Sunday, July 08, 2007

Sacramento Regional Real Estate Trends for July 7, 2007


The monthly inventory drop is upon us this week, with a drop of 357 over last week:


The drop was felt across all segments of the market, with almost every price level and seller category showing a decrease. Some have speculated that the slight drop in flippers in trouble inventory could be due to foreclosures. While that could be the case, I will reserve judgment until a few more weeks have passed. Indeed, flipper market share is undiminished, indicating a broader trend is at work.






36 comments :

Bubble Sitter said...

Very interesting Max. If sales are still dropping, the inventory is not being absorbed with buyers. Maybe sellers are just capitulating and taking their houses of the market.

We are approaching uncharted territory with record inventory. There are many, many more houses for sale and prices seem to be dropping faster.

I am wondering if the auctions have an effect on the listing numbers. There seem to be a lot of auctions coming in the next few months. If you have 1000 homes sold at auction, that will effect the MLS stats, since they do not use agents, or show up on the database.

Hmmm, time will tell. This market is strange.

Max said...

Hmmm, time will tell. This market is strange.

Yeah, I agree. There's a lot that's unpredictable right now.

Real said...

Max - correct me if I am wrong, but I think this marks the point where we have decreasing inventory Year over Year....I believe 1 person predicted this would happen and that we would not have record inventory in 2007 and everyone else stating inventory would balloon to record levels....

As to why inventory is falling, maybe - just maybe - people realize they are selling a house and not a burrito so you don't have to sell before the house spoils. Shocking....

smf said...

I have seen the inventory drop, and the houses still NOT sell.

There is one good example in Gold River personally witnessed where a flipper house was taken off the market. This is a must-sell house, but it is off the MLS. Why?

It still sits vacant.

"As to why inventory is falling, maybe - just maybe - people realize they are selling a house and not a burrito so you don't have to sell before the house spoils."

Some people can afford and not sell their house. Of course, that means they wont buy another house either.

Then there are other who HAVE to sell, as they already pay two mortgages. This type of situation CANNOT go on for a long time.

Give it up, Real, whatever and however you look at this market, it is toast.

Doom and Gloom said...

smf,

Good points about the inventory coming off despite not selling. I have noticed the same thing in my neighborhood (El Dorado County). Some of these were actually bank owned and I saw the signs vanish. So I asked my Realtor friend to look up the selling price of the houses in question and she said there is no record of the house selling and it was just pulled off of the market for some reason.

As for those that think that any small decrease in inventory is somehow a sign of market strength, they better re-analyze. These houses aren't selling and that's the bottom line. We also know that there is a huge shadow inventory out there of REO stuff that isn't on the market and apparently some REO is even being pulled from the market. How these developments could be viewed in a positive light is beyond me, but it seems something rather ominous is happening.

Is this the calm before the storm? Will these land banks dump all at once? Have people just given up in despair? Nobody knows for sure, but it sure is interesting to watch.

Sippn said...

Could be a much simpler answer... the streets were empty last week. Even the comments seemed less.

As much as I'd like to spin this my way, I just think both buyers and sellers were gone last week.

Give it a week or more to look for a trend.

Anonymous said...

From the posting on 7/2: "We're at about 17,650 for inventory which gives us around an 11-month supply of inventory. We also lost 985 homes that expired at the end of June, the highest for any day that I've ever seen."

Does this explain the drop in inventory from week to week? When would this drop be reflected... this week or last week?

Patient Renter said...

"correct me if I am wrong, but I think this marks the point where we have decreasing inventory Year over Year"

Not yet, just the end of month drop off. You must not have been paying attention in a previous post where it was mentioned that the end of month dropoff was the highest ever seen by Max.

Max said...

Does this explain the drop in inventory from week to week? When would this drop be reflected... this week or last week?

Both, actually. I pulled last weeks data on June 30, AB pulled his on July 2, and this weeks data was pulled on the 7th. The listings tend to expire around the end of the month, so you have a lot of volatility on a day-to-day basis during that week. That's why I try not to make any predictions based on those numbers.

