June 11th, 2009 9:38 AM by Lehel Szucs
Carolyn Said, Chronicle Staff Writer
Tuesday, May 26, 2009
Warren Buffett and Alan Greenspan say the housing market is near bottom.
Peppy real estate agents and gloomy stock-market traders alike eagerly embrace that supposition. Wall Street is so hungry for good news that stocks rallied at the barest hint of upbeat indicators several times this month.
To be sure, an end to the precipitous collapse that triggered a foreclosure avalanche and wiped out more than $6 trillion of home equity nationwide, not to mention setting off a worldwide economic collapse, would be something to celebrate. And several recent market barometers - diminishing inventory, increasing buyer competition, slowing price depreciation, rising builder confidence - lend credence to the idea that real estate could soon rebound.
A healthy housing market has a decent balance between supply and demand. While at a quick glance those components appear to be stabilizing, on closer look there are numerous factors that are likely to weaken demand and deluge the market with supply in coming months.
On the demand side, the surge in joblessness, still-high home prices, the credit crunch and a dearth of move-up buyers cut into the pool of potential home buyers.
On the supply side, an assortment of factors seems poised to trigger new waves of foreclosures that will continue to bloat inventory. They include the expiration of foreclosure moratoriums, more underwater "walk-away" homeowners, pending recasts of option ARM loans, rising delinquencies in prime and Alt-A loans, and soft sales of high-end homes.
Here is a rundown of key problems that could continue to undercut real estate.
-- Rising unemployment. It doesn't take an economist to realize people will not buy homes if they're worried they might lose their jobs.
"Employment is crucially important," said Peter Morici, a professor at the University of Maryland business school. "We lost more than 600,000 private-sector jobs last month. That means the housing market is not going to turn up yet for a while."
Unemployment also will spur supply. While the first wave of foreclosed-upon homeowners comprised people who could not afford their homes from the get-go, as more people lose their jobs, they are likely to lose their homes because they no longer have enough income to make the payments.
-- No "move-up" buyers. In a normal real estate market, about 80 percent of buyers are "moving up" or "moving across" - people who sell one home before buying another, said Mark Hanson, principal of Walnut Creek's the Field Check Group, a mortgage consultant. Remaining purchasers are split between first-time buyers and investors.
In today's market, about half of buyers are first-timers and a third are investors, leaving just 15 percent of what he calls "organic" buyers. Those first-timers and investors all troll for bargain-basement foreclosures - leaving few buyers who are interested in the homes being sold by "Ma and Pa Homeowner." That, in turn, leaves Ma and Pa unable to move up to a nicer home. "The organic seller is left out in the cold," he said.
It also could impact supply down the road, when all those pent-up sellers finally decide to put their homes on the market.
-- Tight credit. Even people who do want to buy a home can't necessarily find someone willing to give them a mortgage. The standards of 20 percent down payment; solid, provable income; and good credit are back in force. While that more-stringent underwriting represents a return to classic values that should avoid future delinquencies, it leaves quite a few potential borrowers out in the cold. Most notably, self-employed workers - even ones with high income, such as doctors - are finding a less-cordial reception from lenders.
-- Homes still overpriced. Home values have plunged nationwide. The authoritative Case-Shiller index shows prices nationwide at 158, down from a spring 2006 peak of 226. (That compares to a base value of 100 in January 2000.)
So that means homes are now affordable, right? Not so, say many analysts who believe prices are still wildly inflated compared to historic appreciation rates. From 1950 to 2000, home prices grew 4.4 percent a year, modestly outpacing inflation, said Andrew Schiff, a spokesman for Euro Pacific Capital in Connecticut. Following that metric, the Case-Shiller index should be at 132. "We're still way above where we should be in a normal market," he said.
-- Foreclosure moratoriums end. Major lenders temporarily halted foreclosures late last year and early this year in anticipation of President Obama's housing rescue plan. In addition, California enacted a new law this fall that slowed down foreclosures. That means the foreclosure rate was artificially depressed over the past several months. The moratoriums have now expired.
