Where has All the Housing Gone - Long Time Passing

[don]

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2012 has certainly provided a boost to the US housing market. Incredibly low interest rates combined with declining inventory have certainly pushed prices higher. Low interest rates have served as a method of giving US households more leverage to purchase homes. I was taking a look at sales volume in places like Los Angeles County and Orange County and they are up year over year in the double-digits range. Orange County has seen the biggest jump in sales volume in SoCal going up nearly 25 percent and home prices are up by 2.9 percent bringing the median home price up to $450,000. Even with this jump inventories continue to decline by record levels. Let us take a closer look at Orange County given it has seen the biggest year over year jump in sales volume.

The jump in sales

Orange County sales are certainly up over the last year:

July 2011 sales: 2,455
July 2012 sales: 3,087 (up 25.7 percent)

This has pushed the median home price up from $437,500 up to $450,000. With so many homes being purchased with FHA insured loans, even though interest rates are low the cost is likely to increase:

“(Housing Wire) A House committee voted unanimously to pass a bill that looks to give a boost to the Federal Housing Administration through increased mortgage insurance premium caps and other changes.

The FHA, under the bill, could charge up to 2.05% for its annual mortgage premium, up from a current 1.55% maximum. It also sets a minimum of 0.55% for the yearly payment.”

So workout the numbers. On a $400,000 loan (near the median price) this will increase payments from $400 to $683 per month on top of principal, interest, and taxes. That is a good amount of money. Why are premiums going up? For one, FHA insured loans are facing high defaults in spite of a housing market that appears on the surface to be stabilizing.

You would think that this kind of market would draw out inventory but it has not:


Source: Department of Numbers
Orange County inventory is down a stunning 29 percent:

This is certainly an interesting market dynamic. So you have 9,943 homes listed for sale. How many homes are in the distressed pipeline currently?

Over 10,494 homes are in the foreclosure process, most of these do not show up on the MLS. Many fall out of the process via the growing number of short sales and we are seeing this even in markets like Irvine. Things are down in this pipeline:

January 2010 distressed pipeline: 17,790
September 2012 distressed pipeline: 10,494 (41 percent drop)

In spite of what appears to be better conditions, new defaults are still very high:



1,360 new notice of defaults were filed in July. The fact remains that many of the loans made during the bubble years are still going bad but more troubling, even loans made post-bubble bust are going bad. Keep in mind that in June of 2007 the median home price in OC hit $645,000. The current $450,000 median price is off nearly $200,000 from this peak reached five years ago.
So what you have are many home owners unable to sell given that they are underwater. You also have banks slowly leaking out shadow inventory and using the low interest rate leverage to unload houses in a supply constrained market.
If you want a quick timeline of price in Orange County here you go:


Median home price OC

June 1991: $220,000
Jan 1996: $184,000
May 1998: $221,500
June 2007: $645,000
Jan 2008: $520,000
Aug 2012: $450,000

Current OC median household income? $74,000. 2000 household income? $61,899. If you go back to 2000, the income-to-home price ratio was 3.5 which doesn’t seem so off base for California. Today, even with the median home price down by $200,000 the income-to-home ratio is at 6. Without a doubt low interest rates and the accessibility of FHA insured loans are driving a good portion of the market. Back in 2000 the 30 year fixed rate mortgage was around 8 percent. Today it is down to 3.5 percent (a 56 percent drop). On a $400,000 loan this is the difference:

$400,000 PI at 8%: $2,935
$400,000 PI at 3.5%: $1,796

The leverage isn’t coming from bigger incomes but ridiculously low rates and a market constrained by low inventory. You still have people that bought at inflated prices looking for the day high prices come back. So where did the inventory go? It is still there just not for sale. For the quality homes that are for sale expect some rush to buy given the mini mania.

http://www.doctorhousingbubble.com/o...nterest-rates/

[LorenS]

Re: Where has All the Housing Gone - Long Time Passing

It's similar here in Colorado. House prices "peaked" in 2005, but they never had more than a temporary glitch to the downside. The markets have slowed a bit and the NINJA crowd isn't buying, but overall it's stuck in the "hard to afford" category. Houses still sell, there's no glut of foreclosures and the market isn't saturated with sales. Mostly people are just sitting tight and hoping something improves (owners want prices up and renters/new grads want prices down).

Where the distress really shows up is at the lower levels. Rents are obscene and trailer parks are being closed, not opened up. The jump from homeless to paying your own way is quite large because there's just hardly anything at the lower end. Even "subsidized" housing is over $500/month.

At least a significant portion of our problem with poverty is that we don't allow people to live at the level they can support. There are so many "rules" that prevent people from making it on their own. At least part of that is the fact that "space" is so expensive. It's not like you can build a shack or pitch a tent somewhere. Poor folks are like dust, we keep sweeping them around hoping to keep them out of sight, but we have no good place to really put them.

