The Nationwide monthly index of house prices came in this morning showing a 0.4% bump in October from September. While this was less than last month’s 0.9% rise, it was the sixth consecutive month of price increases and it marked the first time in two years that house price in the U.K. were higher year-on-year. In fact, house prices are now a full 2.0% higher than in October 2008 according to the Nationwide figures.

Nevertheless, the Nationwide Chief Economist Martin Gehbauer is sticking to his more cautious view in contrast to his predecessor.  He says:

House prices rose for a sixth consecutive month in October, but the strong upward momentum in property values seen over the summer is showing some signs of moderating as we head into the autumn months. The price of a typical property was 0.4% higher on the month in October, compared to an increase of 0.9% in September and 1.4% in both July and August. The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – dropped back slightly from 3.8% to 3.4%…

Preliminary GDP figures released by the Office of National Statistics showed that the UK remained in recession during the third quarter of 2009, defying widespread expectations that the economy had begun growing again over the period. The surprisingly poor figures have mixed implications for the housing market. On the one hand, a deeper and longer recession implies higher levels of unemployment and a longer period of subdued wages, both of which will act as constraints on the housing market’s recovery. Given the poor labour market situation implied by the economy’s ongoing weakness, it is difficult to imagine the housing market returning to the buoyant levels of activity and price inflation that prevailed earlier in the decade. On the other hand, the figures mean that interest rates are likely to remain at or near their current record lows for well into next year. As a result, mortgage affordability will remain relatively favourable for both new and existing borrowers. This should limit the number of distressed sales and cushion the negative impact of labour market weakness on housing demand.

The Nationwide numbers have generally been more bullish than the Halifax numbers and a gap has opened up between the two indices (see last month’s post). So, it will be necessary to see how the data are confirmed by the Halifax early next month. What should be clear is that low interest rates are a temporary salve.  The recent increase in house prices is not sustainable unless we see an uptick in the British economy and a stabilization of the jobs market.

Source

House Prices Rise At A Slower Rate In October – Nationwide press release

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• Nationwide: UK house prices down 14.6%

Annaly Capital Management’s blog has a good piece up on foreclosures, inspired by yesterday’s Case-Shiller data (hat tip Scott). If you missed it, The S&P/Case-Shiller index showed a pretty steep 1.2% month-on-month increase in U.S. house prices in its latest figures (for August 2009). This is the fourth consecutive month of increases, signaling to some that residential real estate prices have bottomed (see my post on Case-Shiller here).

Not so fast. First, we need to see this trend hold through the winter months after incentives have dissipated and after the summer selling season is less of a factor driving sales.  But, there’s something more ominous lurking in the data, and Annaly points this out. It’s the growing gap between delinquencies and foreclosures.

The S&P/Case-Shiller Home Price Index grew 1.2% month-over-month, and expanded for the third month in a row, according to data released this morning.  It would appear that the housing recovery is upon us.  To maintain this sunny outlook, we advise readers to please stop their analysis of the health of the housing market right there.  For braver souls, LPS (a provider of data and services to mortgage lenders and servicers) releases its Monthly Mortgage Monitor in the middle of every month.  The growing disparity between delinquencies and foreclosure starts is in focus in the chart below, from October’s release.

As the graph illustrates, delinquencies are rising, but foreclosure starts are not.  As of September 2009, 90+deterioration more than doubled actual foreclosure starts.  LPS has dubbed this “shadow foreclosure inventory.”  Higher unemployment begets delinquencies and defaults, but foreclosures aren’t flowing through due to modification efforts and various moratoria.  Depending on the success of programs like HAMP, more than a few of these loans are still destined for foreclosure.

This is the result of what is known as extend and pretend because a rolling loan gathers no moss or credit writedowns, but does gather fee income.  On the one hand, a lot of home owners are finding it difficult to get loan modification terms. But, on the other hand, mortgage delinquencies have more than doubled since the recession began, so the absolute number getting modifications has risen. The question is not so much whether enough modifications are being done, but rather under which circumstances are lenders modifying loans.

The Annaly data and graph above suggest that lenders are actually modifying a decent number of mortgages that fall delinquent – so much so that foreclosure statistics understate the overall distress in the housing market. So, this is a little bit of damned if you do, damned if you don’t as far as banks are concerned. On the one hand, they are getting pilloried for not modifying loans. Yet, on the other hand, in modifying loans they can be accused of “delay and pray” tactics in order to avoid writedowns. Both accusations seem fair given the enormous increase in foreclosures. Nevertheless, you can understand the dilemma. If you want a real-life story about how extend and pretend works in practice, see my post, “Short Sales in North County: “Feeding Frenzy” as banks pretend and extend.”

These cases are where the shadow inventory everyone keeps talking about comes from: houses that have not been foreclosed but where delinquencies show an increased probability of foreclosure, especially in a weak economic environment.

For banks looking to husband capital, it makes sense to extend and pretend where one thinks there is a reasonable chance that this will result in fewer loan losses. But, at the same time, given the securitized nature of the mortgage market, it is mortgage servicers which have an increased measure of control in loan modifications. And their incentives do not appear to align with those of the mortgagees. Time will tell how all of this impacts house prices.

Source

Who Knows What Evil Lurks In The Hearts of Men? – Annaly Salvos

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The latest data from the S&P/Case-Shiller house price indices shows house prices increasing in 17 of 20 major residential markets. The overall composite index are up for the fourth month in a row but year-over-year comparisons still show a double-digit decline in prices. A snapshot of the data is provided below.

The three lagging markets are Charlotte, Las Vegas and Cleveland. Otherwise house prices appear to have stabilized at 2003 levels, which in real terms is quite a loss of wealth. As the summer selling season is now over, we will soon begin to get a better indication of how permanent this price plateau is.

