The Foreclosure Flood That May Never Come

Pro Teck Valuation Services’ September Home Value Forecast Update examines why there will not be a flood of foreclosure housing stock across the U.S. market and how metro areas in Southern California, Texas and Maryland are experiencing positive real estate trends.

“With regard to the U.S. foreclosure inventory, there has been a misperception that it is a problem for the entire market. In fact, it is quite concentrated in specific cities and neighborhoods,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “For this reason, potential buyers who have been waiting for bargain prices in desirable neighborhoods may be disappointed.”

This month’s Home Value Forecast update lists San Diego as one of four Southern California real estate markets in the Top 10 and also examines a 20-year history of the months of remaining housing inventory trends for homes listed for sale in the San Diego, Orange County, and Los Angeles metro areas.

“The current overall months of remaining housing inventory for San Diego, Orange and Los Angeles is below five months, which is the lowest they have been since the market peak in 2005-2006,” added O’Grady. “This is significant because in the Los Angeles market over the past 25 years, whenever this indicator was below five months, the median price increased by close to 19 percent the following year. Of course, it remains to be seen if the same appreciation happens again.”

Home Value Forecast’s September update shows that while all three counties exhibit low overall inventory remaining, there is a fairly wide dispersion when viewed by home value on a price per square foot of living area basis. In areas, where the price per square foot is less than $550, there is less than six months of remaining inventory. However, there are greater months of remaining inventory of homes with higher prices, especially in San Diego.

This month’s Home Value Forecast update also includes a listing of the 10 best and 10 worst performing metros as ranked by its market condition ranking model.

“The top ranked metros this month represent an interesting mix of U.S. real estate markets. In addition to the Southern California markets, there are four metros top ranked in Texas and one in Maryland,” said Michael Sklarz, Principal of Collateral Analytics and contributing author to Home Value Forecast. “It is interesting to note that all of the metros in the top 10 are exhibiting positive trends and that all have experienced significant declines in active listing counts over the past year, resulting in fewer months of remaining inventory and tighter markets.”

September’s top CBSAs include:

• Oxnard-Thousand Oaks-Ventura, CA
• Seattle-Bellevue-Everett, WA
• San Diego-Carlsbad-San Marcos, CA
• Los Angeles-Long Beach-Glendale, CA
• Santa Ana-Anaheim-Irvine, CA
• Houston-Sugar Land-Baytown, TX
• Baltimore-Towson, MD
• Fort Worth-Arlington, TX
• Austin-Round Rock-San Marcos, TX
• San Antonio-New Braunfels, TX

“This month, some of the bottom CBSAs are in the Northeast again and continue to have double digit months of remaining inventory. However, a number of the metro areas have a fair percentage of trends moving in a positive direction, which is quite a difference from a year ago,” added Sklarz.

The bottom CBSAs for September were:

• New Haven-Milford, CT
• Bridgeport, Stamford, Norwalk, CT
• Augusta-Richmond County, GA-SC
• Rochester, NY
• Spokane, WA
• Portland-Vancouver-Hillsborough, OR-WA
• New York-White Plains-Wayne, NY-NJ
• Edison, NJ
• Nassau-Suffolk, NY
• Newark-Union, NJ-PA

Homeowners Now In Control of Housing Market

Radar Logic and other people are still cranky about the housing market. They opine that the recent strength in national housing price figures won't last because of something latent lurking out there on the supply side. In statistics, latent variables can be perfectly legitimate -- but if it results in perennially brushing aside contradicting observable data, it begins having a legitimacy problem.

There are clearly two trends in the housing market that can be observed directly. One is the significant decline of what some people call transactional inventory and the market share of distressed sales. The other is that home prices are actually rising lately in many areas. I dare to infer that those two trends are highly correlated. I have been seeing things lately about this -- like strong statistical correlations between home price trends and low unsold inventory and declining distressed
sales shares

                                      


In this context, recent home price stats by Clear Capital, is telling. Not only did they observe the “fourth consecutive month of home price gains” in August 2012, but non-investor home buyers made up an increasing chunk of the sales mix and non-distressed price gains outpaced REO prices. According to Dr. Alex Villacorta, Clear Capital’s research guru, the shift from the investor to the owner-occupied sector “could have a far reaching effect, even in smaller markets." Nationally, home prices advanced 1.9% over the quarter in August, essentially unchanged from 2.0% in July.

Yearly home price growth also rose to 2.9% in August from a 0.7% annual increase in July 2012. Clear Capital finds that major California areas experienced quarterly and annual home price appreciation in August, that the home price recovery continues to move inland, and that the REO market share in transactions is dropping. I can’t wait to see what the seemingly infinite inference chains of the conspiracy theorist will have to say about that. Ah, I know, it has to do with foreclosure disposition bottlenecks … yawn! Meanwhile, let’s enjoy the rise of the owner-occupied market as the potentially significant event it might be, I dare to infer (until observable facts say otherwise.)

The Rise in Real Estate Is Sustainable

The cover story for the September 10th weekly magazine Barron's is on the recent surge in real estate and how the rise in property prices is no fluke. In the article by Jonathan R. Laing titled "Happy at Last," readers are given a cautiously optimistic assessment of what has already been a well established trend in the real estate market. A distinction in this article is the confidence with which many professionals believe that the current rise in real estate is sustainable for the foreseeable future.

We agree that real estate will have a sustainable trajectory upward as we outlined in our December 10, 2010 article titled "Real Estate: The Verdict is In". We believe that the clear reversal of the indicators that we discussed at the end of 2010 has proven that the real estate market has bottomed. The following is a review of the indicators that we track that have definitively shown that the direction is up.

As can be seen in the chart below, U.S. housing starts bottomed in January 2009 and started to base over the next 2 years. Two months after our December 2010 article, housing starts began to increase at a healthy pace.

                

The broad basing pattern in U.S. housing starts and the relatively mild increase, as compared to the 1991 bottom, seems to indicate a more realistic view on expectations for real estate going forward.

The next chart that we find useful for determining the direction of the real estate market is the real estate loans at all commercial banks. When we published our December 2010 article, we said that the bottom had occurred in April 2010. In fact, the actual bottom took place in April 2011 as shown below.

                 

The real estate market cannot thrive in an environment where lenders are unwilling to lend. Tracking the real estate loans by banks is instructive as to what the direction might be. Our assessment of this indication suggested that on a relative basis, the declining trend was at, or near, an end. The dramatic increase in lending since early 2011 has helped push select real estate markets higher.

Much of the research analysis that we do on the topic of real estate is based on the work of Roy Wenzlick. If there ever was a scientifically accurate approach to analyzing the real estate market, Roy Wenzlick perfected it. Anyone who read his newsletter, The Real Estate Analyst (published from 1932-1974), would have thought that Wenzlick was strictly a statistician. However, while Wenzlick was a compiler of significant amounts of data on real estate, he also believed that the market price for properties ran on a clearly defined cycle. On each chart, we have indicated Wenzlick's last estimated low for real estate based on that cycle.

The chart below illustrates the importance of considering Wenzlick's estimate of the real estate cycle because it isn't the rise that we're interested in as much as when the next decline begins and when the bottom might occur.

                 

The real estate cycle that Roy Wenzlick adheres to pointed to a low in 1991 and a low in late 2009. In the Federal Housing Finance Agency's House Price Index for the nation, we can seen that 2009 was not quite the end of the decline for real estate. Knowing that all cycle analysis is a rough estimate, at best, we hedged our view to include the possibility that the bottom would occur as late as the end of 2010.