Smart Real Estate News & Commentary by Chris McLaughlin November 11, 2011
Short sales and foreclosures rolling again
The big banks are back in the foreclosure business. After a year
of fewer foreclosures, as bankers reeled from revelations that
they were falsifying documents in foreclosure cases, the latest
monthly numbers suggest banks are starting to repossess houses
again. In October, foreclosure actions rose 44 percent from the
month before in Charlotte County, 20 percent in Sarasota County,
37 percent for Florida and 7 percent for the country as a whole,
according to data from RealtyTrac, an Irvine, Calif., market
research firm. Only Manatee County bucked the state and national
trend. Its foreclosure actions fell 25 percent from September.
The overall rise in foreclosures was welcomed by real estate
agents who have been frustrated by what they view as artificial
supply shortages in the face of strong investor demand. But if
foreclosure filings keep increasing in the coming months – as
expected -it could drive home prices down again and may make it
even more difficult for non-distressed owners to sell. What
could make the situation worse before it gets better, experts
say, is an increasing number of underwater homeowners don’t see
the point of struggling any longer. “People are worn out and the
stigma tied to foreclosure is gone,” Shari Olefson, an attorney
with Fowler White and author of “Foreclosure Nation: Mortgaging
the American Dream.” “At cocktails they are no longer embarrassed
if they have stopped paying, they are embarrassed if they are
still paying. And they are being empowered by the Occupy Wall
Street movement.”
Court records show that the 10 largest lenders in Sarasota and
Manatee counties filed 591 early-stage, or lis pendens, actions
in October — a 32 percent increase from the 447 filed in
September. Bank of America — the owner of Countrywide — led
the way with 170 early-stage filings, compared with 118 the month
before. At the same time, short sales — in which banks permit
owners to sell properties for less than they owe on their
mortgages — also are on the upswing, according to Adam
Robinson, a Sarasota real estate agent who runs
Sarasota-Foreclosures.com. “Short sales in Sarasota County are
up 62 percent from October 2010 — from 108 to 174,” Robinson
wrote in an email message. “Charlotte County Short sales
increased 66 percent from 37 to 61, and even Manatee saw a 21
percent increase from 87 to 105.” Across the country, 230,678
foreclosure actions were filed in October, a 7 percent increase
from the previous month, but still down nearly 31 percent from
October 2011. Nevada, California, Arizona and Florida posted the
top state foreclosure rates. One in every 180 Nevada housing
units had a foreclosure filing during October — more than three
times the national average. California came in second with one
out of every 243 housing units. Arizona was third with one out
every 259 and Florida was fourth with one out of every 268.
Fear factor is the biggest threat
The two main threats to the US economy are government
over-regulation and plain fear that has not dissipated since the
financial crisis, former General Electric chairman and author
Jack Welch said. Welch said in a CNBC interview that the low
demand is rooted in two areas: Regulation gone wild during the
Obama administration, and worries “in the gut” that the economy
would turn back into recession or even depression. “We all lived
through three years ago, all those 401(k) collapses, all those
things. That fear is in the gut,” he said. “Then you compound
that with the uncertainty from this administration and this
incredible run on regulation, which is beyond belief…We have a
regulation runaway (like) we’ve never seen.” There are 382,000
regulators “coming to work every day” for the federal government,
which is a 20,000 increase over the past two years, according to
Welch. “That’s a high-growth business,” he said. “The big issue
in my opinion right now is the fear factor from 2008 to 2009.”
Companies also aren’t hiring because they’ve learned to do more
with less during the economic pullback, and Welch worries that
the jobs lost since the financial system imploded aren’t coming
back. He is also concerned about the country’s refusal to pursue
policies that will foster energy independence, specifically
citing natural gas drilling as an important move toward that
goal. “We can handle the environmental issues. We can do it
right,” he said. Of environmental opposition to drilling, he
said, “This is pure politics.”
Olick – shame on the GOP candidates
“Shame on the Republican candidates for president. Shame on them
for showing up at debate specifically targeting the US economy
with not one credible, rational, even reputable notion of what to
do about the nation’s housing mess. It baffles the mind that this
sector of the economy, responsible for about 18 percent of the
nation’s gross domestic product, is in freefall, and yet eight
potential new leaders of this nation not only don’t understand
the problem but don’t have a clue what to do about it. My
favorite, and I write this with as much sarcasm as a computer
keyboard will afford, is the argument that the Dodd-Frank
financial reform bill is to blame for housing’s current despair.
Foreclosures, falling home prices, negative equity, nil consumer
confidence, record low home building…yep, gotta be Dodd-Frank.
