May’s total was 2009. The graph needs little comment this month, I think. M.C. N/TR Descriptive StatsMean939.6912752Median822Mode746Standard Deviation323.391527Range1527Minimum482Maximum2009Sum140014Count149
General Motors sold off 51% of its interest in the General Motors Acceptance Corporation last year, its financial arm. Yet that remaining 49% interest in GMAC proved to be a big problem for GM’s first quarter 2007 financial results. It seems GMAC got into the mortgage business, and had a first-quarter loss of $305 million, causing GM’s overall results to go from $602 million in profit in the first quarter of 2006 to $62 million in the first quarter of 2007. GM’s 49% stake in GMAC caused it $115 million in loss–and Toyota passed GM for the first time to become the #1 auto manufacturer in the world. I can’t really imagine a $305 million loss. But even more staggering is that this is only about six hundredths of one percent (.061%) of the U.S. government’s spending on the war and occupation in Iraq, which is about to exceed $500 billion. (Thanks to Einzige for suggesting the comparison.)
The Arizona Regional Multiple Listing Service just released their ARMLS Economic and Market Watch Report for the first quarter of 2007. The report says that the current market in Maricopa County (MC) for residential real estate is neither a buyer’s nor a seller’s market - it’s right in the middle. As I have argued elsewhere, to call the current Phoenix market anything other than a seller’s market is absurd. If you buy right now you lose, in my humble opinion. In spite of the fact that MC housing inventory grew from 43,164 homes (at the end of Q4 ‘06) to 52,055 on March 31st, and that the number of homes sold fell by 910, the report has the audacity to claim that “[c]ombined with historically low mortgage rates, home sales should continue at a steady pace”, and that Q2’s average sales price will be higher than Q1’s $350,400 (I’m not a big fan of using the average price as a gauge of anything. Its value is too easily influenced by outliers on the high end). In the section on “Trends”, Ken Fears says the following: …there were 26,135 sub-prime loans issued in 2005 [sic - I think that should be 2004] for the Phoenix-Mesa-Scottsdale metro area, which represent 15.4% of the total population of loans for this area. In 2005, the percentage of sub-prime loans in the Phoenix-Mesa-Scottsdale area rose to 31.5% for a total of 69,997 sub-prime loans issued. This figure was higher than the nation as a whole where 28% of loans in 2005 were sub-prime compared to 14% in 2004. So what does this mean for local Realtors®? There is no doubt that the rules for making sub-prime loans have been to [sic] lax. Furthermore, defaults will rise as mortgage rates rise and employment begins to falter with the waning economy. However, banks learned an important lesson in the last two mortgage banking crisis [sic]. It is much better to help the holders of sub-prime loans to meet their monthly payment than it is for the bank to write off the loan as a loss; a small bite to profits is better than a total loss. So banks will be much more inclined to re-work loan agreements. In addition, sub-prime loans make up a small percentage of the total number and dollar volume of existing mortgages. These factors help to mitigate the notion that there is a large overhang of defaults about to splash on the market, bringing down home prices and sales and the overall economy with it. David Lereah’s “Commentary” had this to say: On balance, I expect about 10 to 25 percent of subprime households to be unable to secure a mortgage loan because of today’s stricter lending standards. However, many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so (e.g., saving for a down payment, growing their income). So the long-term health of the housing market will probably stay in tact. In the near-term, I would expect home sales to fall by 100,000 to 250,000 annually during the next two years due to tighter underwriting practices, slowing the nation’s housing recovery. As for the over 8 million adjustable-rate loans (25 percent of which were sub-prime) originated during the past three years, First American Corelogic estimates that about 1.1 million of them totaling about $326 billion are likely to end up in fore-closure. A bit over $300 billion of subprime adjustable mortgage loans are due to re-set by October 1st of this year. Most lenders will attempt to work out problem loans by refinancing borrowers into other mortgages. A disproportionate share of these foreclosures will occur in high cost regions, like California. Certainly, a rise in foreclosures results in an upward blip in housing inventories, depressing home values. But the good news is that these foreclosures will occur in relatively healthy local markets that boast decent levels of economic activity and job creation, improving the prospects of selling the foreclosed properties in a reasonable amount of time. Foreclosures will create temporary inventory problems, but inventories will be eventually worked out.