Foreclosure Crisis Almost Over It’s Magically Delicious



There’s incredible news out on the foreclosure crisis… it’s almost over.  What’s causing demand for residential real estate to increase?  Well, there’s… um… or what about the… er, uh… and then there’s always the… hmmm… hang on, I’ll come up with something, just keep your powder dry.


DataQuick says mortgage defaults are decreasing because of “a strong economy and housing market as well as more short sales.”


Brilliant!  Of course… it’s our strong economy and housing market.  Now, why didn’t I think of that?  Boy, these guys at DataQuick are some kind of insightful.


But, the other reason mortgage defaults are decreasing is because of more short sales?  Short sales lead to fewer people defaulting on their mortgages?  Like, someone was going to default on his or her loan, but then there were more short sales so they didn’t?  How does that work exactly?  I’m missing the connection there.


The company also says that “foreclosure activity” in California, one of the hardest-hit states, is running at the lowest rate since 2007, which is about when the crisis began.  So, what the heck is “foreclosure activity?”  Is that the number of NODs sent out by servicers?  If it is, then why not say that?  Is it the number of trustee sales?  Then why not say that?  The number of seriously delinquent loans?  Seriously?


See, the thing is that servicers don’t send out NODs on any sort of consistent basis.  Some people get an NOD after they haven’t made their mortgage payments for six months, some much longer and some much sooner.  And trustee sales get postponed all the time and without rhyme or reason.  So, I just have no idea what “foreclosure activity” is supposed to represent.


I suppose I shouldn’t be surprised.  After all… it’s “DataQuick,” not “DataQuality.”


DataQuick’s president, John Walsh, went on to explain how the whole foreclosure thing works…


“A foreclosure happens when a homeowner owes more on the property than the property’s worth.  Otherwise it could be sold and the mortgage paid off.  So foreclosures go up when home values go down.  Prices in most areas today are up significantly from their low point in early 2009.”


Apparently, according to Walsh, what’s happened recently is that housing prices have risen.  It’s as if by magic…



DataQuick says that “the areas still seeing foreclosures are now mainly in lower-priced neighborhoods where homes are selling at below $200,000.”  The company says that the pricey areas are the least likely to have foreclosures.


So, if I’m reading that right, DataQuick is saying that people with more money lose homes to foreclosure less often than people with less money.  Well I’ll be a monkey’s uncle.  Who would have ever thunk that?  Thank you Mr. Real Estate Expert.


Walsh also said that, “Additionally, during the past year we’ve seen short sales overtake the foreclosure process as the procedure of choice to deal with homeowner distress.“


Short sales have overtaken the foreclosure process?  They’re saying that there are now more short sales than foreclosures?  Well, that’s just ridiculous.


And, the procedure of choice?  Whose choice?  Maybe they mean Realtors… that I’d believe.  Like if there was a headline that said, “Realtors prefer short sales to foreclosures?”  I’d believe that for sure.  It’s just like saying, “Realtors prefer commissions to no commissions.”  Or, “Realtors prefer eating to starving to death.” 


Or how about, “4 out of 5 Realtors recommend short sales to people losing homes to foreclosure?”





Residential real estate process can’t increase any time soon.  They cannot.  And by that I mean, this decade at least.  The reasons are simple and they’re not changing…


Home prices rise and fall based on the forces of supply and demand.  And we have neither.


Supply – No one is selling his or her home, with the exception of those who have to sell, like older people who have to move to downsize or whatever.  All I have to do is drive around my own neighborhood to see the state of affairs.  No homes are for sale.


No one is saying, “Gee, now seems like a great time to sell.”  Why?  Well, how about because to sell now, you have to compete with short sales and foreclosure sales, which means you have to sell in the ballpark with distressed sales.  And doesn’t that sound fun?


Demand – The only people looking to buy homes right now are looking to steal them.  That’s why prices are said to be “rising,” because people end up bidding up the price of a home that was selling below market or is at the low end of the market.  If a few homes selling for $79,999 end up selling for $84,000, someone is going to run a headline saying homes went up in that area by five percent, but did they?