‘If the Republican House next week would repeal Dodd-Frank and
allow us to put pressure on the Senate to repeal Dodd-Frank, you
would see the housing market start to improve overnight,’ Speaker
Newt Gingrich told the crowd in Michigan last night. His
reasoning is that, ‘It kills small banks, it kills small
business.’
Increased regulation has certainly made the life of a banker
today tougher, but the fact that there was zero regulation ten
years ago allowed and encouraged reckless behavior on Wall
Street. It created the supremely negligent subprime mortgage
trading bonanza that brought down big banks, little banks and
homeowners alike…and threatened to take down the entire US
economy. Were we to do nothing to change that? And Mr.
Gingrich, if I may, how would repealing Dodd-Frank suddenly help
the 4 million borrowers behind on their mortgages today and the
2.2 million in the foreclosure process today keep their homes?
How would it put a bottom on home prices? Do you honestly believe
that it would suddenly open the mortgage markets wide, allow
banks to somehow fix all the troubled loans on their books and
fuel a gigantic lending spree that would ignite home buying and
selling again like the good old days? Is that even what we want?
Let me just finish with Mr. Gingrich’s last note, ‘The banks are
actually profiting more by foreclosing than encouraging short
sales.’ That’s just flat out wrong.
To begin with what bank has ever profited from a foreclosure OR a
short sale? Industry sources tell me that a short sale nets the
bank on average 20 percent more than a foreclosure. Short sales
speed up the time frame for disposal of the property as well, as
foreclosures can take years to process. During that time,
foreclosed borrowers can destroy the property, flushing cement
down the toilet and stealing everything in the home that is and
isn’t nailed down. In a short sale, the homeowner lives in the
home until the deal is done, and because they are not getting a
huge hit to their credit and being kicked out by a sheriff’s
deputy, they generally don’t destroy the house. In a short sale,
the bank knows exactly what it’s getting, unlike in a foreclosure
when the bank has to take back the house in some unknown
condition, market it and re-sell it at an unknown distressed
price. ‘Nuff said.
My second favorite argument is that it’s all Fannie and Freddie’s
fault, and if we take them down, housing comes back in a flash.
‘For these geniuses to give 10 of their top executives bonuses at
$12 million and then have the guts to come to the American people
and say, ‘Give us another $13 billion to bail us out just for the
quarter,’ that’s lunacy,’ Rep. Michelle Bachmann argued on CNBC
last night. ‘We need to put them back into bankruptcy and get
them out of business. They’re destroying the housing market.’ No
question, Fannie Mae and Freddie Mac are bleeding money, costing
the taxpayers billions already and potentially billions more in
the near future. Something needs to be done to change that, but
‘bankrupting’ Fannie and Freddie would take down the US economy
as we know it, and it boggles the mind that a person running for
president wouldn’t understand that. She in fact noted that Fannie
and Freddie support the bulk of the mortgage market. That’s true.
Without them there would be no lending. Does she think the
private market would just come running back in and give the
nation’s beleaguered borrowers 3.99 percent 30-year fixed across
the board? Only Herman Cain seemed to get that. He argued that
we need to fix unemployment first with his various proposals.
‘Okay. After I did those three things that I outlined, then deal
with Fannie Mae and Freddie Mac. You don’t start solving a
problem right in the middle of it. So we’ve got to do that
first,’ he reasoned.
Fixing unemployment was the only housing plan the candidates
could offer. When CNBC’s Maria Bartiromo asked Governor Mitt
Romney, ‘Not one of your 59 points in your economic plan mentions
or addresses housing. Can you tell us why?’ He responded, ‘Yes,
because it’s not a housing plan. It’s a jobs plan.’ I don’t love
that answer, but at least I can respect it. ‘Our friends in
Washington today, they say, ‘Oh, if we’ve got a problem in
housing, let’s let government play a bigger role.’ That’s the
wrong way to go. Let markets work. Help people get back to work.
Let them buy homes. You’ll see home prices come back up if we
allow this market to work,’ argued Romney. There are plenty of
analysts who agree that the market needs to work itself out, as
painful as that may be to average Americans, many of whom are in
line to lose their homes. Until the foreclosure mess runs its
course, and all those homes are filled with borrowers who can
afford them, home prices will not recover, plain and simple, goes
the argument. I’m not saying here that the Obama Administration
has done anything particular stellar to stimulate a housing
recovery. A small refinance program for underwater borrowers
isn’t the cure-all, and forcing banks to write down mortgage
principal is not politically nor technically feasible. But
without some plan, this crisis could go on for a decade, like it
did in Japan, as President Clinton noted recently in an
interview. I’m not saying I have the answer, the great plan to
fix our nation’s housing crisis. But I’m not running for
president.”