Source

S&P/Case-Shiller Home Price Indices – Standard & Poor’s

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There is mounting evidence that bubbles are forming again everywhere across the globe as easy money makes itself felt in asset prices. The latest evidence comes from Sweden where Europe’s lowest home loan rates have pushed up the price of residential property.

At issue is the extremely loose monetary policy in Sweden that is an outgrowth of both recession in Sweden and a massive exposure by Swedish banks to the Baltics which are presently in depression. Sweden’s central bank, the Riksbank, has cut interest rates to near zero and is charging banks interest to keep reserves on deposit. Meanwhile, the bank has also embarked on a policy of quantitative easing in order to get credit flowing again.

In my July post, “Sweden: negative interest rates and quantitative easing,” when Sweden went negative on interest rates, I wrote:

Pretty aggressive plan, if you ask me. Will it work, though?

Well, first of all, most every major central bank in the world, certainly the biggest: the Americans, the Eurozone, the British, the Swiss, and the Japanese, have rates near zero and are printing money.  The world is awash in money and the incentive to borrow is huge.  So, is the Swedish announcement qualitatively different?  On some level, it is not.  Nevertheless, it is the most aggressive policy and the fact that they are charging negative interest rates for deposits is unprecedented.  This does make events in Sweden something to watch.

So, if you have been watching, what you have seen is a financial sector which is still critically weak – so much so that the federal government has been having secret meetings with the banks to get together a game plan in a worst-case scenario in Latvia, the worst of the lot in the Baltics.

But, even so, while the real economy is in recession, one has to conclude that the aggressively expansionary policy by Sweden’s central bank is reflating asset prices in a major way. Experts are now sounding the alarm as house prices hit new highs.

Below is a translation of yesterday’s Dagens Nyheter article reporting on the warning.

Experts warn: Sweden risks housing bubble

Europe’s cheapest home loans, tax cuts and a continued housing shortage. These are some of the reasons house prices are rising to new record highs in Sweden – right in the middle of a raging recession. Now a growing number of experts warn of a new housing bubble.

Swedish mortgage customers are sitting pretty. The Riksbank’s key interest rate of  0.25 percent is unique in Europe. By comparison, the corresponding rate is 1.25 percent in Norway and Denmark, 1.0 percent in the euro area and 0.5 percent in Britain.

Variable interest rates in Sweden are currently about 1.6 percent. As DN Economics related a couple of weeks ago, short-term rates are 2-3 percentage points higher in countries such as Denmark, Germany and Britain.

Swedish low-cost mortgages are the main cause of the housing rally. House prices fell sharply after investment bank Lehman Brothers’ bankruptcy caused the financial crisis in September last year. But since the start of the year, they have risen again. Prices of flats are now 5 percent higher than a year ago. And house prices have gone up 2 percent.

Reduced income tax and the abolished property tax have also contributed to the housing rally. Likewise concerning the shortage of housing.

In 2008, there was construction of 21 500 apartments in Sweden, which was considered low. This year, new construction is expected to decline by one third, according to Swedish Construction Federation.

Six months ago many experts warned that rising unemployment could lead to falling prices in the housing market. Now they are warning of a housing bubble instead.  Nordea Chief Economist Annika Winsth has repeatedly warned of inflated prices, and SEB’s CEO Annika Falkengren said recently that she felt that both house prices and the stock market have risen too fast in the past year.

In its monetary policy report last Thursday, the Riksbank wrote, "there is evidence that house prices at present are slightly above the level that is sustainable". It also speaks to the dangers of "over-optimistic expectations about interest rates" and "more expansive lending".

Despite the warnings the banks’ barometers tell of housing prices that will continue to rise in Sweden for many months to come.

I see this ending in a very bad way.

Source

Experter varnar: Sverige riskerar bostadsbubbla – Dagens Nyheter

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Further proof that the reflationary efforts of policy makers is taking hold comes from London in the form of record high house prices.  The Guardian reports:

Property asking prices in London have broken through the record high set in November 2007 as the drought of homes for sale around the country continues to distort the market. New research out today shows that the average asking price in London jumped 6.5% to £461,157 in the four weeks to 10 October, sailing through the high of £412,731 set in November two years ago.

The survey by the property website Rightmove also shows that asking prices in England and Wales are now higher than a year ago, after climbing 2.8% in the past month.

Back in March, when the global economy was flat on its back, I suspected that policy makers saw only one way out of this mess: another asset bubble.

Their efforts point in four directions:

1. Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.
2. Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.
3. Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.
4. Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers’ recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ – WSJ)

The same was certainly true in Britain as well. With share prices up well over 50% and property again at a new high in London, the government has succeeded beyond anyone’s wildest dreams.

Mind you, the real economy is still in a shambles, with manufacturing taking the slowdown especially hard.  But, the employment market is not nearly as dire and the economy seems to be leaving recession.

Things are a lot better in the City than in the real world because the increase in asset prices is a huge boon for the banks. Expect bankers in the City to reap the benefits in the form of record pay packages this year.

Unfortunately, if you are a renter looking to get onto the property ladder, it is going to be rough sledding.

Related posts:

• Random Musing: London house prices
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• Nationwide: U.K. house prices down 16.6%
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Here is some anecdotal evidence of the return of euphoria  in housing via Jim the Realtor.  Check out these videos of Carlsbad (North County section of San Diego) and the surrounding community to see what I mean – many but not all of these are going for well over list price. All of these are foreclosure sales.

It looks like we may just have hit bottom on the lower end. Will it trickle up?  We’ll see.