[c1ue]

Re: Where has All the Housing Gone - Long Time Passing

It's similar here in Colorado. House prices "peaked" in 2005, but they never had more than a temporary glitch to the downside. The markets have slowed a bit and the NINJA crowd isn't buying, but overall it's stuck in the "hard to afford" category. Houses still sell, there's no glut of foreclosures and the market isn't saturated with sales. Mostly people are just sitting tight and hoping something improves (owners want prices up and renters/new grads want prices down).

Likely that will continue so long as we have ZIRP.

[bill]

Re: Where has All the Housing Gone - Long Time Passing

Don’t forget about PE boys working their magic. Good luck to whoever ends up with their resale paper or an IPO.

http://online.wsj.com/article/SB1000...448760254.html

9-11-2012
LITHONIA, Ga.—On a muggy morning earlier this month, Paul Fuhrman pried the screen off a window to get into a two-story house in this Atlanta suburb.
Big Investors Turn to Foreclosures

View Slideshow



Raymond McCrea Jones for The Wall Street JournalThe Colony Capital team inspected one of its purchases. Colony owns about 3,600 foreclosed homes, including 133 bought in the Atlanta area in one day.

• More photos and interactive graphics

It was just another day's work for the 43-year-old executive at private-equity firm Colony Capital LLC, based in Santa Monica, Calif. After buying the house for $120,000 in a foreclosure auction, Mr. Furhman and his colleagues wanted to check out Colony's new investment—and broke in because they hadn't gotten the keys yet.
Mr. Fuhrman's sweat and dirty hands show how the business of buying foreclosed homes, renovating and renting them out is morphing from a largely mom-and-pop business into the next big thing on Wall Street. Investors who once chased only big-ticket deals are now buying houses one at a time.
"We went from hunting elephants to whacking ants with a mallet," says Mr. Fuhrman, who found stained carpets, piles of discarded clothing, a broken door and telltale signs of a recent living-room campout by squatters.
Colony owns about 3,600 foreclosed homes, including 133 bought in the Atlanta area in one day, and officials hope to increase the firm's inventory to 10,000 by next spring.
According to investment bank Jefferies & Co., major financial firms led by Colony, Blackstone Group LP, BX +1.01% Och-Ziff Capital Management and Oaktree Capital Group LLC have raised more than $8 billion to buy houses, largely in markets pummeled by the housing crisis.
At first, many investors hoped lenders would sell foreclosed houses in bulk. But most banks prefer to sell one house at a time, figuring that approach will fetch higher prices.
As a result, the foreclosure circuit hasn't yet produced a giant windfall for buyers like Colony, though executives say early returns are promising. Yields on rents from houses owned by the firm are 7% to 8%, higher than many other types of real estate. Purchase prices have averaged 12% less than Colony expected, which should make it easier to sell the homes or borrow against them and exit with double-digit percentage gains.
Anthony Myers, a senior managing director with Blackstone's real-estate group, said that while the cost of operating in the foreclosed-home business is "incredibly high," the buyout firm is well positioned to profit. "We, like others, believe in the housing recovery and we believe there's a great role for folks like us to come in, buy these homes," he said.
"We are in the sixth inning of the opportunity to buy distressed homes and rent them out," says John Burns, a real-estate consultant in Irvine, Calif.
Blackstone and Colony have been especially aggressive in foreclosure-racked Georgia. On an overcast Tuesday morning recently, about 200 people gathered in front of the courthouse in Gwinnett County as an auctioneer opened the bidding on about 900 homes.
"Game on," said Albo Antonucci, a buyer working for Colony, as he rushed to join the scrum.
One early sale was a three-bedroom, two-bathroom house in Duluth, Ga. Bidding started at $43,515.
For the past weeks, Colony had been studying a published list of thousands of properties to be auctioned this month in the Atlanta area, driving by the houses and doing rent and sale price comparisons in order to determine the maximum price the firm could pay for each house and still hit their target yields.
Jay Byce, an Atlanta-based portfolio manager for Colony, glanced at his binder. It showed that Colony's maximum bid price for the property was $71,000. After about 20 offers, he entered the bidding—and won the house for $53,400.
In Georgia, buyers of foreclosed houses usually pay on the spot. Mr. Byce turned to a colleague who held a locked plastic case full of cashier's checks. In all, Colony had brought $3 million in checks to the courthouse. On the same day, 52 Colony employees were bidding on homes at seven different county courthouses in Georgia, and spent a total of about $9 million.
Under a red canopy tent, Evan Jaleh, a third-year associate at Colony, sat in front of a laptop set up on a card table, entering Colony's winning bids into a spreadsheet.
Nearby, Dallas Tanner, a principal with property-management company Treehouse Group, Tempe, Ariz., gave orders and distributed cashier's checks to his team, which usually buys using funds from Blackstone.
The surge in interest from financial firms has boosted foreclosure-sales activity. About one-third of homes in recent foreclosure auctions in Gwinnett County were sold, up from 15% six months to a year ago, estimates auctioneer Doug Hardegree. Unsold homes go back to the lender.
The arrival of private-equity firms and hedge funds rankles smaller investors, many of whom try to quickly "flip" their purchases for a profit. That is harder to do now.
"If you've got four or five major investment firms bidding, you can't get anything out there," says Niana Hill, who sat at a table in a courthouse cafe during a break in the auction. "I like 20% yields or more. I don't like 10%."
Colony executives say the numbers look just fine to them. Once the private-equity firm spends about $11,000 to renovate the house in Lithonia, Colony expects to rent it for about $1,550 per month. After taxes, fees and other expenses, Colony investors should get a net yield on this house of 8.2% per year.
Colony has indicated that it may take its rental business public or sell its homes in the future after values appreciate.
"When I look at other opportunities out there in the commercial real estate space, to get the same current yield, adjusting for risk, it's very difficult," Mr. Fuhrman says. "Of all the real-estate asset classes, this is probably the most liquid."

