The median sales prices of existing homes declined in 134 out of 152 metropolitan areas during the first quarter of this year. While sales are up, 50% of those sales are foreclosed homes at fire-sale prices. And in the worst-hit markets, such as San Francisco, San Jose, Riverside, and Phoenix, prices fell over 40% since 1Q last year.
This presents serious continuing difficulties for banks and for Fannie Mae/Freddie Mac. In any given year, you can figure that around 1% of the outstanding mortgages are going to default and most of those are going to end up in foreclosure. Usually that is not a problem. Mortgage insurance and required down payments ensure that first order lenders are exposed to only 80% risk in a home whose price is at least stable, if not rising. That gives them 20% overhead to do the legal process and dispose of the home, meaning that typically it's even profitable for a bank to foreclose on a home. But if housing prices have declined 40% -- as they did in San Jose California last year -- then suddenly that's a different story. Even lenders who never issued any exotic mortgages, such as Fannie/Freddie, are suddenly going to find themselves in the position of losing major chunks of change.
Thus far the Federal Reserve and U.S. Treasury appear to have stanched the bleeding and kept the financial system working, sort of. But housing prices still have a pretty good amount to go before they reach affordability with conventional loans and thus quit falling. As much as San Jose prices have fallen, for example, I still would not be able to justify purchasing a home in San Jose right now -- it's still much cheaper to rent even with the tax benefits of buying vs. renting. So expect to see more of these headlines over the next year... and as that backing for dollars evaporates from the economy, the need for further fiscal and monetary stimulus is going to grow, yet it appears that the political will for fiscal and monetary stimulus has evaporated. So I guess I'll have to watch with baited breath what happens next. (Yes, baited, not bated -- herring, yumm! ERRRP!).
-- Badtux the Economy Penguin
My fish-breath friend -
ReplyDeleteI appreciate your economics posts (and CA news)because you dive into subjects where mammals fear to go.
One issue that I have not seen any specuation about (let alone facts) is how inflated are the values of repos that the banks are carying on the books. IF - and it's a big if the Treasury allows the banks to list the forlosed 'assets' at near the value of the original mortgage, then those items are inflated by 20 to 40%. And my perception is that homes are defaulting faster than they are being picked up by speculators. Last, this inquiring mind would like to know the stats on who's sitting on real estate, how much and if it's being listed for sale. Because if Citi has billions in toxic homes that they don't want to sell because they don't want to write off the loss, then we are talking about zombie banks, stress test or no stress test.
Well, there's two lines of thought about disposing of foreclosed homes. If there are clusters of foreclosed homes and there is a reasonable expectation that dumping them all on the market at the same time will get you less money than spacing the sales out over time, it makes good business sense to keep them on the books and space out the sales over time. But the problem, from my perspective, is that this isn't a viable way of handling the current foreclosures because there will never be a time at which the bank will be able to get the amount of money they want out of these foreclosures. The housing market is currently in a reset back down to affordability, and the end game of that reset is that banks and etc. sitting on that real estate are going to lose 40-50% of their investment regardless of whether they space out the foreclosure sales or not.
ReplyDeleteSo anyhow, I have no firm evidence that they're over-valuing the assets they have on the books, but as you say, it'd sure be interesting to find out. I suspect they are, maybe even to the point of still being zombies despite all the money they've been flooded with, but I currently have no way to prove it.
- Badtux the Zombie-scrying Penguin
If I may continue with questions ... I wonder if some banks are determined to carry ALL the crap on the books at fictional values until hell freezes over or the markets return to '07 values. (which ever happens first)
ReplyDeleteWhat does this imply for the T-dept plan for hedge funds buying troubled assets? My guess, the banks don't have troubled assets available at the prices the hedge funds will be willing to pay.
Treasury is going to hold an auction and there will be nothing on the auction block for sale.
I think it's great even though it means my place is worth less.
ReplyDeleteOh, wait, it's free and clear and I don't ever intend on selling it. It just means that being worth less means my property taxes will be less. Never mind, it's all good here.
Fire sale prices for greedy jerks.
ReplyDeleteDESPITE DECLINING HOME PRICES, MOST OF THE JOBS CREATED THROUGH THE STIMULUS DO NOT PAY ENOUGH TO AFFORD A HOME
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Ummmm Kippered Herring ! Why , I haven't had that in years ! Not since my folks were alive anyway .
ReplyDeleteI wonder if they have that in this backwoods ?
This kind of stuff makes me soooo happy that I have a fixed $300 a month house payment , Owner financing was the only way they could sell this old "renter" . It keeps us warm and dry and gives us a lovely view of a river canyon . What the heck else really matters . Especially since 'this' is something we can afford .
A hungry but pleased ,
w3ski
I hard on NPR this AM that there are about 1.8 milion homes rhar have been forclosed and not sold. About half are listed, the other half are not or were listed and removed. Who has the title(s), mostly Fannie/Freddy, Citi, Wells Fartngo.. I don't know.
ReplyDeleteAnd in a way, that's remarkable. The pivotal issue of the decade and there's practically no hard data available.
Yeah, ain't that interesting, TD? I can't find straight numbers from any of my sources, either. I've heard speculation that the actual number of foreclosed houses is just the tip of the iceberg too, that if you counted all the houses in default that haven't made payments for six months or more that the banks just haven't foreclosed on, you'd get some seriously whack numbers. But what are the numbers? I haven't a freakin' clue. And I suspect our leaders don't have a clue either. Which is scary as hell.
ReplyDeleteThat said, we know how to deal with this. Resolution Trust Corporation, bay-bee! I'm more concerned about the jobs situation right now than I am about the banks, 'cause if people don't got jobs, the economy ain't going *nowhere*...
- Badtux the Economics Penguin