The net result is likely to be fresh batches of foreclosures from all those deferred troubled loans. California statistics illustrate the problem. According to research firm MDA DataQuick, mortgage default notices - the first step in the foreclosure process - hit record highs in the first quarter, implying that, within months, foreclosures will resurge.
-- Shadow inventory. Banks appear to be sitting on a vast inventory of homes that they have repossessed but not yet listed for sale. As previously reported in The Chronicle, this shadow foreclosure inventory could number in the hundreds of thousands nationwide. In addition, observers say banks appear to be deliberately delaying foreclosures, for example, not yet sending notices of default to homeowners who are months behind on their mortgages. All those properties eventually will have to hit the market, and, like all foreclosures, are likely to sell at cut-rate prices, driving down home values.
-- Walk-away underwater homeowners. The number of people who owe more than their home is worth continues to rise. Almost 22 percent of all mortgage holders were underwater by March, according to real estate site Zillow.com. That's spurring a phenomenon of "walk-away" homeowners - people who choose foreclosure because they don't want to pay off an upside-down asset.
Matt Bording and Mangala Abeysinghe are an example. They have poured love and energy into their three-bedroom Richmond home; the garden alone is a work of art. Bording has a steady job as an ICU nurse, Abeysinghe, a nurse in her native Sri Lanka, should readily find work once she passes the U.S. licensing exam. They made a down payment and can afford their monthly payments.
On paper, they sound like ideal borrowers. But as their home value plummeted, leaving them underwater by more than $200,000, they decided to walk away. They stopped paying their mortgage in October, and are still living in the home, although the lender sold it at a foreclosure auction last week.
Bording described the decision as "a bit of brinkmanship and bravado, along with fear of being financially trapped. I'm wondering about the possibility of many more prime borrowers doing the same thing, causing some kind of ripple in the economy."
-- Loan modification shortfalls. Modifying borrower's mortgages to make them more affordable is a cornerstone of foreclosure prevention. But to date, most such efforts have simply deferred foreclosure, rather than providing a permanent fix. An authoritative study by the Comptroller of the Currency found that more than half of modified loans end up delinquent again within months. However, the study was done before the Obama administration's mortgage mod plan came into play. The jury is still out on how effective it will be at preventing foreclosures.
-- Option ARM, Alt-A time bombs. Two categories of loans used for higher-end homes are emerging as the next trouble spots, as foreclosure contagion spreads beyond subprime. Delinquencies are rising for Alt-A loans given to people with good credit who could not document their income. Meanwhile, millions of option ARMs, or adjustable rate mortgages in which borrowers can choose to start off making minimum payments that don't even cover the interest, are expected to start resetting next summer. At reset, borrowers suddenly must make sharply higher payments, which can trigger foreclosures.
The underwater issue comes into play here, too: People who owe more than their home is worth find the door slammed shut on refinancing their way out of trouble.
"Option ARM and Alt-A products will be the next big wave of foreclosures," said Jeffrey Taylor, a forensic accountant with Digital Risk LLC, which provides risk mitigation services for financial firms. "Many of those (borrowers) reached a little further than they should have. With the economy deteriorating, will those people be able to afford those houses?"
-- High end taking a hit. Until recently, most of the market activity and price drops have been among lower-cost homes. Homes under $350,000 have had the most severe price drops, while those above $750,000 have remained relatively stable. That appears to be changing, as foreclosure woes spread to the upper end. The difficulty of getting "jumbo" loans to buy pricey houses has exacerbated the situation to the point where unsold inventories of high-end homes are swelling.
"The mid- to upper-end housing market is sitting on the exact precipice that the lower-end market was sitting on in early 2008," Hanson said.
E-mail Carolyn Said at email@example.com.
This article appeared on page A - 1 of the San Francisco Chronicle