UCLA says short sales ‘hijack’ housing’s future

September 24th, 2008, 1:01 am · 33 Comments · posted by Jon Lansner

While Sales Of Existing Homes Rise In July, Prices Continue To Fall

From UCLA’s latest California forecast, a discussion of “short sales” that require the lender to accept less than full repayment when a home is sold …

The illiquidity of short sales has a very key implication for those of us trying to look ahead and find the end of this dismal housing market. One of the many methods for forecasting the end of the housing slump involves calculating how much further home prices must fall to return inventory levels to their historical norms, using the price/sales relationships from previous bear markets. But when 30% – 40% of that inventory is tied up in short sale red tape, no amount of price decline will get it to move, making this inventory-based method of forecasting highly suspect.

A realistic forecast of the bottom of the housing market needs to explicitly acknowledge that short sales have temporarily hijacked the market mechanism: the near-term course of the housing market will be determined more by the procedural timelines of foreclosures and short sale approvals than any notions of a magic price that will clear existing inventory. After our housing mega-bender, we will be suffering inventory indigestion for some time to come.

As we’ve argued before, data from the Fed suggests that underwriting standards tightened significantly in early 2007, and Dataquick’s estimates suggest that the average mortgage default in California occurs roughly two years after origination. Taken together, these facts suggest that foreclosures will be the dominant factor in the California housing market until 2009Q1 at the earliest.

(To read UCLA’s job forecast CLICK HERE!!!!)

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mav says:

September 24, 2008 at 6 am

Pat,

It would be hard to get at the exact burn rate, but very easy to get at one more accurate than thomas’.

I’ll give a suggestion:

months inventory = [(MLS inventory + (default % * new NODs) + distressed/shadow inventory)] / [ ( closed sales ) - ( new foreclosures ) ]

I think the pecrentage of NODs that go into default is something like 30%. The hard part would be getting at the inventory that is not in the MLS. You would have to make some assumptions on how many homes bought in 2005-2006 will go into foreclosure. I suspect this will be a very high percentage. You would also have to assume a number for the total number of HELOC abusers, and how many of them go into foreclosure (i would think most).

You could refine that formula (or a formula like it) by using 3 month averages for each data point, or some other time average.

Using pendings at this point does not make sense. Pendings as a data point is somewhat useful. Using pendings in a calculation to draw conculsions is flawed.

dutchtrader says:

September 24, 2008 at 7 am

Pat would you like to have lunch sometime, I work really close to your office.

Mulliganville says:

If banks/lenders choose to not work with their short situations, they will get what is coming to them. They were part of the problem, therefore they need to be part of the solution. The need to create a proactive course with their homeowners, offering loan modifications. Otherwise, they can expect $30-50,000 per foreclosure, and that number will likely rise since demand in that arena is rising.

I liken the current situation to price gouging during national/local emergencies. Would you say we are in a national/local emergency? When Wall St. is essentially paralyzed, something has to be done. The homeowners have their share of responsibility, but if it comes down to eating or mortgage, they will just walk unless you give them a reason to stay. You may not like that fact, but it is what is.

Consumer confidence will not return until housing values stabilize via media reports…regardless of what is happening in your backyard.

NationalBubble.com says:

September 24, 2008 at 8 am

MulliganvilleRealtor Says: “Would you say we are in a national/local emergency? When Wall St. is essentially paralyzed, something has to be done.”, “Consumer confidence will not return until housing values stabilize via media reports…regardless of what is happening in your backyard.”

But I thought housing was just fine. At least that is what you realtors have been telling us.
Don’t you guys say that all real estate is local and that there was no National Bubble?
Well, it turned out that I picked a great name for my blog.
This was one of those few times in history when all real estate is actually “national”.

Your broad brush is out again…but it will fit in my H1 Hummer…and you are still not paying attention. Why so thickheaded? Housing WILL be fine. We all know it is not right now. Your market is local…otherwise, that sale in Santa Ana would devalue your home among the Newpsies. It does not, nor will it ever….hence, local market.

Manhattan is not experiencing the pain we are here…they are part of the nation. Neither is Texas…part of the nation. Neither is Idaho, Washington, Mississippi, Colorado, Oklahoma…I could go on and on. Credit is national…housing markets are local. Ours just happens to be applicable to the headlines of today…and during the boom…which the aforementioned states missed out on.

no_vaseline says:

Pat Veling,

As someone who has several hundred hours in a Cessna, I’d argue that your data is like trying to fly IFR with innaccurate gauges - the end result is the same as if you were to fly blindfolded and ignore them.

You’re gonna crash, and you’re certainly not going to wind up where you planned in the state you planned to get there.

Common Sense says:

I would also say that speculators hijacked the market from 2003 - 2007.

The banks want to get the most money they can for their foreclosures. The truth is that the houses are still overpriced based on the fundamentals of the average income with sound lending practices. The reality is that most folks can’t affort 20% down on a $400-500k home.

JinglesOverDems says:

OBAMA IS MY B1111TCH!!! I LOVE LOVE ITSELF, WHAT ELSE IS THERE IF WE CANNOT JUST LOVE?!?!

The sad truth is that these people should not have to pay for homes that simply cost too much. They signed a piece of paper to commit to something, but the whole idea of commitment is too much. We need to help these people pay the mortgage, or pay off the loans, or tell the banks hoolahoop it! Then we need to give the sad people a total home and body makeover…NOW THAT IS AMERICAN!!!

OBAMA WILL MAKE SUCH A PERFECT QUEEN OF THE US!!!

Liar Loan says:

A member of my family just closed on a short sale last month (against my advice). It took 4 months from the offer date to closing (Offer made in late April, closed in late August). If that is the typical timeline for short sales, then Steve Thomas’ pending number is probably 3-4x overstated compared to the normal 30 day escrow, at least for the distressed segment of the market. If his pending sales are that overstated, then Steve’s “market demand” is completely bogus.