Of course not.


Here’s why it’s impossible for demand to go up for a long, long time…


First you have to understand two things.  The first is that in order for home prices to go up demand has to go up.  That means that people not only want to buy, but also that they can express their demand, meaning that they have the means to buy.   In the housing market, that means that loans are available.  Assets, including homes, do not magically re-inflate themselves.


If you don’t believe me, just consider shares of Cisco Systems, which during the dot-com bubble reached roughly $84/share somewhere near their peek, I believe… and went down to about $8 after the bubble popped.  That was over 12 years ago and today Cisco’s stock trades at approximately $18/share.  (I’m not going to bother looking those numbers up at the moment, but you can trust me… I’m darn close if not dead on right.)


I suppose Japan would be absolutely jam-packed with similar examples as well.


The second thing you need to know is the demographic make-up of any kind of “normal” real estate market, which can mean just about any time before now.


In a normal market, roughly 66 percent of home buyers are repeat buyers, meaning they already own a home and are buying another.  Maybe they’re moving up or maybe down, maybe they’re buying a second home… but regardless, their purchase is not their first.  The lion’s share of these repeat buyers falls between 30-60 years of age.  That’s not hard to imagine, is it?


Another 20-24 percent of buyers in a normal market are “first time buyers.”  Also not hard to see as being the case I would think.  And the rest of a normal market’s homebuyers, something between 10-15 percent of the buyers, are investors of one kind or another.


These are rough percentages and of course they can sway in any direction from time to time, but overall this is how the real estate market breaks down.


GROUP A: Repeat buyers age 30-50… 60-66 percent.

GROUP B: First time buyers… 20-25 percent.

GROUP C: Investors… 10-15 percent.


Okay, ready?


GROUP A: Half of them might as well have vanished into thin air, cause they’re gone as far as the real estate market is concerned, either because they’re underwater, or effectively underwater, meaning that when you factor in sales commissions and moving costs, they owe more than the balance of their mortgages.


And even if not underwater, many lack the 20 percent down payment or the high credit scores required to get approved today for a loan.  There are, of course, other factors suppressing this group’s demand for housing going forward… the aging of baby boomers, reduced consumer wealth and incomes, attitudes about housing and willingness to take risks… all play a role, but the point is they’re gone.


GROUP B: This group’s demand for home ownership is being diminished by three factors that should be easy to understand.  The first is student loan debt.  It’s unbelievably high, and since my daughter is a senior in high school, I can tell you why that’s the case… college tuition… it’s off the charts.  We recently visited Northwestern University outside Chicago, which although a very good school, is not Harvard or Princeton.  It is, however, $57,000 a year.


High levels of student loan debt is causing graduates to delay family formation, which is a major driver of our economy, because once we start families, we start spending our money on things like homes and durable goods.  Until then, we’re still eating out, or over the sink.


The third factor is that many first time buyers lack the 20 percent down payment or the high credit scores required to qualify for a home loan today.  And last would be the number of younger people who have seen their parents lose their equity and in some cases their homes, and it should come as no surprise that they’re just not in the same hurry to buy homes that they were a few years ago.


It’s not clear how much first time buyer demand has disappeared as a result of these factors, but it’s easy to see that it’s not an insignificant amount.  I’d say it could easily be half, but you can create your own forecast.


GROUP C: Investors are the one group that are still able to express demand.  They are affected by the tight underwriting standards at the GSEs that require 30 percent down payments, but on the whole this group has cash and wants to buy.  The problem with depending on this group’s demand as far as appreciation is concerned is that they’re sophisticated in the sense that they want to buy, but only at the lowest possible prices.


So… let’s quantify future demand for residential real estate as compared with demand during a normal market… just in round numbers… we don’t need to be precise to understand the point.