US becoming more competitive
Slowing wage growth in the United States, coupled with rising
wages in China and other emerging markets, could soon make the US
more competitive. While wage levels in China are still far below
the average wage in the US, better technology, transportation and
services in the US could help make the difference for companies,
according to Bart van Ark, Chief Economist at The Conference
Board. “There are other factors at play here, from access to
services, high technology and innovation, to transportation,” he
said today. As wages increase in the major cities in China,
companies are having to move lower-paid jobs further inside the
country, where infrastructure has not yet caught up, to get the
same benefits.
The weaker US dollar has also helped the US regain
competitiveness and increased “on-shoring”, Virginie Maisonneuve,
Head of Global and International Equities, Schroders, said today.
“During the crisis period, the US has regained tremendous
competitiveness, mostly in terms of currency but also in terms of
adjustment on wages,” she said. “It has been a painful process
for the US.” She pointed to the example of General Motors
letting go workers who cost around $70 an hour, when wages were
added to benefits such as health insurance and pensions, at the
start of the crisis. Recently, Volkswagen opened a plant in
Tennessee which costs them about $27 an hour in wages and
benefits. This came after basic starting wages for union members
in the auto sector were lowered to around $15 per hour as part of
the 2007 National Agreement. In the second quarter, US unit
labor costs grew by 2.2 percent, slower than the 4.8 percent
recorded in January-March.
The unemployment rate in the US is gradually falling, and was
narrowly lower at 9.0 percent in October – although economists
believe that it will stay around this level for months to come.
“We have seen some major adjustments in wages,” Van Ark said.
“We see evidence that companies are pulling back business into
the US. The question is how will this affect growth?” He pointed
out that the export sector in the US. is much smaller than in
Europe. “Clearly China is still very competitive, but if you
look at other costs, as wages lower in the US. they’re nearly on
a par,” Maisonneuve said. She warned that there was a danger of
“social fragmentation” in the US as unemployment is
disproportionately affecting young, uneducated workers.
WSJ – FHA running out of money?
Concerns are rising that the Federal Housing Administration (FHA)
could run out money if the economy doesn’t recover soon, raising
the risk the agency would seek a taxpayer bailout for the first
time in its 77-year history. Since the mortgage crisis erupted
five years ago, the FHA has played a critical role in housing
finance as private lenders retreated. It backs about a third of
all new mortgages originated for home purchases, up from around
5% in 2006. But, as the FHA prepares to release its annual
financial report next week, a forthcoming study by Joseph
Gyourko, a real estate and finance professor at the University of
Pennsylvania’s Wharton School, estimates that the FHA faces
around $50 billion in losses in the coming years. The study says
only a “quick and substantial economic and housing market
recovery” can avoid “substantial losses for American taxpayers.”
The paper was commissioned by the American Enterprise Institute,
a conservative think tank. The study says the losses will be
spread over a period of many years and are unlikely to bankrupt
the agency this year or next.
The study isn’t the first to predict the FHA’s insolvency. Last
year, economists from New York University and the New York
Federal Reserve issued a paper warning of the growing likelihood
the agency would need to a taxpayer bailout. FHA officials
disputed some of that report’s findings. Last month, Paul
Miller, an analyst with FBR Capital Markets, warned that the
largest US. banks could face billions in losses if the FHA tries
to push back defaulted mortgages onto the lenders that originated
them. “Unless home prices rebound, I don’t understand how they’re
able to avoid a restructuring and a Treasury infusion,” he said.
FHA officials said they couldn’t comment on Mr. Gyourko’s paper
because they hadn’t reviewed it. The FHA’s independent audit is
likely to show that while losses are rising, it will maintain
positive reserves assuming the economy doesn’t dip back into
recession, say people familiar with the matter. Still, the
Gyourko study along with the FHA’s own annual report could have
political ramifications. Some Republicans have pushed for the FHA
to begin raising its down payments. Higher forecasted losses
could also force the agency to raise its insurance premiums paid
by homeowners even higher.
The FHA, which is funded through the mortgage-insurance premiums
it collects, doesn’t make loans but instead insures lenders
against defaults. At the end of August, it guaranteed 7.2 million
mortgages worth $1 trillion, a record sum. It held nearly $31.7
billion in reserve at the end of June, of which all but $2.8
billion was set aside to cover anticipated losses. The bulk of
the FHA’s anticipated losses stem from loans made in 2007 and
2008, when the financial crisis was at its peak. More recent
loans have among the best credit characteristics the agency has
guaranteed. Still, the majority of homeowners taking out
FHA-backed mortgages have very little equity—the minimum down
payment is 3.5%. Because home prices have fallen sharply and
continue to decline in many markets, many borrowers are
underwater and at risk of default if they lose their jobs or
experience other financial shocks. Losses also can occur when
borrowers simply walk away from their homes. “I don’t think many
of the borrowers truly understand what a risky position they’re
putting themselves in,” said Mr. Gyourko. He estimated that more
than half of all homes with FHA loans are worth less than the
outstanding debt.
