Sellable listings in the San Diego MLS represent only 25% of the distressed loans out there.
This short sentence gets right to the point, but admittedly contains some open-ended terms that vary widely by interpretation. By narrowing down the definitions of these terms, and by getting our arms around their underlying sentiment, we will shed light on some significant implications, unlock some “aha” observations, and stimulate a whole lot of thought… not so much about where things stand in today’s real estate market… but about the types of questions we should be asking.
To squeeze the underlying juice out of this powerful statistic, here’s what we will do:
- We will break down each term to arrive at a lowest common denominator.
- We will explore where this statistic did NOT come from.
- We will discover where this statistic WAS found.
- We will re-triangulate the findings.
- We will resist the urge to make fun of folks who think we are at a “real estate bottom”… by focusing instead on a golden opportunity being missed by government over-regulation and by the (in)action of individuals whose incentives are not aligned with a plan for a broader economic recovery.
- Then we will invite you come back again soon… to poke fun at folks who think we are at a “real estate bottom”.
Breakin’ it down:
Let’s deconstruct this statistic by defining it’s parts:
- By “sellable listings” I mean mostly lower-end, mostly non-short sale. I hereby estimate 83% of active homes on MLS as “sellable”. If you care to know why, click here. If you clicked, and you still don’t like it, write your own blog.
- (The main reason higher-end homes are mostly un-sellable, is because there is virtually no marketplace for their financing. The main reason short-sales are mostly un-sellable, is because bank managers have incentives to make their banks money… not lose money… and so they are reluctant to approve losses).
- By “MLS” I mean the “Multiple Listing Service”, which agents use as the industry standard, and by which the vast majority of all US homes are sold.
- By “distressed loans” I mean any mortgage whereby the consumer missed two monthly payments in a row and who has not yet paid it back.
- By “out there”, I mean not on the MLS …yet.
Here’s where I did NOT get this statistic:
It did not come from the media, public records, the California Association of Realtors, or even omnipresent Google. Its not that I didn’t try… but rather that they all pretty much conclude that this statistic is virtually unknowable.
Not being a conspiracy theorist, I felt a bit paranoid at first suspecting the government and banks to be “in on it”… obfuscating the truth and all that. Then I settled on a far more satisfactory conclusion, which is namely, to not give these institutions that much credit… they’re not that smart.
Seriously though, there are some legitimate reasons why these entities can’t quantify the amount of what some insiders and bloggers are starting to refer to as “shadow inventory”.
In a brief interview with the President and CEO of the California Bankers Association… who actually does come across as one of the smarter people I know… Mr. Rodney Brown, explained that the term “shadow inventory” would imply that there is an actual inventory out there, i.e. a pipeline of bank owned properties that the banks are unable or unwilling to sell. He was quick to point out how banks are in the business of earning money on loans… not holding onto nonperforming assets or renting via property management. When banks take back inventory (from consumers who are in default), they place it on the MLS in short order.
OK, point well taken… however, maybe we should tweak the definition of “shadow inventory”… or better yet, as I have done with this statistic’s phraseology… just lump this mystery “inventory” into “distressed loans out there that have not found their way onto the MLS… yet”.
The thing is, people have short memories… 12 to 18 months ago, we had a record surplus of (bank owned, foreclosure, REO, short-sale, traditionally owned) properties flooding the market, especially on the lower-end.
So, what the heck?
Why are we agents… the ones still standing after staving off economic ruin… by powering through a 12 to 18 month period of unprecedented industry challenges, stalled transactions, massive lower-end price declines, inane legislation, and mass peer exodus, etc… why are we agents, who have now seemingly willed from the ether, a fresh batch of first-time home buyers to work with… some of which who actually have 20% to put down… why are we having to show each client literally 100+ properties, and make dozens of offers, while bidding 20% over list price, before we can get one to go to escrow??
Are all the problems solved? Did we hit a bottom while nobody was looking? Is it truly a seller’s market?
Being an industry insider… having executed both loans and real estate transactions for many years… having witnessed the stock market’s total dislocation from reality leading up to the subprime collapse… seeing how the stock market is still, perhaps, even more dislocated from reality… understanding that we’ve had no let up on defaults of loans since last year when we’ve had record surplus of distressed sales… I really started to wonder… where the hell is all this inventory? Did it go to the place where lost socks and faxes end up?
Where this statistic WAS found:
Shortly after I became a full-fledged broker, after serving for a while as a (half-fledged?) agent, I was somewhat surprised to quickly realize there was only one major difference behind the role that came along with the new title: there is no higher up authority to go to when you have questions… so you learn to trust yourself.
Now I’m just one guy… and when your own smarter than average father-in-law who routinely teaches you a thing or two, about a thing or two… looks at you sideways when you make such a bold assertion, its easy to second guess your thinking.
So I asked another insider colleague… who’s gut feeling not only confirmed my most aggressive projection, but was even more aggressive in his own projection… and so I asked another insider… and then another… each of which backed up my gut feeling within a small variance. It was then that I realized there was some juice to this.
In all, I asked 20 seasoned, professional, industry insiders, including loan officers, mortgage bankers, REALTORS, escrow officers, title representatives, real estate investors, and a former banker turned options trader.
The most conservative projection was that the MLS represents only 50% of the distressed loans out there.
Scientific? Controlled? Foolproof? Maybe not… but who to trust? Fickle media? Self-interested institutions? Politically motivated bureaucrats? California Association of Realtors, who just yesterday discovered a “computer error” responsible for drastically overstating home sales by more than 13 times? Or foot soldiers who eat, sleep, and breathe this business who have their fingers squarely on the pulse on the real life market?
