Matrix Blog

Distressed Housing

Foreclosure Formula = No Job + No Equity + No Homebuyer

April 25, 2006 | 7:39 am | |

In a post I made a few days ago: Foreclose Already So We Can Get Back To Normal, RealtyTrac’s blog: foreclosurepulse, the people that bring you national foreclosure statistics every month, shed some light on the correlation between exotic mortgages (option-arm, interest only, etc.) and foreclosure rates in their post ARM’d and Dangerous? [ForeclosurePulse].

I had questioned why the Midwest seemed to have more foreclosure activity than the east and west coasts where more price appreciation has occured, and specifically the west coast, where there are higher loan to value ratios on average and greater use of exotic mortgages.

RealtyTrac says theres more to it than that.

The common assumption (aka mine)

a popular bias these days towards directly linking the rising foreclosure rates to default rates on some of the higher risk loans that have become increasingly popular – ARMs, interest only, negative amortization, etc. There’s undoubtedly some truth to that: high risk loans are more likely to be defaulted on than traditional loans

What is likely happening we’d probably look at the Midwest rates and chalk them up to higher-than-average unemployment rates (a very strong predictor of foreclosure rates) and lower-than-average house appreciation rates coupled with weak housing demand. That’s a pretty reliable formula for high foreclosures: No job + no equity + no homebuyer = distressed homeowner.

We should be concerned with the looming re-sets next year to the tune of $1B and keep our eyes on California due to the loan volume, high housing prices and heavy use of exotic loans.

I’ll look to RealtyTrac’s ForeclosurePulse to keep me informed on this topic in the future.

Home Foreclosure Rates Soar [NYP]
Which End Is Down? The Problem With Foreclosure Stats [Matrix]

Auctions Shorten Marketing Time For Sellers Who Lose Patience

March 15, 2006 | 12:37 am |

Today I woke up a bit woozy on my last day of vacation in Boston with my family. I picked up the complimentary copy of the Boston Globe outside my hotel room door and, being of the real estate persuasion, scanned the business section for real estate related articles first. I didn’t have to go far because a real estate story had the lead in the business section: Sellers literally put homes on the block [Boston Globe]. I figured that this article will be covered by many others [Walkthrough] better than I can and the premise of the coverage would be as follows:

  • Home auction increase in popularity signifies a weak housing market

  • Sellers that are desperate can use this as a tool

  • It presents an opportunity for buyers to find properties quickly

  • People can get hurt in the process

But what price does submitting a property to auction really achieve?

Well first of all, auctions are most commonly used to dispense real estate assets in large quantities and tend to succeed in investor-heavy markets. The commissions can be as much as 10% of the purchase price. They can be more commonly used as a marketing technique during a weaker housing market in order to differentiate a property from the growing competition.

Some observations and guesstimates about auction properties:

  • Many of the properties were overpriced on the open market before they went to auction (this drives me crazy)
  • The auction properties commonly have some sort of physical defect (this can be a hidden but significant cost)
  • The auction properties have unrealistic sellers who need to get their price (a last ditch way to get a price that the open market couldn’t)

Auctions are not the panacea for buyers and sellers in the current market because an auction is simply a shortcut to move a property faster than existing conditions permit. The shortcut comes with a cost. If a seller actually gets their price from any of the above scenarios, then I’d chalk it up to an inefficient market, namely the buyer bought it blind.

Here’s how an auction price compares to a market price

When a real estate property is placed on the market in the traditional way – listed for sale with a broker – there is a relationship between the time it sits on the market, and how close the list price is to its reasonable value.

If the market is rising, the over listed property will eventually be caught by the market (although many of these sellers may decide to raise their asking price to another unrealistic level and the same thing happens again) and get offers to purchase.

But what happens when the market is not appreciating or begins to decline? The property could sit indefinitely until the seller’s resolve weakens and the price is dropped. An auction reduces the marketing time that a property needs to be exposed to the market. That is the discount usually associated with auctions.

In other words, the price achieved in an auction:

  • In a rising market — reflects a discount for the accelerated marketing time (which technically is not a discount) since you are selling the property sooner than the market can absorb it or rise to it.

  • In a flat or falling market – reflects a discount for differentiating the property from competition. The primary reason properties do not move or move more slowly in bloated inventory conditions is that the buyer has more choices. By dropping the price, the property is differentiated from its competition.

Auctions can be effective given the right circumstances, but lets be honest about the ultimate price achieved…its not market value unless all sales in that market are sold at auction.

The Housing Boom Is Over And Economy Feels A Little Too Fine (Thats The Problem)

March 7, 2006 | 12:01 am |

Ok, thats a little dramatic – semi-borrowed from an REM song. Still, the culmination of reports over the past week appears to confirm what most have known for the past six months: The Housing Boom Is Over.