All the points made here are valid possibilities. There's no telling when the REO overhang will appear on the market, and how much of the current inventory is "wishful thinking" vs "must sell". Only time will tell.

Patient Renter said...

"We also know that there is a huge shadow inventory out there of REO stuff that isn't on the market and apparently some REO is even being pulled from the market. How these developments could be viewed in a positive light is beyond me, but it seems something rather ominous is happening."

Exactly.

As for my own anecdote, one of the homes that sat for sale on my street (in Folsom) for several months recently had its sign pulled down. Did it sell? Nope. Just sitting there now, empty, and still right next door to 2 REOs which also have been sitting there for months.

smf said...

"There's no telling when the REO overhang will appear on the market"

It was my understanding that banks are unwilling to really start clearing their REO inventory.

Once they start lowering the prices on their REOs, it creates an immediate loss on any other future inventory that they have.

And with the already high inventory, any of their additions to it will only depress prices further.

So banks are stuck between a rock and a hard place. What can they do to avoid bigger losses?

buying time said...

Is anyone keeping track of this shadow inventory? It would be interesting to try and get some figures on it. Best I can tell from comments, there are the two main sources, the auctions, and the bank inventory. Anyone want to volunteer to investigate (normally I would, but will be traveling a lot in the coming weeks).

Max said...

It was my understanding that banks are unwilling to really start clearing their REO inventory.

Well, when you talk about banks, you're really talking about servicers, and that tends to complicate things tremendously. There is a mark-to-market issue, in that the REO holders will have to decrease the value of their entire portfolio once they start the "fire sale". There are conflict of interest issues as well (eg CFC is both a holder and a servicer. Which REOs are they more likely to sell first?) There's also the issue of these REO "disposal units" being overwhelmed with the amount of inventory they need to handle.

For a detailed discussion of this minutiae, please see Tanta's posts on Calculated Risk.

I, for one, would love to see the memo from the hedge fund to their servicer asking them not to sell the REOs out of their MBS. Talk about manipulating the market. :)

Patient Renter said...

"I, for one, would love to see the memo from the hedge fund to their servicer asking them not to sell the REOs out of their MBS."

The question I have from this is still, how long could they hold back these REOs? Does holding them for longer periods of time actually have a greater effect on the securities investors or hedge funds (will we see more blowups ala Bear Stearns)?

Max said...

The question I have from this is still, how long could they hold back these REOs?

That question has been asked many times over on CR, and nobody really knows. The concept in the past was that banks try and dispose of REO as fast as possible since the maintenance costs and property taxes will eat you alive over time. However, in these strange times, it might make sense not to dump the REO since that could force revaluations on other parts of your portfolio.

These CDO/CMO/MBS thingees are fighting illiquidity on two fronts: the securities themselves are thinly traded and hard to value, and the loans that make them up are rapidly becoming houses through the REO process (which in this market are thinly traded and hard to value as well). The market has become supersaturated. Things are beginning to precipitate out.

My bet is they try and quietly make margin calls for as long as they can, just to see if the market comes back to life.

Max said...

There's a good tongue and cheek article over on iTulip that fits right in to this discussion. Here's an excerpt:

While we read about the big disasters like the Bear Sterns hedge funds that made heavy ABS CDO bets, you don't hear as much noise as you might expect, considering the market for hundreds of billions of dollars of securities disappeared virtually overnight. According to our sources, dealers are sitting on their hands waiting for the market to improve, while the banks that lent the money that the CDO firms leveraged put the loans in the balance sheet "cache" rather than write them off. (We heard this from three of the CDO fund managers we interviewed, along with what really happened at Bear Sterns. Stay tuned here for that story.)

Cache

"A portion of RAM set aside as a temporary storage area, or buffer, to speed up communications between the microprocessor and the hard drive or other components." ("Jargon Watch," Fortune Technology Buyer's Guide, Winter 1998, p. 10.)