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The Halifax reports that UK house prices rose for the third consecutive month in September, up 1.6% from August levels. Key to the rise has been a lack of supply coupled with increased demand (100% mortgages have helped as well).  Last week, Nationwide had pointed to a rise in ‘accidental landlords’ who did not wish to sell into a soft market as a reason for the limited supply.

Nevertheless, house prices are still 7.4% lower than they were at this time last year, according to the Halifax.  What I find curious, however, is that the Nationwide data released last week show house prices flat with year ago levels.  Below is a BBC News graph showing the growing discrepancy between the two major UK house price indices.

As in the U.S., I would like to see how these figures hold up in winter time, especially giving the huge disparity in the two indices.  Moreover, Britain has shown a considerable degree of economic weakness of late. Manufacturing data released today showed industrial production at the lowest levels since 1987, leading many to believe the UK has yet to shake off a nasty recession.  If economic weakness lingers, expect it to also be reflected in home values.

Sources

More signs of house price rises – BBC News

House Prices Now At Same Level As September 2008 – Nationwide

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The most recent data from the widely-followed S&P/Case-Shiller Home Price Indices was made available today. These data from July show house prices in the U.S. increasing for the third month in a row, suggesting that house prices have stabilized. Moreover, the trend was broad-based with only Seattle and Las Vegas showing house price declines in July amongst the top 20 metro areas.

Overall, U.S. house prices are at 2003 levels even before adjusting for inflation. Moreover, as housing is quite seasonal, we will need to see evidence that this trends holds through the slower winter months as well. The Composite-10 Index of the largest U.S. metro areas is still down 12.7% from a year earlier, while the Composite-20 index is down 13.2%.

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Nationwide released data from its August 2009 house price index showing that house prices rose 1.6% from the previous month.  This is the fourth consecutive month in which house prices have risen in the UK, bringing the year-on-year change to –2.7%.

Martin Gahbauer, Nationwide’s Chief Economist, said low interest rates are behind the recent rise (emphasis added):

“The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008. There are two main channels through which the low level of interest rates has impacted the housing market. First, mortgage payments for existing homeowners – especially those with tracker or standard variable rate loans – have been reduced substantially. Before the MPC began cutting rates, the average interest and principal payment per mortgage holder represented about 38% of the average post-tax labour income. Following the steep cuts in base rate, this has fallen to just 28% of post-tax income, despite historically high levels of outstanding mortgage debt. The fall in debt servicing costs has meant that fewer homeowners are under immediate financial pressure to sell than might have been expected in a recessionary economic background with rising unemployment. Partly as a result, fewer second-hand properties have come onto the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009.

In addition to limiting the supply of second-hand homes, lower interest rates have also had an impact on the demand side. Even though house prices remain high relative to earnings, the fall in interest rates has improved the affordability of mortgages for those looking to buy a home. This helps to explain the strong rise in new buyer enquiries reported by estate agents for most of 2009. Although not all of these enquiries are turning into sales, house purchase transactions have continued to slowly increase from the record lows reached in late 2008.”

Obviously, this leaves open to question what will happen when interest rates rise.  Certainly, by that time, the economy will be on sounder footing and the financial pressure to sell will be less.

The rise in residential property prices in the UK does show the market has housing stabilised.  Definitive confirmation would come in the winter when the market is less buoyant.  For now, it seems the worst is over.

House price bounce extends into August – Nationwide

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The data from the S&P/Case-Shiller Home Price Indices for June 2009 were released at 9AM ET, showing that house prices in the US increased for the second consecutive month.  Last month marked the first month since July 2006 that prices rose in the US. While prices should rise during the spring and summer, the most buoyant period for residential property, the rise in prices does mark a break with the three-year downward trend.

Moreover, fully 18 of 20 markets in the index showed a rise in prices, demonstrating that the trend is broad-based.  Only Las Vegas and Detroit saw declining overall prices in June.  Nevertheless, on a year-over-year basis prices still are off by a considerable margin, 15.1% for the Composite-10 index and 15.4% for the Composite-20 index. Moreover, the continued weakness is the jobs picture necessarily means that the wave of foreclosures which has contributed to inventory is far from over.

Overall, the data have to be seen as positive – another sign that the residential property market in the US is stabilizing.

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Data on existing home sales were significantly above expectations with a seasonally-adjusted annual rate of 5.24 million sales registered according to the National Association of Realtors (NAR).  The NAR released a statement on the figures, an excerpt of which is below.

For the first time in five years, existing-home sales have increased for four months in a row, according to the National Association of Realtors®.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.2 percent to a seasonally adjusted annual rate1 of 5.24 million units in July from a level of 4.89 million in June, and are 5.0 percent above the 4.99 million-unit pace in July 2008.  The last time sales rose for four consecutive months was in June 2004, and the last time sales were higher than a year earlier was November 2005.

Lawrence Yun, NAR chief economist, said he is encouraged.  “The housing market has decisively turned for the better.  A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales,” he said. 

The monthly sales gain was the largest on record for the total existing-home sales series dating back to 1999.

The increase in existing home sales may be underpinned by a heavy inventory of forced and foreclosure sales, but a sale is a sale.  I see this as a bullish data point which will further the view that the economy has rebounded or will soon do so.

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UK house prices have now risen for three months consecutively and four months in five according to statistics released by Nationwide Building Society this morning. The rise for July was a very robust 1.3% month-on-month, which translates into almost 17% on an annualized basis. Clearly, housing is doing very well during this summer selling season.

