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Foreclosure predictions and dwindling sales

Posted by Stacey Myers  August 26, 2008 10:36 AM

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Existing-home sales in the Northeast were down nearly 12 percent last month when compared with July 2007, according to the latest figures from the National Association of Realtors. At the same time, the median sale price, or midpoint price, was $278,700, which is about 5 percent lower than the year-ago period.

The regional numbers were slightly better than the national numbers, which showed existing-home sales fell just over 13 percent from July 2007. The national median sale price fell about 7 percent, to $212,400, from a year ago.

In releasing the latest figures, NAR officials said they hope the recent federal housing bailout bill will provide the “tools” needed to help some buyers get into the market.

“We hope the new tools in the hands of home buyers from the recently enacted housing stimulus package will spark a sustained sales uptrend in the months ahead,” stated NAR president Richard F. Gaylord, a California broker. “Buyers who’ve been on the sidelines should take a closer look at what’s available to them now in terms of financing and incentives. Given some of the inventory on the market, we also strongly encourage buyers to get a professional home inspection.”

Foreclosure foresight
And did you see the story in yesterday’s Los Angeles Times reporting that FBI officials predicted a rise in mortgage fraud –- in September 2004?

The paper reported:

“It has the potential to be an epidemic,” Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. “We think we can prevent a problem that could have as much impact as the S&L crisis,” he said.

Well, apparently FBI investigators didn’t get additional help they requested because many of the agency’s resources were focused on fighting the war on terror. So, only about 100 agents delved into mortgage fraud. The Times reported that the agency had about 1,000 agents working on the S&L failure in the 1980s.

It was a little disconcerting to read that news the same day the Mortgage Asset Research Institute –- which sells services aimed at preventing mortgage fraud to mortgage lenders –- said that incidents of mortgage fraud reported by its subscribers were up 42 percent in the first quarter.

Florida was the state with the highest number of fraud cases and “general application misrepresentation” seemed to be the most popular type of fraud, according to MARI.

However, the report didn’t indicate whether borrowers or loan officers perpetrated the frauds.

There’s lots to think about today, like whether the “housing stimulus package,” as the NAR dubs it, will really jump-start sales, or whether the FBI could have prevented the total meltdown of the mortgage market if it had just had a few more resources? What do you think?


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21 comments so far...
  1. The housing stimulus package will have almost no effect on sales, as it is classic politician-ese - great title, no contents. Reading it makes this very clear.

    Its amazing how many people take it seriously, and really disheartening. I wish there was someway to short the nonsense.

    Of course the NAR hopes it will improve sales. NAR hopes ANYTHING will improve sales. I have various ridiculous hopes of my own (like hoping my girlfriend will stop pestering me about wedding planning) but am not silly enough to confuse hopes with reality.

    The Case Shiller numbers on Mass were quite ugly, as quick reference on this site will show. And now the zeitgeist is that housing prices will fall until summer 2009. THat was my prediction, but nothing like having the usual suspects sign on to ones predictions to really make one question them.

    It is amazing how many people in this blog ignore the fact that price drops over this year are what pretty much EVERY analyst out thinks will happen - the current debate is whether bottom is summer 2009 or later.

    Posted by charles August 26, 08 11:11 AM
  1. Agree with Charles that the bailout will have very little effect. Of course, if the bailout bill did in fact have a big impact on home sales and prices, that would be a bad thing. The problem is home prices are still too high. The solution is lower prices.

    But politicians, realtors, homebuilders, etc. think the solution is to provide bailouts to keep prices artificially high. That's like telling a drug addict that his problem is not that he does drugs, his problem is that he does not do enough drugs. If he would only keep shooting up, all would be well. If we could only keep home prices artificially high, all would be well. Just like a drug addict is destined to succumb to his addiction and die a premature death, homes prices have and will continue to succumb to economic fundamentals and will collapse.

    Posted by John August 26, 08 01:11 PM
  1. How much power does the FBI have over banking???

    This melt down should have surprised no one. Not only was it overdue, but I'm sure every one of us know someone who got a mortgage for more than they could really afford. Kind of like the ATM that was spouting out money - everyone was more interested in getting some money than telling the bank there is a problem. As it turns out the bank didn't care either, because they just passed the buck.

    This whole thing smells just like the dot-com meltdown. Everyone then was so concerned with making money right now, no one cared even though they knew companies with no 'value' were being bought and sold for millions. The same thing happened in housing. Everyone was just happy to GET a house. People selling a house for twice what it was worth laughed all the way to the bank. And the bank sold bad loans to investors and speculators. And no one complained because everyone was getting rich. Until….