A portion of the balance sheet set aside as a temporary storage area, or buffer, to slow up the communication between the trading area and the controllers, financial accountants, top management, and/or the shareholders. In commercial banks, it has in the past consisted of an investment portfolio that the bank need not mark to market and can carry on the books at cost. In investment banks, it has recently consisted of a reserve account and non liquid investments that the trader can mark at will.

Darth Toll said...

My bet is they try and quietly make margin calls for as long as they can, just to see if the market comes back to life.

True, but don't these (very smart) guys know how long it takes a RE market to come back to life, especially one that needs to work off extreme bubble excesses? It could be many years before this market is healthy again, and ironically, it won't get healthy until AFTER the flood of REO's hits. This is the very thing that is needed to cleanse the market of all the fraud, speculative fervor, and abuse.

the securities themselves are thinly traded and hard to value

You are being extremely charitable and diplomatic with that one. I would have said that the CDO's are worth 5 cents on the dollar at most, as we saw with the attempted ML liquidation of the BS mother fund. Once ML saw the bids (or lack thereof), they said, "Nah, we better stop the auction." Oops.

Also, all of this talk about CDO's and MBS gives me the sense that we're not really talking about a housing bubble, but more about a mortgage finance bubble and all of the chatter about location and one location holding value better than another is just that: useless chatter.

Bottom line: once the CDO problems filter down through the credit system, I doubt that it will matter much whether you think a particular house is worth $X, when nobody will be able to get financing for it. I mean, we're only talking about $370TR worth of notional value on garbage paper that is worth maybe 5 cents on the dollar. No big deal! :-)

Diggin Deeper said...

What we're witnessing is pressure building within the investment banks holding all the subprime paper masked as investment grade bonds. Their brilliant backroom think tank wizards have come up with "mark to market" formulas to assess a value to all this junk. When these concocted values begin to show no value at all, the party starts, margins are called in, and those holding these investments are sent to the whipping shed...ala Enron, WorldCom, etc. And what's more is there's a scandal brewing about the ratings companies taking payments from the hedge funds to rate these "pigs" as investment grade, even AAA.

The Bond King Bill Gross had this to say:

“What was chaste and AAA years ago may no longer be the case today. Our prim remembrance of Gidget going to Hawaii and hanging out with the beach boys seems to have been replaced in this case with an image of Heidi Fleiss setting up a floating brothel in Beverly Hills. AAA? You were wooed, Mr. Moody’s and Mr. Poor’s, by the makeup, those six-inch hooker heels, and a ‘tramp stamp.’ Many of these good-looking girls are not high-class assets worth 100 cents on the dollar.”

Let the fun begin ...the greed has shifted to wall street in the form of a dolled up pig waiting to be slaughtered.

Bubble Sitter said...

Here is a third party update on the inventory: HousingTracker has the inventory dropping 0.5%, or 89 listings last week.

However, the bigger story is the asking prices, which have dropped 2% in the last 30-days. So the median value is about $10,000 less than it was last month. Hmmm, should I go out an buy a house right now? Maybe I will wait another 30-days and save another $10,000! Hey, maybe I will wait a year and save $120,000! Hmmm, it certainly seems worth it to take some time and see where all this plays out.

Take a look at

http://www.housingtracker.net/askingprices/California/Sacramento-Arden-Arcade-Roseville/

Diggin Deeper said...

The egg is beginning to crack with regard to prices. You just can't have inventory build up to current levesl without some way to reduce it. There's only one gimmick that works...and its not refrigerator magnets, or balloons, or dancing human signs...

Darth Toll said...

Their brilliant backroom think tank wizards have come up with "mark to market" formulas to assess a value to all this junk.

Exactly! But it's even worse than that. Now they're doing mark to model! HAHA! LOL!

So, you start off by booking assets based upon what the market value supposedly is, which is Enronesque to begin with. And then you find out when you try to sell them that there isn't actually a market for the garbage, so you just pull a number out of your rear and say that is what the "assets" are worth. My gawd, what a load of crap.