What does that mean, exactly? Lets look at the stats: [WP]

  • New home sales fell 5% (4th decline in 7 months) [Commerce]

  • Backlog of unsold new homes hit a record [NAR].

  • Existing home sales fell 2.8% in January (4th consecutive monthly decline) [NAR].

  • Median sales price of existing homes $210,500 in January down from $219,500 in July 2005 [NAR].

  • Foreclosures are rising [Big Picture]

  • 43% of all new jobs created since 2001 are related to housing.

As a sign of more difficult times ahead, specifically in the real estate economy, analysts are beginning to raise their estimates as to how high the Fed will go until they feel inflation is in check. Consensus has been to either 4.75% or 5%. Lehman Brothers has just increased their federal-funds rate peak to 5.5% in August or September. They have not penciled in a policy reversal at any time in the next year and a half [Barrons]. Their reasons for the change:

  • although the housing market is cooling off, the process is slow and Fed Chairman Bernanke has reiterated the idea that the Fed will respond slowly to the cooling.

  • the economy is showing more underlying strength than we had expected. Therefore, it will probably take longer for the diminishing housing-wealth effect to overcome an even stronger underlying trend in growth.

In other words, no bursting housing bubble is seen by the Fed. They are focusing on the overall economy and not tinkering specifically with housing at this point (much to the disappointment of those who follow the housing market, I might add).

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Ugly Is As Ugly Does: HomeVestors Franchises Property Flippers

February 21, 2006 | 12:01 am |

Source: NYT

In Fred Bernstein’s excellent article Looking for Eye-Catching Profits From ”Ugly Houses” [NYT] he explains how this concept works.

HomeVestors, a company that specializes in buying houses from people who want or need to sell them quickly. In the 30 states where it operates, HomeVestors is known for the bright yellow billboards that announce: “We buy ugly houses.” The billboards feature a toll-free number that brings calls to the HomeVestors headquarters in Dallas. From there, the leads are passed on to the franchisees.

Franchisees pay an initial fee of $46,000 and agree to pay monthly fees as well as fees for every purchase. They also pay into an advertising fund to support the billboards. Over all, a new franchisee is expected to commit about $200,000 to the business, according to Mr. Hayes.

They buy property at a steep discount, then fix them up and sell them, leaseback to the previous owners, etc. They target the low end of the market. Its a very specific niche and its 250 franchisees bought and sold about 6,000 houses in 2005.

The founder said:

The trick is to buy homes for 60 to 65 percent of what they would be worth in good condition.

That seems to be quite a leap of faith. It makes me uncomfortable just thinking that my franchise success would be determined by getting that type of discount on every purchase.

This niche would appear to be a high risk franchise investment if the market declines in a given market. The founder made reference that there is not much of a bubble in $80,000 houses. Of course there is. Houses in that price range see smaller swings in prices but can be ultra-mortgage rate sensitive. The entry or low end of the market can be the first sector to stop activity if mortgage rates jump.

If an investor buys a house as prices drop, they are stuck with the property and since the franchisees have financed at 9% through HomeVestors, it can get expensive. However, franchisees claim they are doing well.

When we start seeing this sort of activity, I get nervous. I suspect many of the franchisees are not savy real estate investors or they would not be paying a franchise fee at all and, most importantly, many have not seen a weakening real estate market before as an investor.

Lets hope their pockets are deeper than the former owners of their properties or its going to get ugly.

Dealing With Rumors And Reality That May Hurt My ARM

February 17, 2006 | 10:44 pm | |

First American Real Estate Solutions released a study called Mortgage Payment Reset: The Rumor and the Reality [pdf] which shows some contrarian results to what would be expected if mortgage rates continue to rise. It is reported to be based on 97% of the nations real estate transactions, plus it has some very cool charts.

[Webmaster’s note: if the 97% number is accurate, why don’t they release national housing statistics? It would seem to be that it would be far more complete than NAR and OFHEO stats which tend to be suspect.]

Incidentally, core inflation stats were released today [MW], showing the biggest monthly gain in a year, seemingly insuring at least two more moves by the Fed in the coming months.

There is limited distinction in risk between owner occupied homes v. investor homes but there was a risk distinction between adjustable rate mortgages and fixed rate mortgages. Quite often, ARM mortgageghest risk strata were found to be those ARM’s with 2% teaser rates financed and less than 15% equity existing. properties have lower equity levels, including many with negative equity and have stretched their ability to make payments. The hi

Some other neat charts in the study:

A caveat – Since First American has a lock on much of the public record information in our housing market (ie floor plans and tax maps) and no real competition, they have no incentive to be fair and reasonable, made even more challenging because they are so big. Last year, I reduced the services my firm subscribes to because some of it was redundant. So they sent my firm to collection even though we paid the reduced invoice in full! It took nearly a year and untold phone calls to get this situation straightened out. It took months before we could get anyone to return our calls. Plus the services (that we had paid for) were suspended until it was straightened out. Incredible. But I tried very hard to maintain my objectivity with them in this post because the remaining services we do subscribe to is of great quality.