    So I’m one of the “suckers” who knew what he could really afford and was mocked that I didn’t run out and buy a home. I didn’t go and get a mortgage bigger than I could chew – and I ended up safer by not joining in the feeding frenzy. Now I can continue to save and wait for the correction until I may buy.

    As for the bailout, well… I’m not a republican by a long shot, but they sometimes make sense. Most of these foreclosures are from people who did no homework and got caught in the middle. They could have check out a ‘how to buy a house’ book in the library. Or spent the $500 on a lawyer. Or even had the sense to get a FIXED rate mortgage when rates were the lowest in recorded history. But they didn’t – they heard the siren of the snake oil salesman and went for broke. Literally. If I went and shopped and maxed out all my credit cards and then yelled “Government please save me” they would toss me in the street. But people did the same thing with housing, and now the government is tripping over themselves to help? What’s wrong with this picture

    Posted by John Mc August 26, 08 01:13 PM
  1. I'm encouraged that today's Globe headlines actually bear a reasonable relationship to the data reported. A few other publications led with "Pace of declines slowing!" which is a curious way to say that declines have accelerated to record-breaking levels.

    In a month or two, as winter approaches, all the cheerleaders who touted month-over-month increases will mysteriously fall silent. In their wake, though, they will leave a small handful of foolish summer buyers they bamboozled into paying 2005 prices.

    Posted by Marcus August 26, 08 02:17 PM
  1. Here's my suggestion for the NARs next press release.

    "In a shocking reversal of previous press releases, the NAR stated today that it found the nationwide decline of home prices 'refreshing'. "As a professional organization, we have no interest in maintaining transaction prices at any level other than what represents the price that two honest parties pay in an open agreement. We believe that artificially high home prices - either due to government assistance or irrational exuberance - does nothing more than rob the economy of much needed capital. The NAR supports mortgage brokers who insist on 20% down, full document mortgages, and are suggesting that NAR members insist all transactions in which they are present meet those mortgage standards. We want our customers to be happy, and what better way to ensure our customers are happy than to make sure they can actually afford what they are buying?"

    Posted by Michael M August 26, 08 02:44 PM
  1. Like the economic stimulus package with $600 rebate checks, Congress' and Wall Street's notion of improving the housing market and economy is by encouraging the U.S. consumer to -- consume even more. What will happen when inflation bankrupts the Treasury?

    Posted by Kyle August 26, 08 03:28 PM
  1. What buyer honestly gets their unvarnished real estate advice from the NAR? You really expect that they are going to be forthright and honest about all the facts when their vested interest in boosting sales is so clear? Consider the SOURCE. People who think the NAR has ever even considered an agenda that doesn't involve increasing property sales needs their heads examined. That's like going to a barber and asking him if he thinks you need a haircut - or going to an insurance salesman and asking him what he thinks would be perfect for your portfolio. You're honestly surprised at what these people tell you?

    Posted by J.P. August 26, 08 04:06 PM
  1. From a recent NY Times article on the National RE Bust;

    " As Merced, CA goes, so might go much of the nation. With as many as 2.5 million homes in the United States entering foreclosure this year and, at best, sales of only five million existing houses, the foreclosure price is becoming the rule in many areas. In Los Angeles County, whose 10 million people make it the most populous county in the United States, a third of the sales are foreclosures."

    That is 33.3% for you- math challenged RE Brokers. Try to explain this to CNBC's Larry Kudlow, one of their " experts" !! The bottom is coming... Sure, Larry !


    Posted by Peter C August 26, 08 05:22 PM
  1. i'm not quite sure why everyone is trying to bash the square peg into the round hole on this. we have been monitoring prices in our target market since peak and reduction in ask price is non-existent. properties sit on the market for a lot longer for sure but the minor depreciation in sales price is almost entirely eaten by the increase in the cost of capital. if the market continues at the current pace for the next year or so and the median sales price drops another 10% statewide but the interest rates rise another point or so then we will be in exactly the same position as we are in today. the benefit to waiting out the market is risk reduction. if unforeseen circumstances force you to sell your primary residence you'd like to be able to do so quickly and at a reasonable price. the legislation is a non-factor in our decision to purchase and i assume the same to be true for most on both coasts. sorry michelle singletary, we're going to take our tax credit and pay it back w/ no interest over the next 15 years if we're eligible. the credit failure has as much to do with greedy and unsustainable policy from the top down as it does with unscrupulous practices on the bottom. i'm pretty sure the fbi had no control over any of that. in short, dramatic price depreciation is real and it is dragging down the median price. however, it's probably not happening to any great extent where you are looking for your primary residence so deal with what is actually happening rather than what you would like to happen.