That's why it's currently impossible to have a discussion about RE in traditional terms when you have all of this stuff going on in the background that has supported the "loan to anybody with a pulse" mentality. Once this stuff comes crashing down (which appears imminent) then we'll see what the true value of RE is. Me thinks the true value will be quite a bit lower when lending standards are quite a bit higher.

But this is just a guess. LOL!

Patient Renter said...

"And what's more is there's a scandal brewing about the ratings companies taking payments from the hedge funds to rate these "pigs" as investment grade, even AAA. "

Scandal indeed. The ratings companies should be shot for some of the BS they've been spewing (New Century ratings pre and post-collapse, come to mind). I don't see any real punishment happening though.

Diggin Deeper said...

darth toll...

"Once this stuff comes crashing down (which appears imminent) then we'll see what the true value of RE is. Me thinks the true value will be quite a bit lower when lending standards are quite a bit higher."

Amen to that statement!

There never was such a pretty "pig" as this one. If one reads the various assessments by the likes of Credit Suisse, Pimco, and Deutsche Bank, the "at risk" investment failures are pegged between $52B to $90B on subprime paper/Alt-A paper. Not chump change by anyone's imagination! And because these are "marked to model" investments, no layman can really do the quantum math required to refute the values.

And the Fed said that subprime would be contained and manageable within the economy. Maybe, but most likely not.

This problem cannot be isolated because the entire world is involved and heavily invested in this "valueless paper". If the safest investment in the world(US backed Treasuries)is paying 200-300 basis points less than this crap, but this crap is clothed in Standard and Poor's and Moody's highest safety ratings, clearly they become a very attractive alternative to Treasuries.

Imho, Bear Stearns took a pebble to the windshield. When that crack begins to spider, things will get interesting. From a real estate point of view, it probably won't matter where you live. The problem then faces a nation and maybe even the world with regard to huge losses. With all these derivatives, hedge funds, and carry trade transactions inter-related to each other, all one has to do is go back and study the fallout of the 1997's Asian Financial Crisis to see just how fragile the world's financial community is.

Diggin Deeper said...

S&P May Cut $12 Billion Worth of Subprime Debt

http://www.cnbc.com/id/19693291

Here comes damage control as Standard & Poors tries to upgrade its image in the subprime mess.

Some juicy exerpts albeit from the CNBC talking heads:

"This subprime situation is being underestimated and is worse than many people had expected," said Thomas Metzold, a portfolio manager at Eaton Vance in Boston. "Investment managers' exposure to this is greater than they say and they will get less recovery than they expect."

Here's another

"If S&P, in fact, downgrades these issues, it is an admission that they weren't appropriately rated in the first place," said Andrew Harding, chief investment officer of fixed-income at Allegiant Asset Management in Cleveland, adding the situation "is pretty ugly now."

and one more...

""Ohio Attorney General Marc Dann earlier this week said that S&P, along with Fitch Ratings and Moody's Investors Service were all on his radar screen for giving top ratings to pools of subprime loans that were sold to bondholders.

The high ratings created a bigger market for the subprime securities, enticing bond buyers, including Ohio pension funds, according to Dann.

"The folks on Wall Street knew or should have known these loans they were remarketing were fraudulently obtained," he said.""

These exerpts are taken out of the entire article's context.

Looks like we'll get to the bottom of this potential crisis sooner rather than later....

Darth Toll said...

Looks like we'll get to the bottom of this potential crisis sooner rather than later....

True, but isn't this a lot like staring into the abyss? I mean, who knows how many layers there is to this mess or how many people or how much money is involved? That's why I keep going back to the $370TR total derivative notional value. This amount is truly immense, unfathomable, and is virtually incalculable. My take on it is that the unwinding of these CDO's will ultimately bring the entire bubble economy down. I'm not sure how long it will take but I am sure that the fuse has been lit.

Diggin Deeper said...

darth toll...