While prices could still fall during the slower Fall and Winter time frame, the recent rise in prices is beginning to look like a bottoming.  To be sure, prices are still down 6.2% year-on-year, but the index is within striking distance of the October and November 2008 figures, suggesting we may move into positive year-on-year territory if this trend holds through to Fall.

Nationwide’s Chief Economist Martin Gahbauer had this to say about the figures (emphasis added):

The price of a typical house rose for the third consecutive month in July, increasing by 1.3% on a seasonally adjusted basis. The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – rose from 1.0% in June to 2.6% in July, the highest level since February 2007. House prices are still 6.2% lower than 12 months ago, but this represents another sharp improvement from the 9.3% year-on-year decline in June. Even if prices were to remain unchanged for the rest of 2009, the year-on-year rate would continue to improve since prices were falling very sharply in the second half of last year. For the first seven months of 2009 as a whole, prices have risen by a cumulative 1.3%, suggesting there is now a reasonable chance that prices could end the year slightly higher than where they started. Only a few months ago, such an outcome would have appeared unthinkable.

I should also note that mortgage applications have been increasing strongly, evidence that first time home buyers are coming back to the market.  This underlying demand may be buoying prices.

Overall, the data cannot be seen as anything but bullish.

Source

House prices up for third month in a row – Nationwide website

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• Nationwide: UK house prices rise for fourth month

Yesterday, I mentioned that the housing data, while generally positive (the first uptick nationally in 34 months), contained some negative news due to seasonality.

The crux of the problem lies in the strong tendency for house prices to increase in the spring and summer because that is when demand for housing is greatest. Add in the fact that we have seen some distortions due to a rise in distressed sales in higher-income brackets due to the jumbo loan market meltdown.  All of this means that one month’s data should be taken with a large grain of salt.

Nevertheless, the increase is the first uptick in prices nationally for some 3 years and it is broad-based.  This has to be recognized.

For my part, I don’t like seasonal-adjustments because it adds in statistical noise.  My preference is to look at trends via movements in year-on-year rates of change.  And the trend here shows a clear plateauing.  In January, year-on-year changes were 19.0%.  Since then, the year-on-year changes have become progressively less negative.  The change is now 17.1% year-on-year.

Does this mean house prices have hit bottom?  Hardly, year-on-year declines are still massive at 17.1%. And the graph clearly shows the change in direction is rather slow.  But, it does mean that house prices are bottoming because we have seen a trend in year-on-year changes from January through May that looks likely to continue into the present day.  If this trend (of less negative data) holds for a few more months, say through September or October’s data, you could say that the housing market has stabilized.  By next summer, the year-on-year numbers would be positive.

But, it is early days yet.  At a a minimum, I would like to see the next few months data.  However, the ultimate confirmation will come through the Winter 2010 data from a far less buoyant time of year. And this won’t be released until next Spring.

I should add that we are talking about nominal prices here, not inflation-adjusted prices where we could see declines for much longer.

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The S&P/Case-Shiller Home Price Indices for May 2009 were released today and the data showed a marked contrast to previous months. Fully 14 of 20 markets showed an increase in home prices in that month, making it the first time since July 2006 that the overall index has risen month-to-month. On a year-over-year basis, home prices are down 17.1% in the Composite-20 markets.

Clearly, we are seeing a bottoming in US house prices, just as we have done in UK house prices.  While the stock market is down this morning and analysts remain cautious despite this news, these data can only add to what is looking like a more favorable picture for residential real estate in the US.  Just yesterday, the new homes data showed similarly positive news. Analysts were cautious then as well. If we string together a few months of similar numbers, this would in all likelihood signal a bottoming of house prices in the US.

However, it bears remembering that we are in the heavy spring/summer selling season (seasonally adjusted pries are down – see spreadsheet), so things could look very different come Winter.

Source

S&P/Case-Shiller Home Price Indices – S&P Website

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In late June, I posted two items China’s present growth story is built on malinvestment and Chinese stock market bubble inflating, on the building bubble in Chinese lending and asset markets.  The crux of the pots was that China, in its efforts to reflate the economy to meet very high growth short-term targets and start a new domestic demand dynamic, was creating a credit bubble. Much of the lending mandated by Chinese authorities was finding its way into housing and shares, inflating those markets in an unsustainable way.

Chinese authorities are onto this and have decided to act.  The Financial Times reports.

Chinese regulators on Monday ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming.

The new policy requires banks to monitor how their loans are spent and comes amid warnings that banks ignored basic lending standards in the first half of this year as they rushed to extend Rmb7,370bn in new loans, more than twice the amount lent in the same period a year earlier.

Beijing’s concerns are echoed in other countries across the region, most notably South Korea, where the government says it is taking steps to cool a real estate bubble, and Vietnam, where the government has ordered state banks to cap new lending to head off inflation.

The situation in much of Asia is very different from most Western economies, where governments have flooded the financial system with liquidity to encourage unwilling banks to lend more.

In China, regulators are now concerned that too much money is being lent by the state-controlled banks and the country’s tentative economic rebound could come at the cost of a stable financial system…

The flood of new lending also has implications for the quality of bank loans and the country’s overall growth.

“China’s economic recovery is being constructed on the back of a savaged banking system,” said Derek Scissors, a research fellow at the Heritage Foundation in Washington. “Tens of billions – and perhaps hundreds of billions – of dollars of loans will not be repaid.”

He points out that in recent years total loan growth of around 15 per cent has supported gross domestic product growth of higher than 10 per cent but in the first half of this year total loan growth of around 33 per cent supported GDP expansion of only 7 per cent.

“China’s economic policies have shifted from being unsustainable over the very long term to being unsustainable for any more than one year,” Mr Scissors said.

