When evaluating where we are in the housing cycle, it is often useful to evaluate fundamental valuation metrics and compare current trends versus historical averages. Below is a graph (click to enlarge) depicting the national price-to-rent ratio, which depicts how homes are trading relative to their rental values. This metric is similar to the P/E (price/earnings) ratio typically used in analyzing the stock market.
This graph uses the Case-Shiller Composite 20 and CoreLogic House Price Index, and sets the baseline period at January 1998, which is assigned a value of 1.0. The current ratio (as of October 2011) on both indices is at 2000 levels, indicating that we are very close to long-run historic average metrics. While foreclosures/short sales (lagging economic indicators) still account for a significant share of existing home sales, the good news is that delinquency rates (leading economic indicators) are gradually diminishing. As such, we can expect home prices to bounce around gently for several months, then gradually start to recover based on improving fundamentals.
This New York Times piece, written by Andrew Martin and David Streitfeld, highlights the latest “foreclosure-gate” debacle — that is, the shoddy preparation of mortgage documents which has stalled foreclosures in 23 judicial foreclosure states — and the effect it has on home sales. While the article focuses on sales declines, it altogether ignores the issue of price stability. With fewer homes released into the market, supply is constrained, creating a bit of temporary price stability that otherwise may not have existed. Either way, like most efforts under the current administration, this series of events will simply slow the decline to where the housing market will end up anyway. Here’s a link to the article:
David Haldane’s piece in this week’s Los Angeles Business Journal discusses the continuing decline in local median home prices. Haldane quotes me fairly liberally, and then in the end, pits my views against my good friend and colleague Chris Thornberg. And all along I thought I was the pessimist. Link below:
Alana Semuels of the Los Angeles Times wrote yesterday about an emerging trend in distressed residential communities: banks allowing defaulting borrowers to stay put in their homes while making no payments.
The logic is that allowing borrowers to stay put reduces the likelihood of vandalism and protects the value of the bank’s investment, essentially allowing borrowers to act as caretakers of the property. At the same time, banks can explore various avenues in an effort to comply with government pressure to modify loans and keep people in their homes. Finally, with a glut of distressed inventory, banks are loath to dump too many homes into the market for fear of further depressing prices. According to the article, in the Inland Empire, over 100,000 delinquent borrowers are living rent-free. Link below:
James Hagerty of the WSJ writes that more waves of foreclosures will keep downward pressure on house prices for years to come. Hagerty cites a recent study that estimates, nationwide, approximately 5 million out of an estimated 7.7 million delinquent borrowers will eventually lose their homes through foreclosures or related procedures. And 5 million homes would represent roughly 10 months of inventory at the current pace of home sales. Unless we see some highly unlikely turnaround in the labor markets, the government’s efforts to reduce foreclosures will be largely futile. Then again, I was one of those kids who preferred to yank out a loose tooth using a string and doorknob, rather than alter my life for days on end until the inevitable came to pass.
RealtyTrac reports a 10% decline in foreclosures for January, compared to the previous month, yet the number is 15% higher than January 2009. “January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity followed by a 10 percent drop in January,” said James J. Saccacio, chief executive officer of RealtyTrac “If history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works.”
And while the well-intentioned Home Affordable Modification Program (HAMP) has targeted over 3 million borrowers, only 900,000 trial modifications have been extended, with only 66,000 of those having been made permanent. At a success rate of 7%, it’s tough to predict anything but a foreclosure log jam ahead…
Bloomberg ran a great piece today on lenders pursuing borrowers for deficiency judgements after foreclosure of their homes. While several states are recourse states, California is non-recourse for purchase money mortgages. In other words, if the borrower defaults on the loan used to buy the home, the lender is left with only the collateral, regardless of whether it covers the loss on the loan. Many other states do not afford borrowers this privelege.
All this is out the window, however, if the borrower refinanced or put on a second mortgage. In these instances, the lender has recourse, and can pursue a judicial foreclosure, as opposed to a trustee’s sale, and seek a deficiency judgment. Should this happen, remember that California is a “single action state,” meaning that the lender can either pursue a trustee’s sale, or pursue a judicial foreclosure and seek a deficiency judgement, but not both. Finally, for short sales, I encourage sellers to consult with legal counsel and ensure that the lender waives its right to a deficiency judgment. This should be a point of negotiation in the transaction.
DataQuick today reported a decrease in overall foreclosure activity during Q4 2009, but noted a transition in foreclosure activity from entry-level markets into the pricier, more established communities. This trend is consistent with what I’ve predicted through several media sources; that is, there exists a strong linkage between markets at all levels. Some are insulated, but none are immune.