Best to get as far away from the dollar as possible. Just too many Benjamins out there right now. They're likely to cause a major bout of inflation. Commodity price inflation is well underway and is creeping into base goods and services. Central banks throughout the world are raising rates to combat it. Even the Japanese whose interest rates were at 1% for nearly 20 years are starting to raise their rates.

Imho, when and if the derivative bomb goes off, the dollar goes with it and inflation runs rampant. Those holding dollars will be sorry they didn't move into gold, precious metals, TIPS, or other currencies beforehand.

Its a nasty scenario, but there are no safeguards to protect the unsuspecting.

Real said...

"That's why I keep going back to the $370TR total derivative notional value."

You can not value the derivatives market by summing notional values - did they teach you to do that at Sac State? Because derivatives are used mainly for hedging purposes and changing fixed or floating positions there is a huge amount of double-counting the occurs due to offsetting transactions. The size of the derivatives market is more accurate reflected by looking at total settlement date payments - which is a tiny, tiny fraction of the notional value. Further, after LTCM there are no longer huge naked positions used for just speculation. Do you know the total size of LTCM's exposure and what the ultimate losses were? You should probably start there to understand that notional value doesn't mean anything.

Diggin Deeper said...

Real

I agree to a point. LTCM was levered to $125 Billion requiring a just over $3.6B to bail it out.. a little under 3% to its notional value. But this problem is little bit different. LTCM knew they were going down. Out of the 9000 hedge funds out there, many heavily invested in credit derivatives who's value is derived based on "marked to model" methods, they're not going to know if they're upside down on these notes because there is no way to determine fair market value. They'll find out when the investment banks tell them so or fail in the process.

I've heard that there's in excess of $25 Trillion tied up in credit instruments that include these "marked to model" notes. While not all $25 Trillion will fail, it's probably a safe bet to project at least some is at extreme risk of failure. If 5 %-10% failed, and we attached the same bailout ratio applied against notional value, the LTCM bailout will look like milk money compared to what it will take to bailout this potential mess.

Patient Renter said...

"did they teach you to do that at Sac State?"

I'm not sure where you got the idea that every poster here went to Sac State?

Darth Toll said...

real, the $370TR number is more of an indication of the sheer size of the problem than anything else. It just shows it’s an incredibly huge and common game and it really doesn't matter if they are double counted in some cases and the number is $240TR, it's still more than enough to torpedo the entire economy. Personally I think the $370TR is the correct number.

I have to laugh at the statement that derivatives are used for hedging, but that's a good story so stick with it. In reality, they are used for much, much more than that. Have you heard of the BSC mark to model debacle and how two "small" CDO funds nearly destroyed the entire company? (the jury's actually still out on this one) How is this possible if these instruments were only used for hedging and weren't leveraged? Don't BSC and the other primary dealer investment banks consider derivatives and CDO's assets unto themselves? Don't they use mark to model pricing when no market can be established? If mark to model pricing is being used, how can anybody determine what the true value of a given security is?

Don't tell me that the derivative market is worth $X because the total settlement date payments are only %3 of the total. This is complete hogwash and you know it. The BSC situation proves I am right - effectively there was an ENTIRE loss of principal based on the notional value.

Now, you may say that the derivatives can't be used for naked speculation positions, but the funds that deal with the CDO's against the derivatives sure are using a lot of leverage, so the net effect is the same! A little loss creates a huge problem and your 3% total settlement payment turns into a 100% loss. This is how Wall St. Wildcat finance works: they will always find a creative way around whatever small regulation exists, whether or not it is good for them in the long run. It's more logical to look at the actual effect of these losses with supposedly safe and unleveraged instruments and how they behave in the real world.

Can you sit there with a straight face and say there won't be any contagion from these events? I agree with diggin on this that the LTCM fiasco will look like chump change compared to what is developing.