“Inventories will eventually be worked out,” which will be “depressing home values” - but, nonetheless, Q2 in MC will see a “steady pace” in home sales and a higher average sale price? Hmmmmm… Dr. Lawrence Yun, in his “Forecast” section, says that in the last year Phoenix jobs grew by 89,000 and that this may increase the number of potential homebuyers. Yun acknowledges that Phoenix has seen a fall in home sales, but he says that rental rates have, as a result, been “climbing fast.” He asserts that, “very soon, the squeezed renters will begin to search for a home purchase." Rents in the area are definitely rising, as you would expect, but they’ll have to rise a long way to catch up with area home prices! Forecasting the impact of the subprime fallout, Yun presents this analysis: Consider, the subprime loans comprised about 13% of the overall mortgage market, and 20% of mortgage originations since 2005(though there are divergent figures depending upon the source). The recent overall rise in default rates is primarily associated with the subprime loans rather than with the predominant prime loans. The delinquency rate on prime loans was only 2.8% by comparison with the foreclosure rate running at 0.5%. Both delinquencies and foreclosures for prime loans have been steady with very little movement. Therefore, a 14.3% delinquency on 13% of the loan market means subprime problems are impacting close to 2% of all loans. Factor in the fact that one-third of all homeowners own their home free-and-clear, the subprime problems are associated with about 1.4% of all homes. History says that less than half of these homes with delinquent mortgage payments ever move into actual foreclosure. So roughly speaking, 0.7% of all homes will at most run into eventual foreclosure from recent meltdown in the subprime sector. Something tells me that Yun’s numbers are overly rosy. Using his 1.4% figure only gives us an average of 1459 Trustee’s Sale Notices per month in Maricopa County. Since we’re already seeing numbers higher than that, and there’s no indication that things are going to be slowing down, Yun appears to be missing a piece of the puzzle. To be fair, Yun’s numbers refer strictly to subprime loans - so one could argue that the additional numbers seen in the real world are delinquencies in alt-A and prime mortgages. In any case, the next few months should prove very interesting.
Given the explosive growth Maricopa County's Trustee Sale Notices saw in the second half of 2006, the numbers for the first four months of 2007 have seemed somewhat like a plateau. April’s total was 11 below March’s 1720, leading me to seriously wonder what the future holds. From a recent Reuters article: Subprime mortgages to less creditworthy borrowers comprised only 13.7 percent of outstanding U.S. mortgage debt in the fourth quarter of 2006, and their delinquency rate was 13.3 percent, according to the Mortgage Bankers Association. If, like the article, you believe that the woes of the subprime mortgage market are “well contained,” then perhaps we have a hint of what the remainder of 2007 has in store. Assume, for (extreme) simplicity’s sake, that... 1) All 1,250,231 houses in Maricopa County have a mortgage, and 2) The percentages quoted above remain the same for all of 2007, and 3) No one who does not have a subprime loan will become delinquent, ... then that means the average number of Phoenix-area trustee sale notices per month should come to 1898. I’m inclined to take it as a good sign that we’ve only seen a peak of 1720 so far, in spite of Mish’s contention, over at his Global Economic Trend Analysis, that containment is spreading. However, the graph below, far more than Mish’s falling sky pronouncements, gives me pause: Trustee’s Sale Notices are a lagging indicator, since they don't happen until the borrower has been in big trouble for several months. That fact, in conjunction with the data behind the Credit Suisse graph, leads me to believe that late 2007 through early 2008 (and beyond) is when we should be expecting the big wave to hit. How big? Who can say? Anonymous (2007-09-10): Is this ARM reset schedule just for Arizona?? ...
Einzige has a great post at his blog titled “Making Fortunes* in Foreclosures (* Once you’ve discarded your ethical compass)" which describes the details of how some sleazy real estate gurus make money off of gullible homeowners in distress. Historical Comments Einzige (2007-04-28): Thanks, Jim!
This video shows U.S. inflation-adjusted home prices from 1890 to present, as a roller coaster ride. Gee, I wonder what the next piece of the ride will look like? (Via Catallarchy.)
The count for March’s Notices of Trustee’s Sales in Maricopa County was 1720. Not a record beater, but certainly within sight of the summit. MC Trustee’s Sale Notices (1995-Present)Mean929.5Median819Mode746Standard Deviation306.2041743Range1256Minimum482Maximum1738Sum135705Count146 The daily average in March (78.18 Notices recorded per day) was also not a record beater. <img style=“display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;” src="/images/DailyAvgMar07.jpg" border=“0” alt=“Click for full-sized image"id=“BLOGGER_PHOTO_ID_5048174691379040498” /> Here’s an interesting chart I threw together based on sales data I pulled from the Arizona Regional Multiple Listing Service. The take-away from it is that, clearly, the inventory of unsold homes in the Phoenix area has been increasing for quite a while, now. The words “downward pressure” come to mind. <img style=“display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;” src="/images/listingsales.jpg” border=“0” alt=““id=“BLOGGER_PHOTO_ID_5048176301991776514” /> ...