These accounts are not intended to malign the Chinese in any way.  After all, the US led the way in the last decade in regards to reckless lending and unsustainable growth. And the Chinese have much greater savings with which to cushion a fall i assets prices. What’s more, whether we like it or not, an authoritarian central government in China is better able to handle economic shocks simply through coercion.

But these accounts should cause you some concern if you are invested in China’s asset markets and think the uptrend there  can last indefinitely.  To be sure, we should take heart that Chinese authorities are looking to step in and reduce the excess liquidity.  Nevertheless, it sounds a lot more like jawboning than true regulation of the excesses.  In my view, animal spirits are too high for this to have much effect.  Authorities will have to take more draconian action.

The real question is whether the Chinese can foster more domestic demand before any ill effects from the present malinvestment become manifest.  If so, we should expect growth to continue with only a little hiccup.  My worry is that we are seeing the makings of a bust which could have wide-reaching consequences for China and the global economy.

Source

China warns banks over asset bubbles – FT

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• Marc Faber: China’s numbers are fake
• China: Growth on track but at what cost?

If you haven’t seen any of Jim the Realtor’s videos over at Calculated Risk, you are not getting a feel for what’s happening in residential real estate in America.  The guy really gives the whole housing problem in California a look you wouldn’t have unless you were a real estate agent living it. His videos do have a certain twisted voyeuristic appeal to them.

In the videos below, Jim cruises around looking for REO properties.  All of this stuff is ‘shadow’ inventory, meaning it’s not really on the market.  There aren’t any for sale signs in the front yards. You can only imagine the shattered lives behind these videos. It gives you a good idea of how much more inventory is out on the market and the distress that creates for people selling. In the first video, Jim does say there isn’t a ton of shadow inventory yet, though.  He works in North San Diego County.

Since foreclosures are flooding the market in places like California, it pays to do your homework because some of these houses are being unloaded by the banks for ridiculous prices.

Just in case you don’t know what an REO is, here’s a great primer from the bloggers at roost.com:

Real estate owned or REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.^[1] A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the bank will legally repossess the property. As soon as the bank repossesses the property, it is listed on their books as REO – Real Estate Owned – and is categorized as an asset (non-performing).

As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the bank will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker Price Opinion BPO or order an appraisal. Based on the amount of equity that is determined from the BPO, the bank will decide to try for a short sale or to allow it to go through the foreclosure process. If the bank is able to sell the property through a short sale or at a foreclosure auction, then the property will not become a REO property.

After repossession and the property becomes classified as REO, the bank will go through the process of trying to sell the property on its own. It will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a real estate broker (REALTOR). Generally speaking, bank REO properties are in poor shape in terms of repairs and maintenance; however, real estate investors will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property.

Once a property is REO, the bank or lender will try to get rid of the property by either selling it directly themselves or through an established broker. Many larger banks such as Bank of America and Wells Fargo have REO/asset management departments that will field bids and offers, oversee upkeep and handle sales. The majority of REO properties that are on the open market are listed in MLS by the broker/REALTOR that performed the BPO.

And now for the clips.

Shadow REO Tor 1

I should mention that all the data for these houses is right there on the Internet.  Here’s the page at Zillow.com for the 2nd house from the previous video and here again on Redfin.com.  It’s pretty amazing how much reconnaissance you can do without even leaving your home.  Scary, actually.

Here’s video 2. Shadow REO Tour 2

Shadow REO Tour 3

Shadow REO Tour 4.

Related posts:

• Existing home sales add to the parade of bullish data
• Short Sales in North County: “Feeding Frenzy” as banks pretend and extend
• Manhattan Q2 Apartment Sales down 22%
• Banks can do ‘You Walk Away’ too
• Baker-Samwick trial balloon floated by Obama

My translation below is of an article from the website Finanzas.

House prices accelerated their decline in June, down 10.1% over the same month of 2008, which is three tenths more than the previous month, when housing fell 9.8%, according to an Index of Spanish real estate market (IMIE) from Tinsa.

This fall, which is typical at the beginning of the year, adds to those ongoing since December 2007, a date from which the cumulative decline in the price of housing is 13%.

The IMIE shows further that this past June two of the five regional sub-indices showed decreases greater than the overall average.

Thus, house prices in the Mediterranean coast fell by 12.3%, while in the capitals and big cities, it fell by 10.5%. Still, in metropolitan areas the price of real estate declined by 9.9%, below the 10.1%.

Cumulative decline of 17.7% in coastal housing

For their part, house prices fell by 9.3% in the case of the Balearic and Canary islands, while the drop was 9.8% in the category of the remaining municipalities.

Based on the cumulative decline from the peaks of each subs-index, the Mediterranean coast, with a correction of 17.7%, and the capitals and major cities, reaching 14.3%, and the municipalities of metropolitan areas, with a fall of 13.6%, stand out.

What you should notice here is that the decline in house prices in Spain is much less than the declines we have witnessed to date in Britain or the United States.  Some might see this as a positive sign regarding the Spanish economy.  However, given the huge run-up in prices during the boom, I see this as a warning that declines in prices have much further to go in Spain.  The resulting losses will be catastrophic for the savings banks in the region. Therefore, developments in regards to Spanish house prices bear watching, in particular because the ECB had been instrumental in providing liquidity to the savings banks (debt owed by Spanish banks to the ECB hit a new record in June above €70 billion – see Spanish-language article here).  I suspect this liquidity is no longer on offer and that means the cost of larger problems in the banking sector will fall on Spanish taxpayers.