[LorenS]

Re: Where has All the Housing Gone - Long Time Passing

Likely that will continue so long as we have ZIRP.

True, but how long can they drag this out? Japan's ZIRP has been going on for nearly my entire adult life.

I know it can't last, but I don't have a clue when it'll end. This is like an hazing event where the fun has gone overboard and the pledges are so badly mangled no one knows what to do. Once you go beyond irresponsible into criminal it's hard to get out because there is no pain free alternative.

[LorenS]

Re: Where has All the Housing Gone - Long Time Passing

Colony executives say the numbers look just fine to them. Once the private-equity firm spends about $11,000 to renovate the house in Lithonia, Colony expects to rent it for about $1,550 per month. After taxes, fees and other expenses, Colony investors should get a net yield on this house of 8.2% per year.

I'd be interested to see how realistic that rental rate is for the area. That's 25% of gross income for a $74,000 household and pretty much 100% of minimum wage.

From Wikipedia:

http://en.wikipedia.org/wiki/Lithonia

The median income for a household in the city was $23,397, and the median income for a family was $24,792. Males had a median income of $27,500 versus $23,788 for females. The per capita income for the city was $10,605. About 22.6% of families and 25.9% of the population were below the poverty line, including 31.8% of those under the age of 18 and 25.7% of those 65 and older.

[flintlock]

Re: Where has All the Housing Gone - Long Time Passing

I'd be interested to see how realistic that rental rate is for the area. That's 25% of gross income for a $74,000 household and pretty much 100% of minimum wage.

From Wikipedia:

http://en.wikipedia.org/wiki/Lithonia

Same here. People need jobs to pay that kind of rent. Lithonia is home to Lithonia Lighting, a large manufacturer of light fixtures. The end of the building boom must have had a large impact on the work force there. Maybe there is a reason so many homes were foreclosures.

There seems to be a lot of large capital companies getting into this market now. Now that a lot of the small fish jumped in too soon and got plastered. My brother is a former housing executive who fixes up some of these homes for a large capital company. Might even be Colony.

[don]

Re: Where has All the Housing Gone - Long Time Passing

I'd be interested to see how realistic that rental rate is for the area. That's 25% of gross income for a $74,000 household and pretty much 100% of minimum wage.

U.S. Incomes Dropped Last Year, Census Bureau Says

WASHINGTON — In a fresh sign that the country’s middle class has yet to feel the gains from a weak economic recovery, median household income declined last year to $50,054, a level last seen in 1996, the Census Bureau reported Wednesday. This income measure, adjusted for inflation, was down by 1.5 percent from the previous year. It peaked in 1999, when the median income for American households reached $53,252.


Health Care Premiums Rise Slightly

A family with employer-provided health insurance now pays just under $16,000 in annual premiums, an increase of about 4 percent over a year ago, according to a study released Tuesday by the nonprofit Kaiser Family Foundation. Individual policies purchased through an employer rose even less, increasing just 3 percent from last year to an average of $5,615, the study said. “It is a year of very moderate increases in premiums and health care costs,” said Drew Altman, the chief executive and president of Kaiser, which tracks health care spending.


$50k, with $16k (32%) going to healthcare. That leaves $34k for housing, food, transportation, clothing, etc. Rent would of necessity be on the lower end. Savings for retirement - a bit more problematic.

[c1ue]

Re: Where has All the Housing Gone - Long Time Passing

True, but how long can they drag this out? Japan's ZIRP has been going on for nearly my entire adult life.

iTulip/EJ have the view that it won't last 10 years (I think); my view is it will be sooner rather than later.