistically speaking – those with “less than perfect credit”], it slowly worked its way up the food chain, and infected prime borrowers who fully qualified with 20% down payments. Defaults and foreclosures mounted to the point that lenders abandoned their easy-money loan programs. By 3Q 2007, homeowners were unable to refinance because lending dried up, home values plummeted, and qualified buyers backed away from the market, fearful they would be catching a falling knife in midair. Moreover, many potential buyers needed to first sell their own homes, and found that to be impossible, once market values fell below their mortgage balance, creating what is now known as “negative equity.”
[6] Being unable to afford a home during the go-go years, circa 2005 – 2007/8, was not an impediment to obtaining a loan. The lenders’ mantra was: “Don’t worry. If you can’t afford it, you can either (a) refinance into a cheaper loan after you gain some equity; or (b) sell the home for a tidy profit. Either way, you win!”
[7] The “right of redemption” is a right of the foreclosed borrower to pay the price paid by the buyer at the foreclosure sale, and recover back the property. It lasts for six month following the sheriff’s sale. When prices were continuing to fall as they did for at least five years following the 2007/8 collapse, the right of redemption meant little. But as property values increase, the right of redemption can be important. In some instances, even though the borrower cannot afford to re-purchase the property, he/she can sell the right of redemption to someone who can. Note: If there is a second mortgage on the home being foreclosed, the exercise of the right of redemption restored it – meaning that it too had to be paid when the right of redemption was exercised following the foreclosure of the first mortgage. Thus, the right of redemption is most useful where (a) there is only one mortgage and (b) prices are appreciating above the amount due on the loan.
[8] To ascribe a diabolical scheme by the Big Banks to cherry-pick some homes to foreclose and ignore others, is to attribute to them a collective level of intelligence they simply do not have. If they did, they would have embraced short sale years earlier and streamlined the loan mod process, rather than turning it into a shell game, and generally treated their clients with respect rather than disdain. Corporate Group Think is their modus operandi, and money is their Holy Grail. Shame is a human emotion that disqualifies one from joining their executive ranks. What should we expect from a morally bankrupt industry that spawned such practices as “robo-signing,” “dual-tracking” and “extend and pretend”? When was the last time a mother said to her daughter, “Why can’t you find a nice banker to marry?”
[9] “Real Estate Owned,” i.e. those homes the banks have taken back in foreclosure or deed-in-lieu-of-foreclosure.