If GROUP A is half the size that it would be in a normal market, and I’d say this is a best case scenario, that means that 66 percent of future demand is half the size that it used to be.  And let’s say it’s the same thing for GROUP B, or pretty darn close… if it’s not half the size, it’s a heck of a lot smaller, you can bet on that.


And GROUP C who cares?  A bunch of investor types looking to pay the lowest prices possible is hardly the sort of demand we can expect to make up for the demand lost in GROUPS A & B.


So, if the normal market had 100 buyers, where there used to be 66 repeat buyers, now there will only be 33.  Where there were 25 first timers, now there will only be 12.  Are you getting the picture?  The future demand simply cannot be what it was during any housing market we’ve ever known in the past.


And yes, there is population growth to add into the mix, but we’re just not creating the robust work force we once knew, and no matter what, as the baby boom generation moves into their retirement years, there’s just no work force that’s anywhere near the size of the 88 million Americans born between 1946-1962.


Problems with Supply…


Our current housing market is not really a “market,” at least not in the sense that we’re used to.  Why?  Well, because in addition to the problems limiting demand, there’s simply no supply.


Essentially no one is selling his or her home today.  In the hardest hit markets, home values have fallen by 60 percent, and perhaps more.  In California, homes have fallen by 37 percent on average.  And no one sells into a market that far depressed with weak demand and uber-tight credit markets, and if you believe otherwise, well… then you’re a Realtor for sure. (Not that it makes you a bad person.)


For the most part, the only people listing homes for sale are over 70 years old… ask around, you’ll see.  The 30-60 year-old repeat buyer is largely gone.  Older people moving as part of their retirement years are the non-distressed sellers today.



Now, let me wrap up with a couple of closing thoughts and disclaimers. 


The credit markets are broken.  We haven’t had a private securitization of mortgage debt since 2007, and the securitization markets show no signs of healing.  Investors don’t trust the ratings agencies and their AAA ratings.  The last time investors lost faith in the ratings was 1929.  After that, our faith wasn’t restored until 1970.


For the foreseeable future, it’s going to be government lending alone… Fannie, Freddie, FHA, USDA, and VA… and the absence of competition is likely to keep credit tight going forward, and low rates leave little room for private money to enter the market, as investors continue to demand government guarantees.


It’s going to be a bumpy ride down, and until the market fundamentals change in some appreciable way, we just can’t expect home prices to appreciate either.  As I said, assets simply do not magically re-inflate themselves.


However, nothing goes down in a straight line, so there are going to be pockets that appear to do better than others from time to time.  That doesn’t means the fundamentals have changed.  The low end of the market can fluctuate by let’s say ten percent up or down, and that makes for some enticing headlines to be sure, but it also doesn’t mean the fundamentals have changed.


Here’s today’s news from the NAR after last week’s news was so giddy it almost gave me a nosebleed… Existing Home Sales Slip in September


The housing sector hit a speed bump in September as existing home sales dipped, the National Association of Realtors revealed Friday. The NAR reported existing home sales fell 1.7 percent to a seasonally adjusted annual rate of 4.75 million, the first decline in three months.


Yada, yada, yada…


And Barclay’s analysts today said something downright prescient…


Barclay’s analysts explained, home prices will remain below their 2006 pre-crisis peaks until June 2021.


Home prices to remain BELOW their 2006 peaks until 2021?  Now there’s a forecast you can’t possibly get into any trouble by making.  Prices will stay low, and by 2021 anything could have changed… including that guy’s job.


And none of this means that you should or shouldn’t buy a home today… or tomorrow… as long as you plan on living in it.  In fact, now might be a great time to buy a home in which you plan on living.  Prices are certainly down quite a bit from their highs, and if you can meet today’s underwriting requirements and get the loan you need, then certainly interest rates are about as low as one could ever expect.


It’s a house.  You should buy it because you want to live in it for some time and because you can afford it even if you lose a job and are out of work for a few months.  If those two things are true and you love the home… who cares what the market does in the next five or even ten years… you’re not buying a stock… it’s your home.


Mandelman out.


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