Source

El precio de la vivienda acelera su caída en el último mes y baja un 10,1% - Finanzas

Related posts:

• Case-Shiller shows home price plunge
• Case-Shiller index: Across the board declines in U.S. housing
• Consumer credit down a massive 33% in Spain
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain
• Nationwide: UK house prices up strongly for third month

This comes via the Nationwide website:

As a responsible lender which aims to support its borrowers Nationwide has responded to market conditions and made an option available which enables some existing customers in negative equity to move home. This is not available to new customers. The maximum LTV for existing customers taking a new deal at Nationwide remains at 95%.

Nationwide remains a very prudent and cautious lender with a track record of low arrears, low possessions and has a low LTV (loan-to-value) mortgage book. As the borrower is required to put down a deposit of at least 5%, under this scheme, the LTV and the risk to Nationwide will reduce as a result of the transaction.

Nationwide introduced this option on 10 June 2009 for existing customers only in the following particular circumstances:

• they are in negative equity
• they need to move home
• they meet our strict lending criteria and
• they have a good credit record.

The Society does not anticipate, and has not seen, a great demand for this service.

Borrowers in these unique circumstances are simply able to transfer part of their existing negative equity with them when they need to move home – as illustrated below the actual value of the negative equity and the LTV will reduce in all circumstances.

The maximum LTV available is 95% on the new property plus the remaining negative equity amount carried forward from the current property. The customer will need to pay a 5% deposit on the new property from their own funds, for example:

Current property value	£200,000	New property value	£250,000
Current mortgage	-£220,000	5% deposit required	-£12,500
Negative equity amount	=£20,000	Negative equity carried forward	+£20,000
Current LTV	110%	New mortgage	=£257,500
		New LTV	103%
		New negative equity amount	£7,500

Both the main loan and the associated negative equity top-up are restricted to three and five year fixed rate products to protect the customer from potential payment shock over the short term and are only available on a repayment basis.

Rates available on the main loan match those available to existing customers not in a negative equity situation who are moving home with a 95% LTV and are currently:

• main loan up to 95% LTV: 6.73% (3 year fixed) and 7.48% (5 year fixed)
• top-up loan covering 100-125% LTV: 7.23% (3 year fixed) and 7.98% (5 year fixed).

Andy McQueen, director of mortgages at Nationwide said: “Nationwide is a responsible lender and our negative equity policy is an appropriate and prudent response to market conditions and demonstrates our continued commitment to supporting our customers.”

Related posts:

• Nationwide brings back 125% LTV mortgages
• Home Equity Lines Pulled
• Nationwide looking to buy targets in UK mortgage market
• Nationwide: British home prices now higher than a year ago
• Nationwide: U.K. house prices down 16.6%

The Nationwide, the world’s largest building society, is now bringing back the dreaded 125% mortgage.  While the lender claims these mortgages are a “niche product” designed for customers of Nationwide in negative equity, the Financial Services Authority (FSA) is looking to ban this type of lending.

From the BBC:

It will only be available to existing customers in negative equity who want to move house.

Negative equity means that the value of someone’s home is less than the amount they owe on their mortgage.

Nationwide said the deal was a very "niche offer" and that not everyone in negative equity would qualify.

The Financial Services Authority is considering limiting mortgage loans to 100% of a property’s value.

‘No more risk’

The Nationwide only offers new customers mortgages worth 85% of the value of the home they want to buy.

Under its new arrangement, borrowers would take out a loan for 95% of the value of their new house at a fixed rate of 6.73% for three years or 7.48% for five years.

They would then be able to add on the negative equity from their old home, up to another 30% of the value of the new property, at a higher fixed rate of 7.23% for three years or 7.98% for five years.

Now, this is a different product than the one being sponsored by the U.S. government ( see posts on that here and here). In the U.S., the 125% mortgage only applies to the refinancing of mortgages of existing properties.  Here, the Nationwide is offering to fund 95% of the new house purchase, plus up to 30% negative equity from a previous residence.

While I am sceptical about the rationale for this product, it is quite innovative. First, the negative equity portion carries a higher rate than the 95% mortgage.  Moreover, loan exposure for Nationwide probably won’t increase because these deals are for existing customers.  And, Nationwide seems to have found a way to get more house transactions in a climate where prices have been declining.

To my mind, the 125% product offered by this building society shows how innovative the financial services industry can be in any investing or economic climate.  However, products like these operate on the fringe of what should be considered prudent. I see it as further evidence that the financial services industry needs strong oversight to prevent lenders from taking on too much risk and creating the kind of financial crises we have experienced.

Related articles
Nationwide offers 125pc mortgage to home owners trapped in negative equity – The Telegraph
Nationwide brings back 125% mortgage – The Guardian

Related posts:

• Nationwide: guidance on its 125% LTV product
• Home Equity Lines Pulled
• Nationwide: U.K. house prices down 17.6% in year to Februay
• Nationwide: UK house prices rise for fourth month
• Nationwide: U.K. house prices resume their descent

This comes via Brown Bothers Harriman’s Win Thin (no link available):

South Africa’s ruling ANC said that it was open to discussing demands by its labor union allies to nationalize its mines.  This is an astounding admission, and confirms our worst political fears with regards to the new Zuma administration.  First, they get rid of respected Fin Min Manuel, now they’re talking about nationalization?  Add in poor economic fundamentals (recession, stubbornly high inflation, and a widening current account gap) and you get a recipe for a weaker rand, in our view.  And yet since Mar 9, when the dollar peaked vs. EM and right after US equity markets bottomed, ZAR has been the top EM performer, up 33% vs. USD.  Next is HUF (up 25%).  