Arizona has risen from #23 for reported mortgage fraud in 2005 to #7 in 2006, based on number of fraud cases out of the total number of home loans in the state: The top 10 states for 2006: 1. Utah 2. Florida 3. California 4. New York 5. Idaho 6. Michigan 7. Arizona 8. Georgia 9. Minnesota 10. Illinois
Today’s Arizona Republic reports that “Big lenders and Wall Street investors are going after Arizona mortgage brokers, appraisers, real estate agents, title firms, and home buyers for fraud”: Dozens of civil lawsuits alleging the gamut of mortgage fraud, from cash-back deals to lying about income on loan documents, have been filed against Valley firms and individuals during the past few months. Fraud experts and regulators say the lawsuits are only the beginning as the fallout from mortgage fraud starts to hit the Valley. Cash-back scams involve getting a mortgage for more than a home is worth and pocketing the extra money. The deals inflate home values and leave lenders with losses from loans worth far more than the house itself.A few specific suits mentioned: Phoenix’s Biltmore Bank is suing Security Title, appraiser Kittelman & Associates, and Tucson resident and house flipper Frank Padilla (who already was indicted and pleaded guilty to fraud and money laundering) over a $1.3 million loan for $800,000 property. A Lehman Brothers investment trust and Aurora Loan Services are suing the parent company of First National Bank of Arizona for 38 home loans which misrepresented home values and income, debt, and employment of borrowers. The plaintiffs bought the loans and want the bank to buy them back. Transnational Financial Network is suing Lending House Financial and a Scottsdale investor “who purchased 22 homes within days of each other last spring” for failure to disclose debt level or the fact that the investor was purchasing multiple homes (which were all foreclosed upon). Tucson mortgage lender First Magnus is suing its former Phoenix-based loan officer, Tyson Rondeau, for fraud and negligence, saying that bad loans are costing it $1 million. That lender itself has been investigated by the Arizona Department of Financial Institutions for misrepresentations and failure to disclose facts, and has agreed to pay a $200,000 fine. The article quotes attorney Michael Manning, who is working for some of the above plaintiffs, saying that “This is the tip of the iceberg, but I think regulators got on top of it faster than in the mid-1980s.” I’m not sure how fast they got on top of the S&L issues in the eighties, but they’re at least three and a half years late to the party this time around–when these fraudulent deals were working, the regulators were uninterested. Now that they’re failing and the house of cards is collapsing, suddenly they gain an interest. This is because all of these players–the plaintiffs and the defendants–knew what was going on. They were all profiting from it. The regulators and lawsuits are just a way for the larger players to cover their asses after the fact and avoid paying the full price for what they must have known was bound to ultimately happen. ...
As someone who skews heavily Extropian, I tend to be very optimistic about the future. This, in spite of being brought up by a paranoid (though otherwise intelligent) guy who always seemed convinced that a catastrophic economic collapse was imminent. In the '80s it was hyperinflation and thermonuclear war. In the '90s it was Bankruptcy 1995, followed by Y2k. Nowadays it's global warming (somehow we've managed to skirt around the issue of Peak Oil). All the parental paranoia helped to cultivate in me a healthy skepticism (though it got to me just enough to unfortunately keep me out of the stock market for far longer than I should have been). So, my optimistic/skeptical attitude has been keeping me up-beat about the real estate market in Phoenix - at least until recently. Given the way things have been going - neatly summarized by the two graphs on the right - a combination of factors now have me a little worried about the next year or so, at least. As I have argued elsewhere, Phoenix housing prices are too high. There's no reason to buy houses when you can rent them for a lot cheaper (and you thus can't make any money with them as investment properties, either). As you can see from the Appreciation graph above, even though houses are overpriced, as of the last data point on the graph we were still seeing a 10% appreciation over last year. Even the quarter-over-quarter line is still in the positive. I have to believe that we're going to be seeing a strong reversal of that trend in the coming months--or else we'll see whatever drove that crazy spike (in the second graph above) manifesting itself in some other area of the economy. Then there are those pesky notices of foreclosure [in the graph below, the blue line is monthly notices, while the orange line is the yearly moving average]. In spite of the fact that, according to some analysts, we haven't seen most of the interest-only ARMs kick into their higher payments, yet, we're already seeing an alarming uptick in notices of foreclosure (an indicator of people who've already been in serious financial difficulty for at least 5-6 months). February saw a total of 1577 trustee sale notices filed. That's off a bit from January's 1623, but when you consider that January had 21 business days for recording documents, against only 19 for February, there really was no slow down at all. In fact, as you can see from this graph, February 2007 had the highest average daily recordings (83/day) of all months for which I have data. It beat out January of '03 by 0.24 recordings/day. If the trend continues then this month should see over 1900! This may be good news for all the mythical short sale foreclosure investors, but it's bad news for pretty much everybody else. Historical Comments Einzige (2007-03-15): We're at the halfway point of the month and our current tally is 794.It would seem that 1588 trustee sale notices for March would be a safe bet. Not a record, but certainly an outlier. ...