25% was the average assessment. Put that in your pipe and smoke it.
“This voice speaks San Diego”
In some great articles written by Kelly Bennett, Staff Writer for Voice of San Diego.org, I link with permission to these telling San Diego statistics:
- “This March, the 90-day delinquency rate shot up 2.6 percent from March last year… but the rate of home loans going into foreclosure was… up just 0.3 percent over the year. That means there were more loans falling delinquent than received official notice of default — indicating a bottleneck and a potential flood of foreclosures to come.”
- “This March, 25 percent of the county’s Alt-A loans were at least 60 days delinquent… (and) 38.5 percent of the active subprime loans… were at least 60 days delinquent.”
- In April, 5.74 percent of outstanding mortgages were at least 90 days late on payments… but only 1.5% of homeowners (received “Notices of Default”).”
“Google’s not too shabby after all”
The act of writing this post itself helped to adjust my Google thinking cap… and guess what happened after I dialed in my keywords using phrases like “how will the foreclosure moratorium effect shadow inventory”?
- In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity – only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as “shadow inventory.”
How could this be?
“Government gets its peanut butter all over the banks’ chocolate”
- In one way or another, there has been some form of a foreclosure moratorium in effect for the last 18 or so months. This means, banks with some exceptions, have been disallowed from foreclosing on non-performing loans.
- Fannie and Freddy issued moratoriums.
- Banks issued some voluntary moratoriums… perhaps attempting to cut losses while getting some, rather than no payback… perhaps reluctant to drive the real estate market down further… perhaps to create demand, by limiting supply… or perhaps because they’re in no hurry to report more defaults to shareholders.
“Creation of even more irresponsible lending standards”
- Ever heard of “stated income”? This was when borrowers (over)stated income and assets to obtain loan approval. Want to know how loan modifications work? Borrowers (under)state their income and assets to determine a “fair” payment.
“Lowering standards” works especially well in conjunction with the “peanut-butter-chocolate theory”
- Don’t allow banks to foreclose on consumers unless they offer loan modifications to folks who have demonstrated that they need help… by missing their mortgage payments.
- We’ll just assume that the people who have been working three jobs to make their payments come hell or high water are less deserving than the folks who have missed their payments.
- Never mind that the folks who have missed their payments will default again the first chance they get. Don’t take my word for it? Did you know over half of the modifications already granted… are in default again?
“Fuzzy math shenanigans”
- Whew, good thing banking stocks rebounded recently… why bother adding up those tedious mortgage lates… is there really any rush to alert the shareholders and drive down stock prices?
- Right, and while we’re keeping share prices from dropping like an empty can of soda, how about we 86 that pesky mark-to-market accounting practice to “free up” our reserve requirements!
- Yeah… and “zero down loans” are so 2007… let’s call them FHA loans… we’ll make people cough up 3.5% so it won’t have that “zero down” stigma… good deal, but if the government is going to be in on it, they have to get theirs too… right, right… we’ll just tack on 1.75% to the loan balance to keep Uncle Sam happy.
“In marble lobbies we trust”
- Banks have no obligation to report statistics on loan defaults.
- Banks have no obligation to report statistics on loan modification requests.
“Working the system”
- Some folks seem to stave off the foreclosure man by making partial payments or pressing the right levers or I don’t know how but they are still in “their” homes.
And not factored into my homegrown statistic… “the mother lode of shadow inventory”
- Consumers who are 30 days late.
- Consumers who are current but can’t hold on for long.
- Per Bloomberg, nearly 25 percent of ALL mortgage holders are upside down.
The golden opportunity being missed:
The purpose of taking this poll, posting its results, and researching its guts out, was not to sarcastically attack the banks and government for perpetuating an already bad situation. The purpose is to call attention to a golden opportunity being missed.
While all this havoc was being wreaked upon our economy, a new freshman crop of first-time home buyers came online while nobody was looking. With good credit, a stable job, and 20% down from savings or from a little help from the ‘rents… the under $325k market is actually the one segment that does make sense to buy right now.
The rates are still low. People can qualify. More importantly, people can afford it. The post write-off payment is on par with rental prices. The sales prices have already taken a serious beating, and even planning for the worst… if the downward trend continues, future monthly payment savings will likely be offset by higher rates. There’s also that tax credit thing nobody really knows how to explain or whether it will be around long enough as advertised, but hey, it can only help too. In short… it makes sense.
And in this one and only market segment where it does makes sense to buy… the government is doing its darnedest to artificially limit supply.
This stance creates a head fake to higher-end markets that the tide has turned, which will irresponsibly cause more consumers to be caught off guard. It also sends a message to the hardest working class of consumers we have, who have not made room for any excuses, that it pays to quit.
We have a chance here to stop subsidizing more of what we don’t want. We likely have enough pent up demand to replace non-performing borrowers with performing ones. And if the demand on deck does not prove to be sufficient… then now is the time to find out. It is so important that we firm up a bottom to this madness in advance of the high-end displacement yet to come. A low end line in the sand is desperately needed to create a last chance foothold from which to draw a bridge when the high-end drops off the precipice. I say take the hit now while we still can:
- Remove the moratoriums.
- Set up an REO conservatory to rent to foreclosure displaced consumers.
- Enforce banks to report defaults and non-performing loans to shareholders.
- Let the market take care of itself.
- Adjust incentives for bank managers to execute short sales (rather than pretend).
- Recognize that new home purchases will stimulate the economy.
- Understand that nobody “deserves a home”.
- Stand up for the contracts that underpin our social fabric.
All ya’ all real estate junkies are cordially invited to revisit SethEstate in the next few days… to find out why we are so not even close to a high-end “real estate bottom”.