While the rand has been on fire, we simply don’t see much in the way of rationale for the rand to be doing so well except for high interest rates.  Given the recent turn in EM currencies as a whole, we think the rand could remain under some pressure near-term.  We would buy USD/ZAR at current levels for a move to 8.30, the June 23 high.  Intermediate target seen at 8.055 (62% retracement of the Jun 23-30 drop).  Longer-term, a big target is the May 15 high of 8.80, and intermediate targets on that path are 8.10, 8.235, and 8.37 (retracement levels of the May-Jun drop).

The situation sounds pretty rand bearish, doesn’t it. 

And, by the way, if you were looking for a market where house prices rose to astronomical levels and still have not yet declined significantly, then look no further. South Africa is the place.  In the 8 years to 2005, when the U.S. market peaked, South Africa was the market with the largest run-up in prices, a staggering 263%, well above second-place Ireland at 196% and third-place Spain at 171%.

But these days are well and truly over.

Source

Global house prices: A home-grown problem – The Economist (subscription required)

Related posts:

• UK house prices up for third time in fourth month
• UK house prices up again in September
• Case-Shiller: U.S. home prices up for third month in July
• Nationwide: UK house prices rise for fourth month
• Nationwide: U.K. house prices resume their descent

When we saw the Case-Shiller data for April on Tuesday, I noted that New York was the most overpriced metro area in the Composite-20 as prices there were still 70% above January 2000 levels.  This is changing fast.  Bloomberg reports:

Manhattan apartment prices dropped for the first time since 2002 in the second quarter as the collapse of Lehman Brothers Holdings Inc. and Bear Stearns Cos. caught up to property owners in the nation’s most expensive urban market.

The median price fell 18.5 percent from a year earlier to $835,700, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today. The number of sales plunged by half, the most since Miller Samuel began keeping data in 1989.

“The standstill that existed after Lehman Brothers has been broken, and it was the sellers that cried uncle,” Pamela Liebman, chief executive officer of New York-based property broker the Corcoran Group, said in an interview.

Values are falling broadly in Manhattan for the first time in the almost four-year U.S. housing recession, with declines now seen in co-operatives and condominiums of every size and price. Private-sector employment in the city dropped by 91,200 jobs, or 2.8 percent, in the 12 months through May as Wall Street losses and asset writedowns topped $1.4 trillion.

The price of studio apartments declined 16 percent from a year ago to a median of $405,000, according to Miller Samuel. One-bedrooms dropped 17 percent to $650,000 and two-bedrooms fell 23 percent to $1.27 million. Three-bedroom units fell 37 percent to $2.35 million and four-bedrooms plummeted 47 percent to a median of $3.92 million.

The Miller Samuel-Prudential data reflect for the first time what sellers have known for at least six months: The way to lure a buyer in the current market is to cut your price.

The article goes on to mention jumbo lending and the crash of the high end market in Manhattan due to restrictive lending on jumbo mortgages, which are not Fannie and Freddie-eligible.

Below is a video at Bloomberg News reporting and discussing the details of this same report.  This is the first quarter where every segment in Manhattan saw price declines.

Related posts:

• Manhattan Q2 Apartment Sales down 22%
• Looking for a bottom in Manhattan real estate
• Manhattan real estate in freefall
• US GDP shrinks 0.3% in Q3
• U.S. CPI: Lowest since 1954 – deflation here we come

The S&P/Case Shiller Home Price Indices for April 2009 were released today.  The Composite-10 and Composite-20 indices showed a 18.0% and 18.1% decline respectively, making the data less bad than in the previous month.  Nevertheless, there is still considerable weakness, particularly in former bubble cities like Phoenix, Las Vegas, and Miami.  There, prices have been cut in half, with Phoenix now down 54.1% from the peak, Las Vegas down 52.1% and Miami down 48.1%.

Yet, this month does mark a large shift in directionality with 8 markets showing increased prices from March to April. The most inflated market now showing price upticks is Washington, where there was a large surge, perhaps due to the change in Administration. In fact, Washington D.C. is now the second most expensive market relative to prices at the beginning of this decade, with prices having risen a full 67% despite a 33% decline in values. New York is the most expensive market by this measure, prices having risen over 70%. However, prices in the NY area are now falling.

I should note that these data are from April. If the trend holds, we would expect to see more markets shifting to price rises in May and June.  What is striking is that most of the bubble markets are still in decline: Phoenix, LA, San Diego, Miami, Tampa, and Boston.  However, San Francisco has turned up, as has Washington. And many non-bubble markets are now seeing house price appreciation.

In the UK, price appreciation started in March and has continued to the most recent survey (see post here).  If the U.S. is following the same pattern, it suggests price declines are now moderating. To the degree that Washington, a market which is still very overpriced, leads the upturn in prices, one can see this as a sign that government largesse bears a large responsibility for the change in trend.

Related posts:

• Case-Shiller Time Machine
• Case-Shiller shows a further decline in prices
• Case-Shiller shows home price plunge
• Case-Shiller Home Price index shows a 17% fall
• Case-Shiller: home prices fall even further

On the same day that the worst economic growth numbers in the U.K. in 51 years, we also get some news that the British economy may be stabilising. Well, at least house prices seem to be stabilising as Nationwide reported a 0.9% increase in house prices in UK June.  That is the third rise in four months and takes the annual decline to only 9.3% over June of 2008.

Nationwide Chief Economist Martin Gahbauer notes that the 3-month average house price change is up for the first time in eighteen months.

The three month on three month rate of change – a smoother indicator of the short-term price trend – turned positive for the first time since December 2007 to stand at 0.9%, up from -0.4% in May. If the pattern of price movements seen in the first half of the year is repeated over the second half, then prices could show only a small single digit fall for 2009 as a whole. This would represent a stark shift from trends seen at the turn of the year, when most indicators were pointing to a repeat of the large declines seen in 2008.

