CA Housing Forecast: A Realtor's Analysis of the San Diego Housing Market

I just spoke with an agent, who said a busy REO listing office was just screened by a lender, to make sure they had the staff to handle a deluge of bank owned homes that would hit the market in August or September.  This broker has 17 people in his office, so he was able to handle their volume.

I've heard rumblings of this in a few places.  The foreclosure moratoriums created a backlog of properties that are going to hit the market all at once.

This will give the market a temporary reprieve, but unless the floodgates open for good, even 2000 homes hitting the market in one month will be absorbed within a week, if not less.

So for those frustrated with low inventory, you could soon get a chance to write some offers.

For those waiting for high inventory to cause price drops, this won't be enough.

This question has bugged me for years now.  Why are banks not filing NODs (Notices of Default) on homeowners who are delinquent on their mortgage?  In California, an NOD can be filed after 3 months of delinquency, but we all know of people who are 8, 9 months delinquent and still have no NOD.

Banks delay auctions as well.  They issue NTS (Notice of Trustee Sale, sets an auction date), but most of the time they postpone or cancel the auction.

Once the bank takes back the property, the REO (real estate owned) is not put on the market for many months.  I've seen REOs take 9 months to get listed for sale.

Why?

This is my theory.  Banks are carrying the real estate at full value until they sell the house.  By delaying the entire process, they delay taking the loss.  Do you remember the "Level 3 assets", those assets that are marked not to market, not to model, but to myth?  

Foreclosure and selling these homes means the banks would have to recognize the losses on real estate.   It's better for them to just keep the inflated paper profits.  

Some might say that it's better to foreclose and get some money, than to keep losing the cash flow from the mortgage payment that is not coming.  However,  losing the mortgage payment may not matter, since the banks have access to cheap funds from the Federal Reserve.

Here's another problem:  the government owns large parts of the two biggest mortgage holders, Fannie Mae and Freddie Mac.  Does the government really want to foreclose on voters?  Does the government want to recognize more losses for these giants?

And of course, what nobody talks about, is that the Federal Reserve holds mortgage backed securities on its books, and is a large purchaser of more of them, to keep the mortgage market flowing.   It would be in the Fed's favor to delay taking any losses on its own books.  That means the Fed has to delay foreclosing on homes which are inside its mortgage backed securities pools.

That is the best theory I could come up.  Does anyone else have any other ideas?

On May 27, mortgage rates rose by 3/4 of a percent, from 4.75% to 5.5%.  They may have retreated a bit, but are still higher.

The concern with this, is that higher interest rates mean that buyers can spend less on a house.   Buyers are pre-approved based on the maximum monthly payment they can make on their income.  As the interest rate rises, so does the payment.  You can easily lose 10% of purchasing power when rates go higher just a little.   For example, this mortgage calculator shows that a $300K buyer turns into a $270K buyer when interest rates move from 4.5% to 5.5%.

I've been tracking the pendings from May 27 and a few prior days, to see how many buyers fell out of escrow since they could not afford the higher mortgage rate.  I'm suprised to say it has been insignificant.

The pending fall-out for May 22, May 26, and May 27 is less than 10%, which is a normal fall-out rate.

In fact, demand is stronger than ever from what I can tell, at least to $700K, where we see multiple offers.  Unlike the multiple offers of a few years ago, today's offers are solid, near asking price, or often over asking price.  The days of lowballing are gone!  

So far, buyers have swallowed the increase in interest rates.  How long can they continue to do so?

Pending sales plummeted 30% in June.

But how can this be, when homes are getting 20-30 offers,  going pending within 1 or 2 days on market, and buyer are outbidding each other?

The answer lies in the new field, Contingent.  Contingent, a field added the end of May, is a holding bucket for listings, usually short sales, with accepted offers, that are awaiting lender approval.  

When this field became mandatory, over 2600 listings were converted from active to contingent.   Unfortunately, the contingent field is only displayed, and cannot be searched, so there is no way to know how many of those 2600 contingent listings came from May, and how many should have been added to the pending numbers for the prior months.  We can't add the 2,694 contingent listings from May to the pending for May, because many of those contingent listings were from prior months.

So this is one of those turning points in our data, where the new measure is not the same as the old.  It turns out the pending number has been undercounted for quite some time.  Many active listings actually had offers on them.

Going forward, we are no longer using pending to measure the demand, but a new metric, "off market", which includes pending and contingent listings.   

Now, if we could only count the number of buyers out there writing offers!

May off-market:  3,740 pending + contingents from all prior months (2694)

June off-market:    4,276 pending + contingent

So to summarize, I don't know how to compare demand for May to June, but don't let anyone tell you that pendings plummeted either.

Consuming more than we produce is what got us into this mess,  so more consumption, as the government is trying to encourage, is not the solution.

The solution to our economic woes is for each of us to produce more than we consume.

In short, that means saving.

This point is made well by Doug Casey of Casey Research on his blog:

When you have low interest rates, people borrow more and they save less. But in today’s economy, low interest rates are the problem, not the solution. What people should be doing at this point is saving more.

In other words, people should produce more than they consume – but these low interest rates are causing people to consume more than they produce. And that’s the genesis of the problem we have today.

He predicts much higher interest rates, and his advice is to buy gold from the money you get out of your house:

 take out the largest mortgage you can against it on a fixed, low interest rate. As interest rates go up, the value of your mortgage goes down.

Finally, he says higher interest rates will further depress real estate and stocks.

I agree with everything he says.  Any thoughts?