At least with this discussion, you're thinking more macro and you can get off the inane concept that Davis and East Sac won't be going down in price, which is way more absurd than your statements about the benign nature of derivatives, which are just ignorant and misguided. Buffett (the world's greatest investor) once called derivatives weapons of financial destruction and quipped that the derivatives business was a lot like hell: easy to enter and impossible to exit. BSC demonstrates what he was talking about and many more examples are soon coming.

Diggin Deeper said...

darth toll...

"How is this possible if these instruments were only used for hedging and weren't leveraged? Don't BSC and the other primary dealer investment banks consider derivatives and CDO's assets unto themselves?"

They were indeed leveraged to the tune of approximately $25 Billion between the two funds. And that type of leverage permeates the entire CDO universe. The fact that nobody knows how to value, assess risk, or acknowlege gain/loss of capital until there's a failure, it puts unsuspecting investors in some serious trouble. One day you wake up and its gone! There's no opportunity to execute an exit strategy or watch its value swing up or down.

The Whiz kids have set up these debt instruments accounting for risk based on some mathematical failure model (only they can decipher). Kind of like carrying around an invisible bomb...If the kids did good...it never goes off...but if you bought into some of those the model fears will fail...Boom!

Real said...

"LTCM was levered to $125 Billion requiring a just over $3.6B to bail it out"

I hate to inject facts into your ramblings, but LTCM had over $1.5T in notional value on its derivatives contracts and the total loss by investors (there was no bail-out) was $4.4B or 0.3% of notional value. So applying a 10% failure rate to your $376T market numbers and assuming 0.3% of notional value in default is actually a loss (based on LTCM), then the total at risk = $112B - a big number but less than 10 months of direct Iraq war funding. In short, even assuming your worst case scenario, the collapse of the market would be a global drop in the bucket. I really hope you don't sit up at night worrying about these things - especially considering you don't understand the numbers.....

Diggin Deeper said...

$112 Billion? That's worse than I thought...Now that ought to rock the financial centers back to reality should the worm turn here.

It isn't the big number I worry about, its how the financial systems deal with the problem. Imho,we go quickly from credit glut to credit squeeze(notice the Treasury yields lately)? Bad bonds are pulled from the system (ala BSC), and interest rates rise dramatically to dry up dollar liquidity in the world. Rate hikes force M&A to go away and that takes the stock market with it. Business activity slows to a crawl in order to assess the damages and the various options available. Real estate slips deeper into depression due to rate increases and financial instability. Lending standards clamp down even further, and who knows, maybe even a prolongled recession while the institutions dig out.

The LTCM problem was a culmination of problems that started as the Asian Financial Crisis in '97 that moved to Russia and pummelled its currency as worthless, and finally ended up here with the LTCM failure.

The world survives on the financial integrity of nations and it teeters delicately between stability and chaos(for a great referenece point, go back to the recent market meltdown after the Shanghai market tanked).

To think that any break in this integrity will not affect the world is a bit naive. And to place the loss in terms of months it costs us to fight in Iraq, is irrelevent to how world financial institutions would view the problem.

Sippn said...

Max - on the other hand, Sac inventory is within a few points of the peak of '06. Note that many other bubble markets are 20-50% higher in inventory than their '06 peak.

All have the same REO issues.

Vs other markets, did Sac get there 1st? stop feeding the inventory monster 1st? or is inventory hiding at a higher % in new homebuilding than other markets? Reno is also flat with last year.


Many of those markets also have pop to listing ratios 1/2 of Sac too.

Bubble Sitter said...

Sippn,

Great points as always. Phoenix is at 60,000 listings with a population of 4.1 million. They were at 53,000 this time last year. They seem to be selling 5,000 homes per month, so they have 11-12 months inventory.

Sac has 17,500 listings and we are selling 1500/month? So we have 11-12 months of inventory? Even though we have 2.1 million people, we seem to have the same depth of inventory based on monthly sales rates and inventory levels.

It is an very interesting time. The foreclosure velocity is still accelerating. This will be the next trend to watch thru mid 2008.

Sippn said...

tappin my fingers, expecting inventory numbers up this week as everybody was sleeping last week.