Real Estate Rocky Mountain High Remains Up In The Air

December 28, 2005 | 12:01 am |

In a contrarian’s position to many economists and academics, a real estate professor at the University of Colorado (the only one) says that the Colorado housing market is insulated against big price drops because there is no speculative bubble. [Denver Post]

Inflation, not speculation, can explain most of the gains in Colorado home prices the past decade, Thibodeau says.

“Colorado last enjoyed double-digit gains in sale prices of existing homes in 2000 and 2001. Since then, the state has lagged the rest of the country when it comes to real estate appreciation.”

Prices are rising because of rising construction costs and investors are putting more of their net worth into real estate, including 2nd homes and investment properties. More single people are buying homes and job creation is forecast to increase next year.

The postion here seems contradictory to facts simply because the argument of an increase in 2nd home and investment properties contains an element of speculation. In addition, Colorado home purchasers are heavy users of interest only mortgages, foreclosures are rising and payrolls are lower than they were in 2001.

In other words, this professor has not provided any arguments to refute existing issues other than the forecast for job creation. This is the typical momentum argument we see quite often, light on facts, heavy on confidence.

In otherwords, the forecast for Colorado remains up in the air.

Home Owners: Too Big To Fail

December 27, 2005 | 12:01 am |

If there is one thing that mortgage servicers learned from the last downturn in the housing cycle (1989-1995) was that foreclosure were expensive and had the potential to be a public relations nightmare. In the today’s market, Ken Harney’s article Mortgage Servicers Help Avoid Foreclosures [Washington Post] discusses how mortgage servicers do everything they can to avoid foreclosures.

In the 1990-91 market downturn, lenders had to maintain large in-house departments to manage inventory as well as manage vendors that were needed in the process such as lawyers, brokers and appraisers. As an appraiser, I stood with many a broker and locksmith in the early 1990’s, getting into a foreclosed apartment, only to find the interior was picked clean.

Daniel Gross, in his article Didn’t Pay Your Mortgage? Don’t Worry. Why banks are so afraid to foreclose on you [Slate] he discusses why this is happening. Lightening up on those who fell victim to the hurricanes is understandable and would be a public relations disaster. But what about everyone else?

In the process of raising the percentage of home ownership [Census], the lending industry is trying to avoid the expense of foreclosure. The delinquency rate as of the 2nd quarter, according to the MBA was 4.34%, but less than half of those are in excess fo 90 days. [MBA]

Gross notes that the delinquincy rates of ARM mortgages is 10.04% and subprime loans is 9.06%, which means that the rate for conventional loans is barely on the radar, clearly a pattern related to the pressure to expand the base of customers to those who are a higher risk.

He concludes that when borrowers get behind in their payments, lenders prefer to do workouts and these often can come into the form of another refinance, with the homeowner getting deeper in debt. They have in effect, like lenders 20 years ago, become too big to fail.

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Which End Is Down? The Problem With Foreclosure Stats

December 21, 2005 | 12:01 am | |

RealtyTrac, an online marketplace for foreclosure properties, this week released its November 2005 Monthly U.S. Foreclosure Market Report, which showed 71,606 properties nationwide entered some stage of foreclosure in November, a 12 percent decrease from the previous month.”

The report shows a November national foreclosure rate of one foreclosure for every 1,615 U.S. households.

Now what does this mean? In October, RealtyTrac says foreclosures spiked 19% to set a new record. Is there a lot of volatility in foreclosures nationwide?

The November stats are not available on their web site to the general public as of this posting so we can’t look at it more closely.

I think the problem with RealtyTrac’s press release philosophy is their propensity to release their headline figure as a month over month change – this month a 12% decrease instead of an annual change. Last month this indicator jumped 19%. The month over month change shows the most volatility. They should be presenting a yearly change when dealing with monthly figures. They are not considering seasonality by using this method but it definitely gets everyone’s attention. Case in point, last month Connecticut foreclosures increased 7,710.71%. Sounds pretty serious, but its actually pretty ridiculous.

Small stat universe + month to month volatility = misleading results.

In a previous post, I had similar concerns but for different reasons with the monthly stats released by [Matrix]


Media Critique: To Be Able To Say “I Told You So” By Telling Us With So-So Information

December 19, 2005 | 12:01 am | |

In Seth Jayson’s Motley Fool column: Housing: Solid or Soft? [Motley Fool] he discusses signs of a housing correction. And with’s thorough policies on disclosure, he indicates he is biased and he “remains a happy renter, because he knows there’s a difference between price and value.” He has been predicting a crash for some time now.

