Monday, January 21, 2008

Sacramento Regional Real Estate Trends for January 19, 2008

I'd like to focus this week on the market stress indicators, since there still appears to be a disconnect between what is being reported in the media, and what we're seeing in the MLS. To put it simply, REO inventory is not showing up:

A word of explanation: "Flipper inventory" in this context is defined as a houses that were bought within the last two years, and are now being offered for sale. "Flippers in trouble" are flippers who are selling at a loss, based on their previous sale price. Since a foreclosure shows up in the county tax records as a "sale", any REO house that a bank is listing in the MLS would show up as a flipper in this context.

We should expect flipper inventory to begin increasing as banks become desperate to sell their REO inventory.

This isn't happening. In fact, flipper inventory has been on the decrease since mid-2007. Even as overall market stress began to rise exponentially, the banks held inventory off the market, either unable to cope with the surge of volume, or unwilling to further stress the market with more inventory.

Now, even Sellers In Trouble inventory appears to be reaching a top, even as dollar losses continue to rise. Also, average days since last sale for SITs continue to rise:

So what does this all mean? Honestly, I have no idea. While I firmly believe that REO inventory must return to market at some point, it is possible that the banks will hold off selling as long as possible so they can avoid recognizing losses. Combine that with sellers not bothering to list their house at a loss before mailing in the keys, and you could see a reduction in market stress indicators even as things deteriorate further. In other words, I'm losing patience with the FIT indicator.

All the "traditional" metrics are still keeping with their trends. Each week brings a new two-year low on asking prices, and inventory is at record levels for this time of year. I'll leave you with an email I received from Agent Bubble today. Here's hoping everyone's stock portfolio is sufficiently hedged!

Oddly enough, inventory for the 4 county area is RISING, not declining right now. We're are 15,281 listings. There was a drop at the end of December that spilled into the first week of January, but it's now steadily rising again.

Tomorrow should be an interesting day for the DOW. With the other world markets taking dives today, I wouldn't be surprised to see trading stopped tomorrow if it starts in a downward spiral early on...Interesting times ahead.


Wadin' In said... shows listings in Jan. 2007 at 12,656 and in Jan. 2008 at 15,084. Thus we have 19% more houses for sale at the start of 2008. Bubble Markets Inventory Tracking shows sales running about 1100/mon in the Sacramento area, or a 14 month inventory. Any way you slice it, the market indicators are still heading south.

I have a hard time believing the lenders are holding product off the market. They are probably overwhelmed with inventory and can not get it all out the door in a timely fashion. One good sign is the lenders are reducing prices to move what do they have for sale. I predict we will see many sales below $100/sf in 2008. About 6 months ago, it was hard to find much below $150/sf. Now, if you are not below $110/sf, you can not even get in the game.

In terms of the stock market, I moved 100% into Treasuries in Dec. 2006 at a $12,200 DJIA. I missed the run up to $14,000, but my portfolio is the equivalent of $12,800 today, and stable. The DJIA is below $12,100. It might be time for me to start dollar cost averaging back into the market! Of course, I tend to run 12 months early on all my moves, since I read this blog and it provides me with very accurate forecasts.

I bought a house in November for the equivalent of rent on an after tax homeownership basis. While I am very happy with the "pick of the litter" from all the year end inventory, it is clear to me now that prices are still going lower and I may have been able to purchase a house at below the rental equivalent in 2008.

This will be an interesting year. Patience is the watchword for the smart money.

Gwynster said...


I was one of the lucky people who shorted the builders (luck, not skill and some advice from a friend) and got out. I was just a few months behind you in getting out in April of last year. I was early too and missed the high but after watching this last week, I feel brilliant..... and really lucky.

That said, I still hold Amazon and Ebay which I bought in 98/99. These are the only two stocks I'm long on.

patient renter said...

"it is possible that the banks will hold off selling as long as possible so they can avoid recognizing losses"

I agree, but we all know that "as long as possible" won't be long enough. Similarly the Fed's emergency rate cut, attempting to put off the pain as long as possible, also won't be enough.

It's all futile.

Wadin: I'm certainly no expert, but I don't know if I'd go marching back into the market just yet :)

... said...

I'm not sure the banks can process their REOs any faster.

Also, I noticed that inventory increased last January so why is it a surprize that it is increasing now - I think thats historical and typical.

Anonymous said...

Too late for wadin', he's already in. What tends to happen in these RE busts is that a small group of buyers who have been waiting for a while, see some good discounts and they mistakenly believe that the bottom is in. So they dive in and become the first wave of knife-catchers and get cut badly. As time goes on and this pattern repeats, new buyers become more cautious as they witness what happened to the last wave of knife-catchers and they don't want to get burned. Wadin', this is no slam on you personally, as your deal seems to make sense, I'm speaking of general cycle patterns here.

Eventually, almost everyone thinks that RE is a horrible investment, and then the true bottoming process can begin and some good deals can be had. Is $100/sf the bottom? Hardly. We will commonly see $60/sf before all of this is done. This isn't some wild prognostication, more a projection based on past cycles and income levels and factoring in recession and job loss scenarios.

A lot of my projections center around the very thing that Max is talking about with the REO inventory. We already know that inventory is at an all-time high for this time of year, and AB is rightfully concerned it is ramping up so early in the season. Also, Max mentioned that there should be many more REO's on the market and he is 100% right.