    Posted by Still waiting August 26, 08 08:23 PM
  1. Price declines are real, and are accelerating. Why, the median price in pristine, immune, everyone-wants-to-live-there, multiple-offer Arlington dropped 10%. Rising mortgage rates would only depress prices further. In fact, the talking point that mortgage rates and prices cancel each other out is an old realtor argument, and it doesn't work with anybody who's ever glanced at an affordability index.


    Posted by Marcus August 26, 08 09:12 PM
  1. still waiting, I agree with your facts but not your analysis. Or rather, I agree with it partially.

    Yes, reduction in ask price is minor currently. But this doesn't mean that ask price will always remain flat - though it could mean that, what it most likely means is that most of the correction is still ahead of us

    Posted by charles August 26, 08 10:46 PM
  1. marcus and charles, i respect both of your opinions as much as anybody on this blog. personally, i'm not talking about pork bellies or orange futures. my goal for my family is that we purchase a home that is affordable to us, where we can raise our family for a long time. if we can outperform the market in appreciation then that will be a great bonus. i do believe that there is investment opportunity in this market but to say my wife is risk adverse is to assume that she would accept any risk at all. the one point that i believe you both prematurely discount is that we will not all share equally in this drag down to the affordability equilibrium. as far as i can tell what has happened to this point is distressed properties have disproportionately assumed that burden, followed closely by properties in proximity to clusters of distressed homes and there is no reason to suspect that they will not continue to take the brunt. it's not that any town is immune, more that the landing may be softer where the earning power and the fundamentals are a little more solid. we'll see what effect the alt a's have. i think the geographic effect may be larger but the overall effect will be smaller than the subprimes which were unsustainable from day 1. my guess is that they will hit marginal towns where currently foreclosures and shortsales are not the rule, but aren't entirely uncommon either (the whitmans and dracuts). i believe that there will be bleeding in the middle and upper-middle too but that it will be incrementally smaller as you go up the ladder. time will tell i suppose but if i were to take a historic snapshot of 8/27/08, '07 & '06 in our target market you would not be able to tell the three apart even though were are in the midst of enormous, at least by volume, correction.

    Posted by Still waiting August 27, 08 01:22 AM
  1. still waiting,

    I ran your scenario of a 10% drop and a 1% rise in interest rates in one year.

    Buying a 350,000 home with 20% down and a 6.67% 30 year fix mortgage as of September 1, 2008 will cost you $66,456 in real terms and $128,843 in nominal terms compared to buying a $315,000 home with 20% down and a 7.67% 30-year fixed mortgage as of September 1, 2009

    The break even APR is 9.833. I will write you an option that says that they will not be 9.8% next year.

    The analysis assumes that everything is equal: housing affordability remains constant (wage inflation = housing inflation), the return on housing immediately regresses to 5% yearly return from September 2009 - 2039; the nominal return on financial investments is 6%.

    This does not evaluate the impact of increasing mortgage rates consequently decreasing affordability. Nor does it evaluate regional demand for housing, but is somewhat captured in the 30 year mean appreciation rate for Massachusetts homes. It is likely that given scarcity of land in Boston that the area will have higher highs, but given the relation of the highs to income, any reduction in work force or real wages will accelerate the downside.

    Posted by WSJevons August 27, 08 11:46 AM
  1. Marcus, I think recent reports suggest price declines are not accelerating. Prices are still dropping yes, and will for awhile, but more slowly than they have been.

    Posted by accidental landlord August 27, 08 12:13 PM
  1. still waiting,

    You began your posts with a hypothesis rooted in home ownership as an asset. When Marcus, Charles and I offered a rational assessment of your hypothesis, you switched to the emotional:

    "my goal for my family is that we purchase a home that is affordable to us, where we can raise our family for a long time. if we can outperform the market in appreciation then that will be a great bonus."

    I don't have a problem with it per se. However, I would argue that the current market run-up was emotionally based and that the normal safeguards to circumvent favoring emotional decision making over rational decision making were removed by greedy bankers. Now we have the fall out from that.

    The future solution to circumvent emotional decision making is going to be personal responsibility achieved through education and real financial literacy. Unfortunately, we have a long way to go.

    Posted by WSJevons August 27, 08 05:00 PM
  1. I find little comfort in prices declining at a declining rate.

    Of course, the NAR reports that as an increase. ;-)

    Posted by WSJevons August 27, 08 05:10 PM
  1. prices declining at a declining rate on a month over month cyclical basis moreover, which is even more absurd!