Mr. Gyourko says the agency is underestimating by billions of
dollars the future losses related to borrowers who used an $8,000
federal tax credit to fund their down payment. The paper also
says the FHA is underestimating default risk related to
unemployment. The study could also reignite debate over the
government’s role in stabilizing the housing market. Congress is
now considering a proposal to restore higher FHA loan limits.
“Without the FHA, the housing market would not be in a recession,
it would be in a depression,” said Kenneth Rosen, chairman of the
Fisher Center for Real Estate Research at the University of
California at Berkeley. The most certain way to increase losses
for Fannie, Freddie and the FHA would be “by making loans harder
to get.” Mr. Gyourko says he isn’t advocating an “immediate
withdrawal” by the FHA, which he said could create a “real risk”
of future price declines. But he said a gradual withdrawal is
warranted and that policy makers “should all be clear about
whether we understand the risks we’re taking on, and whether the
benefits justify the risks.”
Obama delays oil pipeline
The Obama administration said yesterday it will delay a decision
on the controversial Keystone oil sands pipeline expansion until
at least 2013. Citing concern over the proposed route through
Nebraska’s Sand Hills region and over the Ogallala Aquifer, the
State Department said it needs more time to study the issues and
look at possible alternative routes. Based on previous pipeline
permitting experience, the State Department said the review
process “could be completed as early as the first quarter of
2013.” In a separate statement, President Obama said he
supported the State Department’s move. The news set off a
firestorm of comments from the pipeline’s supporters. While the
decision has been put off until after the presidential election,
it will no doubt be seized upon by the president’s supporters and
opponents during the election season. House Speaker John Boehner
criticized the delay. “More than 20,000 new American jobs have
just been sacrificed in the name of political expediency. By
punting on this project, the president has made clear that
campaign politics are driving US. policy decisions — at the
expense of American jobs.” The intensity of the protests turned
up the heat on the Obama administration, and put it in the
uncomfortable position of having to choose between two important
constituencies. “This is a surprise to us and counter to our
existing call that the approval was still likely and only the
timing was in question,” said Kevin Book, managing director of
research at ClearView Energy Partners. “This does indeed suggest
a political, not practical, choice to ‘kick the can’ into 2013.”
Pipeline supporters, including many in the business community,
the construction trades, and nearly everyone in the oil industry,
say the United States could use the 700,000 barrels a day the
pipeline would carry.
Manhattan condo market dives
Market pandemonium and concerns about the economy alarmed
potential Manhattan condominium buyers in August, causing both
condo prices and sales in the area to drop briskly throughout the
month. Real estate data provider Radar Logic RPX Manhattan
Neighborhoods report released Thursday shows condo prices falling
5.3% from July to August, more than offsetting the gains achieved
over the preceding year. On a year-to-year basis, the condominium
prices have fallen nearly 1%. Sales of condos in Manhattan fell
a dramatic 14.6%. “A rapid decline in sales and transactions is
not unusual in the second half of the year but the declines this
August were unusually severe,” Radar Logic reported. The monthly
decline in Manhattan condo prices in August was the largest
decline for that month since the beginning of Radar Logic’s
data in 2000.
And the monthly decline in the number of sales was the largest
for the month of August since 2007, and in terms of% terms was
the largest on record. ‘Turbulence in the stock market and the
prospect of another recession likely caused many would-be condo
buyers to delay their purchases, contributing to the rapid
August-over-July decline in condominium closings,” the RPX report
states. “Stock prices fell off a cliff in the beginning of
August, as investors expressed serious concerns over the US.
economy and the European debt crises,” the report adds. “The Dow
Jones Industrial Average fell nearly 11% between July 29 and Aug.
19.” Condo prices declined on a month-to-month basis in five of
the eight Manhattan neighborhood tracked by Radar Logic, with the
largest decline in the East Village/Lower East Side (-32.4%),
followed by the Upper East Side (-19.7%), Soho/Tribeca (-6.6%),
the Financial District (-2.9%) and the Upper West Side (-0.2%).
Condo sales suffered on a month-to-month basis in six
neighborhoods in August, with the largest declines on both an
absolute and% basis occurring in the Upper East Side (-35.4%) and
Chelsea/West Village (-25.5%).
See you at the top!
Chris McLaughlin
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