Part of the reason prices have stabilised is the huge shadow inventory that has been taken off the market as prices declined, reducing residential property inventory.  How long this lasts is anyone’s guess.  But Gahbauer is cautious.

While it is encouraging to see that prices are no longer seeing steep falls, there are still many obstacles in the way of a genuine and sustainable price recovery. To begin with, abnormally low supply levels are unlikely to last forever, as the recent price increases should make previously hesitant sellers feel more confident about marketing their properties. Additional supply is also likely to come from homeowners who see their financial position impacted by higher unemployment and lower incomes. With the stock of property available for sale likely to eventually increase, house purchase demand will need to rise more convincingly from current levels to prevent a possible relapse in price levels.

Part of the reason that Gahbauer is awaiting further evidence has to do with the high cost of housing relative to income in the UK.  We are still at levels unseen in the last 25 years, suggesting that house prices are still too high.

Nevertheless, three months in four is a good counter-trend to be taken seriously. To the degree this data is confirmed by the Halifax when it reports, we should start to consider that the U.K. is the first of the large housing bubble markets (Spain, the U.S., Ireland and the U.K.) to stabilise.

Source
House Price Rise Continued in June – Nationwide

Related posts:

• Nationwide: UK house prices rise for fourth month
• Nationwide: UK house prices up strongly for third month
• Nationwide: U.K. house prices rise for second time in three months
• Nationwide: U.K. house prices resume their descent
• UK house prices up again in September

This morning I was reading Simon Johnson’s excellent post “President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide” about what Barack Obama should say when he makes his regulatory reform pitch today at 12:30 PM.  I agree with what he has to say about the need to re-assure us his ‘administration ‘gets it.’  And I suggest you read his commentary.  But, all the while I was reading it, I couldn’t help but think: ‘what about the homeowner?’

See, we have bailed out the financial services industry to the tune of nearly $14 trillion in guarantees and support according to the U.S. bank regulator the FDIC.  Yet, time and again we see differential treatment elsewhere.  Chrysler and GM were forced into bankruptcy and, more recently, California was denied aid.  The preponderance of evidence suggests that President Obama views the banking industry as systemically important in a way these other industries may not be.  The question is: how does he view homeowners, who collectively are American workers, taxpayers and voters?

I ask this because mortgage debt was the trigger for the financial crisis. And I have yet to see any comprehensive legislation protecting homeowners from financial distress, while we have certainly put the financial services industry and its reform front and center.  Just yesterday, in his “Ideas for fixing the economy,” Felix Salmon mentioned an idea first proposed in August 2007 by Dean Baker and Andrew Samwick which I will dub ‘rent-to-own.’ Baker and Samwick propose the following:

There is a simple way to allow troubled homeowners to stay in their homes without also bailing out the mortgage issuers and speculators.

Congress can pass legislation granting current homeowners the right to stay in their homes as long as they like, simply by paying the fair-market rent. In other words, no one gets tossed out on the street, as long as they can pay the rental value of their house. The fair rent would be determined by an independent appraiser — exactly the same way that a lender is supposed to determine the size of a mortgage that can be issued on a home.

Under this plan, homeowners would turn over their property to the mortgage holder. This would generally not be a loss since borrowers currently face crises precisely because they owe more than the value of their house. If the value of the home exceeded their debt, then they wouldn’t have to sign up for the program.

As a renter with secure tenure, the former homeowner would have incentive to do necessary maintenance and keep the home from falling into disrepair. This would prevent the blight that is already hitting neighborhoods where foreclosures have become commonplace.

The mortgage holder would get possession of the house, but they would be stuck having the former homeowner as a tenant. Otherwise the mortgage holder is free to hold or sell the property as they choose. Being stuck with a renter may reduce the resale value of the house, but intelligent investors knew there was risk when they got into the business.

To limit the size of the program and to ensure that it only benefits those who are really in need, there can be a cap placed on the value of homes that qualify. For example, Congress could stipulate that only homes with a market value below the median price for an area are eligible for this plan.

This security-of-housing proposal meets the needs of the homeowners who were victimized by deceptive lending practices and pro-homeownership ideologues. It gives them the right to stay in their home as long as they want. It accomplishes this task in a way that provides minimal opportunities for fraud and should require very little by way of new government bureaucracy.

It also manages to benefit homeowners in crisis without also rescuing the financial institutions that were speculating in mortgages gone bad. This will give the presidential candidates, and other members of Congress, a clear choice between helping distressed homeowners or bailing out financial institutions that should have known better.

Although the Baker-Samwick proposal does not specifically include a rent-to-own provision, whereby the renter has the option within a certain timeframe of buying back the house, it can easily be added.  Clearly this proposal has merits, yet I have heard nothing on this score for months except via Felix’s post.

I might add that there is also a huge amount of shadow inventory – repossessed houses not currently on the market due to the glut of residential housing inventory – which needs to be dealt with.  Calculated Risk has a sobering video from Jim the Realtor which makes this issue plain. This glut of inventory is likely to push house prices down lower, forcing many into negative equity and default.

So, my suggestion is that you should keep the homeowner in the back of your mind as you listen to President Obama make his case for banking regulatory reform.  I certainly want to see real reform, much as Simon does – and I will be listening for cues that we are going to get it.  However, I also think the time is right for homeowners to move center stage as well.

Related posts:

• Baker-Samwick trial balloon floated by Obama
• Nationwide: UK house prices rise for fourth month
• Citi agrees to do cramdowns
• Can I borrow the full amount and an extra 25% too?
• Wow, judges now nixing lenders’ foreclosure claims entirely in court