    WSJevons - I admire your willingness to put a spreadsheet together. They give me agita. I was playing around with the 20 year case shiller today, trying to make pretty graphs, and gave up in sheer frustration.

    May I ask why you used 5% as the rate of increase going forward? 30 year bond plus the historic 50 bps of real return on housing?

    Still waiting - I appreciate your analysis, which is not unreasonable. Iwould put out there that buying a house is currently a riskier financial maneuver than not buying a house, if your wife would truly like to avoid risk.

    I do think you are right in that there will be the traditional flight to quality, and higher end markets will not fall as far. But that is not to say they will not fall a great deal further than they have already, as there has been little movement that I've noticed in high end prices.

    once again I agree with you on your snapshot, but we have a 180 degree difference on what it means.

    Posted by charles August 27, 08 09:56 PM
  1. ws you build a beautiful arguement. unfortunately i may not have communicated very eloquently in my previous posts. i apologize. the last one was at 1am and i was watching my newborn so my thoughts may have been slightly jumbled. my basic points were while statewide prices are down 12% or whatever since peak that is NOT our experience in our primary residence search. in our experience prices are down in the 2% range since spring 07. interest rates have increased roughly .75% washing the nominal price drop in our target market if not making it more expensive for us in the short term. if current market conditions continue for x # of years it is largely irrelevant to us b/c we are not reaping the benefit of these drastic price drops. the only way any of this benefits us is if this is just getting started and if the back nine is more generous to us than the front has been. i understand that is annecdotal but that is my experience. just like me, many others treat their primary residence emotionally and irrationally. i understand real estate can be an investment but to treat housing as a emotionless commodity is to stick your head in the sand regardless of how rational you believe people's choices should be. prices are sticky and there is no impetus for people to sell short of distress and/or life change. short sales and reo's are almost a non-factor in our market so unless there's a substantial percentage of the market that reached w/ alt a's, haven't reset yet and do not have the earning power to repay at reset the future depreciation similarly looks like it largely will not benefit us. could people decide to leave our market for the sunny prospects of cheaper housing in areas of depreciation. absolutely, however, my guess is that they won't. i guess my general train of thought was if your goal is investment there are untapped revenue streams that you could exploit today in real estate rather than argue w/ people about what they are experiencing in looking for a place to live.

    Posted by Still waiting August 28, 08 05:00 PM
  1. still waiting - still no money to be made in real estate that I see. Which is why I'm hanging out rather than making money.

    Once again, I think you are right that the price drops have been minimal. But where I disagree is that I think that big price drops are still ahead of us, not that price drops won't happen.

    There are forced sales in Newton too... Some people die, some people move, some people lose their job (as the economy gets worse, that last group will increase)

    And some bought more house than they can afford, and their arms will reset.

    I'm sure you see why I think a major investment should be done rationally - why should I think irrationally about it? I don't see the advantage?

    Posted by charles August 29, 08 12:25 AM
  1. charles - you seem like you're a very capable decision maker in your own right and i agree w/ you that those decisions should never be treated lightly. i have no more interest in telling you how to make financial decisions than i have in telling you what kind of socks to wear. the problem is when you assume that everybody is as thorough in research and analysis and goes through the same decision making process as you and shares the same goals. many view primary residences as something other than a commodity investment making their decisions seem irrational from an economic perspective but in actuality are really predictable for other reasons. i think we share many of the same opinions as to the state of the overall real estate market. to switch gears to investments which is a process similar but not identical to my search for a primary residence, from my perspective you must think a little outside of the box to earn under current market conditions. as you mentioned life changes and/or affordability issues arise so price speculation is not dead but it's difficult. i'm obviously not going to create unnecessary competition for myself but i can allude a little to process in scouring for opportunity under current market conditions. when i am looking for potential windfall, my analysis starts with where can i piggyback an economy of scale. sorry i can't be more specific but opportunity does exist.

    Posted by Still waiting August 29, 08 09:31 PM
  1. There are always opportunities, indeed. Believe it or not I've actually bid on property this year. Though it was at the price I thought it should be, not the ask, and the bid wasn't taken. No biggie, I'll rebid it next summer lower...

    I agree that most don't approach real estate analytically. I just don't think that's a good thing. To my mind, a big financial decision is something that should be done rationally, not emotionally.

    I recognize that those of us who think so are the minority, but I just don't understand why. On the other hand, nothing like an inefficient market for making money...

    Posted by charles September 2, 08 11:20 AM
 
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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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