I am not advocating that there aren’t serious issues with the housing market at all, but its troublesome when articles like this are sensational and based on anecdotal indicators like a link to a few broker comments and list prices. We all know that examples can be pulled out of any data set that fit our argument.

The problem with predicting housing declines using list prices can be illustrated in my Three Cents Worth post on Curbed called Seller Reality Distortion. The drop in list prices in a cooling market can be exagerated when the property is significantly overpriced to begin with. Even though the market could be rising at a modest pace, the list price has to be cut significantly for the property to sell.

The link to the ForeclosuresMass stats is particularly interesting. It seems like they have been issuing a lot of press releases lately giving the impression that huge numbers of Massachusetts housing units are going to foreclosure. While there is certainly an uptick in foreclosures based on their data and it seems to be in lower income demographics, I got the impression that the article pulled out the towns at the high end of the range and ignored the lower end of the range. I’ll also bet that many of the towns at the high end of the range of foreclosure increases are based on relatively small data sets judging from the total number of statistics presented for the whole state.

This has been my beef with the media housing coverage over the past 9 months. Sensationalism in the guise of being informative has got everyone’s head spinning. Its simply the other end of the spectrum from the churn presented by housing advocates like NAR. Maybe there’s not a better way to cover the market, but this type of coverage is really starting to bug me.

Real Estate Spin: Its All Good (If We Knew What It Meant)[Matrix]

Bubble Challenge: Just The Facts

December 12, 2005 | 12:01 am | Radio |

In George Chamberlin’s column By George: Words for Investors [North County Times] in San Diego provides some plain language to the discussion of the current state of the real estate market. He is a TV and radio commentator.

  • After the Fed release its quarterly household wealth report, CNBC ran alerts that Americans were deeper in debt than ever before but the report said that net worth rose to a record level.

  • Foreclosures are lower today than a year ago

  • As far as a slowdown in sales, the California Association of Realtors said it took 34 days to sell a house in October. A year ago it took 33 days.

  • The NAR report that pending home sales dropped 3.3% in November and that was reported as a sign of collapse yet in California, they rose 0.8% indicating that real estate is local.

  • The UCLA Anderson Forecast calls for a crash of Southern CA real estate prices over the next few years yet excludes San Diego county from their stats.

  • Wall Street has a vested interest in seeing housing slide to prompt more people to return to the financial markets.

Although this commentary is California-orientated and I am not an advocate for the real estate industry, the lesson here is for the media to fairly interpret the information released.

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Housing : Placing Bigger Bets By Placing Less Down

September 11, 2005 | 11:16 am |

Many homebuyers are being more creative, taking more risks in getting into the housing market. According to SMR Research 38.1% of home buyers put less than 5% of the purchase price down, up from 30.6% in 2000. [USA Today] Piggy back financing, obtaining a line of credit simultaneously with the house purchase to put 20% down to avoid PMI insurance, has also been rising. SMR says 48.2% of buyers used piggy backs up from 19.9% in 2001.

Americans now shoulder record levels of housing debt — more than 8 percent of homeowners spend at least half their income on their mortgage. [Washington Post]

So What?

Well, as more people increase their borrowing risk, foreclosure rates rise. published a list, by state, of foreclosure inventory available for sale in August. [Valuation Review: Pd. Sub.] There was a 3% increase from 90,611 units in 93,440.

Sample media foreclosure coverage from around the country:

Texas Up 6.6% from July to August 2005 [San Antonio Bus Journal]

Massachusetts Up 29% from August to August 2004 [RISMedia]

Georgia Up 4.4% from June to July 2005 []

See previous post: PMI Gets You In The House: Now Get Rid Of It

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PMI Gets You In The House: Now Get Rid Of It

August 28, 2005 | 12:41 am |

percent Homeowners can save thousands by canceling private mortgage insurance [PMI]. PMI is an insurance on the top 20% of the loan so the lender is assured that they will get the full 80% or balance of the funds outstanding if the property goes into foreclosure.

The Homebuyers Protection Act was passed by Congress in 1998 requiring lenders to notify homeowners when the equity in their home reached a level where PMI was no longer required.

“Your home falls under this act if you purchased, constructed, or refinanced your single-family home after July 29, 1999, and your loan is not a government-insured FHA or VA loan. If you purchased your home before July 29, 1999, your lender is not required to cancel your PMI when you reach 20 or 22% equity, but many lenders will do so if you ask.”

How to Cancel PMI Here’s a great article on removing PMI from your loan by Chip Wagner, an accomplished appraiser in the Chicagoland area. Most lenders require and approved and state certified appraiser to perform the evaluation.

Here’s how they do it in Minnesota. I suspect it is not much different than other states.

Note: Check with your lender for specific instructions.