Pat:

If you could get a good data set to start with I’m sure your data would be fine. But since you don’t……….your data (and Thomas’) isn’t useful - just distracting.

My suggestion is to work on getting a better data set. It will be a monster labor intensive project, but it can be done. But you could skip all that and just toss in the towel because eventually you’ll come to the same conclusion I have:

The market is in such a state of dissaray the data doesn’t mean much, except the market is very sick and getting worse. That ’shadow inventory’ is very real and very distorting to the market. In the next 90 days, you’ll see it come out of the shadows and be “listed”. If you think the (local) market has been kneecapped so far, hold on to your shorts.

September 24, 2008 at 9 am

Anyone can count closings. That ruins Pat’s business model.

If he set up a data gathering team to figure out the shadow inventory………….now he’s got a product.

The question becomes - does he have a customer who’s check will clear who needs the data?

lee in irvine says:

Mr. Veling,

We are far beyond “data points”, and what you perceive as “intelligent input”.

The military acronym SNAFU comes to mind at this time.

no_vas,

I believe First American CoreLogic has the unlisted REO inventory for all lenders if that’s what you consider the shadow inventory. Mr. Veling could subsribe to their service for around $100k per year.

If you want the true potential shadow inventory for OC, then you should count not only unlisted REO’s and short sales, but any loan with a NOD filed in the past year. Even if they don’t go straight to foreclosure, a high percentage of these will end up in foreclosure sooner or later. Those that receive modifications will stave off foreclosure temporarily, but at least 50% of these will end up as foreclosures within a year.

samson says:

Im not sure if this question fits here or not.

Since, we had lax lending standards in the recent past, giving easy money to anyone that can put an X on a piece paper. Additionally, the irrational exuberance of appraisers/Realtors/brokers propping up the market to prices that are out of reach for most. Furthermore, with job losses growing and growing and incomes declining.

Based upon all of this, is it now a forgone conclusion that the housing market in Orange County was and in many markets still overpriced/overvalued?

Is there still a faction of people that believe homes in Orange County are undervalued?

If so how do this base this data when incomes do not support it?

MulliRealtors says: “Neither is Texas…part of the nation”

Well, who wants to live in Texas anyways. Of course, they had no housing bubble. Even you moved out of Texas. Only Bush wants to live there.

Active Buyer says:

September 24, 2008 at 11 am

LL - if shadow inventory = unlisted REO (RE that is owned by a bank that no one lives in that is not listed for sale) - What value is there is over inflating this number by including short sales (which are MLS listed) and NODs which are still occupied by the mortage holder?

Actually Bubbs, I moved here to be closer to work…not because I did not like Texas. You would love Austin…It is Berkeleyesque.

Oh, and TX is second only in population to CA. My guess is TX is increasing in population while CA is dropping. I guess about 23,000,000 people want to live there.

not buying it says:

September 24, 2008 at 3 pm

A few things:

It is absolutely amazing that long term rates have not gone up higher than they already have given the current liquidity crisis. Yeah for taxpayers - we are dolling out plenty of cash on a daily basis right now, and the Fed is printing most of the rest.

Lending standards are harsh - but given the fact that it is investor confidence that can shore up the lack of capital - their confidence is exactly what is needed. What do people think these folks and institutions should feel like at this point?

Lastly, given the facts that 15% of ALL US MORTGAGE HOLDERS pay 50% or more of their income towards their mortgages, and this has never been the case at any other point in history, one can argue that 15% of all mortgage holders should not have bought those homes. Who in their right mind would loan to someone with a DTI of over 50% (and that is if they had no other debt).

It is so ironic that with each bailout measure, we are moving one step closer to the very type of government we fought wars over to prevent from happening. The only problem is we did it ourselves.

Let the public vote on this bailout - majority of people I have spoken to (all six figure plus earners, most are homeowners, business owners) cannot even stand that their money is being put to such use. This is a huge amount of spending being forced upon the American people to preserve the wealth of others. Personally, I’m quite hedged against this mess.

Lastly, isn’t anyone else amazed as to how they are calling this situation dire when, in fact, no one has actually officially called this a recession yet? That is because the US people are still working hard and producing and selling product.

i would be for some kind of bailout if I had a personal hand in who is lent the money to lead us towards a recovery. How in the world can anyone trust these schmucks with our money when my grandmother (God rest her soul) would have done a better job in handling it?

Truthiness says:

September 24, 2008 at 4 pm

Am I the only one completely sick of Mulligan on this blog?

bpsqwerty says:

September 24, 2008 at 5 pm

man that’s a bummer. this whole ‘housing future’ thing…

tolerance truthi…tolerance.

Samson says:

September 24, 2008 at 8 pm

I guess not since no one responded. Maybe I should call somone a name and I will get a response.

September 25, 2008 at 9 am

AB-

I tried responding yesterday and Lansner’s spam filter wasn’t having it.

The point I was trying to make is that if we want to count unlisted REO as shadow inventory, why not count any loan in default because they will soon be hitting the market as short sales and foreclosures. Many of them will get modifications or some other workout, but will still end up in foreclosure within a year. You may say that that’s too far off to be counted, but a lot of unlisted REO can take many months to hit the market also. Evictions take time and lawyers can slow the process even longer. By then, the house may be completely trashed and certain repairs need to be made before the property is marketable.

Slice	Price	Ch.	Sold	Ch.
House	$500,000	+18%	1,833	+11%
Condo	$290,000	+7%	881	+22%
New	$617,500	+24%	171	-17%
All OC	$435,000	+10%	2,885	+12%

Orange County Register