Guys, these properties haven't disappeared and they haven't burnt down, and yet they are nowhere on the MLS. Thinking people want to know why this is, and we've had a couple of good theories on this subject, both of which are probably correct to some degree. Can the banks hold out for a return to better market conditions when the credit system is entering into a death spiral and inventory still builds without the REO's even part of the mix? Banks are basically insolvent and no amount of liquidity injections by the Fed will have any effect upon this fundamental solvency issue. The Fed has often said that they can provide liquidity but no capital, and so far they are keeping true to this mandate. When do the banks capitulate and throw everything on the market with a take what we get mentality?!? The REO inventory is the giant coiled spring that gets more compressed with each passing day. Once it lets loose, and I believe it will be very soon, prices will plummet.

Did you guys know that after the surprise Fed cut today, there were no takers with collateral above 1.85%, and only $5B at that price!!! This is telling you that there is no credit demand and there is much fear between the banks lending to one another.

Normally I would have agreed with Max's earlier projection of a Spring dead-cat bounce in Sac RE prices, as this would be true to the historical pattern (knife-catchers, followed by more pullback, followed by more knife-catchers, etc.) But given the above situation with imploding credit markets and a vast "shadow" inventory problem, I don't.

... said...

Bank owned properties not included?

Here's a quick and dirty look at REOs and WHERE the problems might be. You decide....

73 new listings in Antelope in January, only 16 not listed as REO or short sale. 78% distressed.

52 new 39 not listed as REO or short in Carmichael....25% of new listings distressed.

Now this may be overstated as the distressed listings, especially short sales, tend to be recycled again and again and we're just looking at new listings.....or understated if the agents did not enter the short sale or REO indicator - but they could loose access privliges for that.

There is always a "shadow inventory problem" with builders building in the pipline, condo conversions, etc.

Empty subdivisions mothballed for 2008 are included in "inventory"... maybe these shouldn't be counted.

In the past few days, the stock market has been discounted for investors; however, monthly interest costs for real estate investors were reduced 5-10% today, on top of recent price discounts.

An interesting dilemma.

Josh said...

Now this may be overstated as the distressed listings, especially short sales, tend to be recycled again and again and we're just looking at new listings.....or understated if the agents did not enter the short sale or REO indicator - but they could loose access privliges for that.

I think Agent Bubble's stats also play to this point. What I find disconcerting is the lack of confirmation on the data comparisons that I'm doing. I don't doubt the MLS any more than I doubt my own data, but there is a disconnect here.

Normally I would have agreed with Max's earlier projection of a Spring dead-cat bounce in Sac RE prices...But given the above situation with imploding credit markets and a vast "shadow" inventory problem, I don't.

The way things have been going, we might see a bounce despite the shadow. From where I sit, the number of house listings the REIC in Sac can process is just as limited as the servicers' capacities. If the Fed keeps throwing out life preservers, we might see the shadow inventory continue to grow off-market while Realtors only select the choicest houses to list.

Of course the carrying costs on the REO houses will grow exponentially until the servicer/MBS holder needs cash, and then you'll see huge blocks of houses selling for pennies on the dollar. That's my market bottom cue.

Anonymous said...

Max, do you think that auctions are taking on some of this shadow inventory?

Sippn, Max is right, at some point the carrying costs will be just too large for the lenders and they will have to have a fire sale to raise cash. We are very close to this point and Max and I only disagree as to how close we are to this point. If we are very close, than dead-cat-bounce doesn't happen. If we are 6-8 months away, than maybe the dead-cat-bounce does happen.

The problem is one of solvency. An example is the supposed CFC/BAC merger, that is looking more dubious all of the time. Sure BAC wants the servicing arm but they don't want all of the bad debt, because if they take on the bad debt, they too would also be insolvent, lol.

Take a look at the graph on this link:

It shows we were a 3.5 deviation above norm on prices going back 30 years, and you could extend that graph back about 100 years and it would look the same. We've currently worked off about a .5 deviation in price with amazing repercussions in the economy and stock markets, so we have another 3 standard deviations to go before this mess stops!

Interest rates on treasuries and mortgages are not the same. Also, lending standards have increased dramatically along with this credit "crunch" - which is really a credit collapse. The reality is that it is much more difficult to get a loan today and the standards are much higher. Stock market gyrations won't change this picture. Do you suppose that mortgages will all of a sudden get cheaper (or more readily available) now that risks are so much higher and banks are folding left and right? If that happens, it will be for a short time and would only be due to more market gaming by the GSE's or sovereign wealth funds.

In terms of the mothballed subdivisions, I'd be surprised if these are on the MLS, as they aren't for sale. Max?

... said...

No they aren't in mls - but when you get "new homes" # months inventory, they are in that stat from the government. My point is that they are feeding the inventory number just like the banks/REO is. Builder inventory - starts are finally slowing. REO stuff - likely looking at another spike in payment increases this spring - will result in foreclosures SPREAD through the rest of the year - it takes awhile.

Mortgage activity now higher than any point since early 2004.

DT-if you go back far enough, you will see a divergence before the invention of the modern mortgage. I think you are now seeing a continued divergence due to new types of mortgage vehicles introduced over the past decade, land rationing, and a willingness by part of the general population to "rent" higher end homes instead of paying off the loans.

But I'm impressed you remember deviations, etc. Perhaps call Gwynster and read her Economist!

See kids, pay attention in stats!