The Rally is For Real, Say Case and Shiller

Submitted by Rich Toscano on August 26, 2009 - 4:27pm

The Case-Shiller index of San Diego home prices notched up its second monthly gain in June. Wait -- wasn't June, like, two months ago? And given that the index is based on the preceeding three months' worth of data, doesn't this give a better idea of the price movement in May (the middle month of the three) than June?

Yes and yes. Such lagginess is what we hate about the Case-Shiller index. What we love about it is the fact that it is an apples-to-apples comparison based on subsequent sales of the same homes. This provides a much more accurate view of home price changes than indicators like the median price, which measures how much the typical buyer is paying but doesn't account for what he or she actually got for the money.

continue reading at voiceofsandiego.org

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Submitted by SD Realtor on August 27, 2009 - 12:51am.

All I can say right now Rich is that things are out of control at the trustee sales.

Submitted by CA renter on August 27, 2009 - 2:07am.

(sigh...)

And I'm guessing that the rally will last well into next year.

Time to get some more of that popcorn. We have a long, long way to go. :(

Thanks for all your research, Rich!!!!

Submitted by outtamojo on August 27, 2009 - 9:18am.

Out of control enough to have an impact on the flood of REO's everyone is expecting?

Submitted by sdrealtor on August 27, 2009 - 9:45am.

Just one data point from my corner of the world but maybe this will help some of you shadow inventory onslaught expectors.

I have listed about 50 short sale properties in the last 12 months. I would say that about 30 of them had NOD's filed. Most of those also had Trustee sales scheduled and they usually were postponed a few times while we were in the approval/escrow process.

So far I have had 1 property go back to the bank. It was a small house in Menifee that I couldnt get an offer on no matter how low I dropped the price. Sellers just walked on non-recourse loans.

A couple homeowners decided to stick it out and keep the house but more than 90% of them have or will sell.

Granted that this is just my experience but that should at least lead you to question how many of those NOD/NOT will ever end up as REO's.

Submitted by sdcellar on August 27, 2009 - 9:48am.

CA renter wrote:
(sigh...)

And I'm guessing that the rally will last well into next year.

Time to get some more of that popcorn. We have a long, long way to go. :(

Thanks for all your research, Rich!!!!

(unsigh...)

I don't know that it will, but seems certain to continue on for another few months. Since C-S lags, it might make it *seem* like it lasts into next year.

I'd be a fool to deny there might be another extended spring kick next year though. Seems like the rules are being re-written and I'm having a hard time keeping up. Kind of like those 16.575 scores they handed out in gymnastics at the last Olympics...

So, maybe you're right.

(sigh...)

Submitted by SD Realtor on August 27, 2009 - 10:46am.

Annecdotal evidence to what sdr pointed out is definitely displayed at the trustee sales themselves. The inventory actually getting opening bids is piss poor lately and getting worse not better. I do see an increase in bks which will make it to the bidding stage in a few months. However this is a much different paradigm. Yesterday there had to be at least 50 people at the auction. It is getting ridiculous. Similarly people are making bids that to me are a much slimmer profit margin then what I would accept.

Don't get mad at me as I am just reporting what I am seeing, not trying to talk anyone into anything.

Similarly when all of this does all slow down we will have seen price increases that will then have to be wiped out again. It is gonna take awhile.

At any rate... I guess we will see but I am of a much different mindset then I have been over the past 3 years and it is distressing.

Submitted by DWCAP on August 27, 2009 - 11:06am.

sdrealtor wrote:
Just one data point from my corner of the world but maybe this will help some of you shadow inventory onslaught expectors.

I have listed about 50 short sale properties in the last 12 months. I would say that about 30 of them had NOD's filed. Most of those also had Trustee sales scheduled and they usually were postponed a few times while we were in the approval/escrow process.

So far I have had 1 property go back to the bank. It was a small house in Menifee that I couldnt get an offer on no matter how low I dropped the price. Sellers just walked on non-recourse loans.

A couple homeowners decided to stick it out and keep the house but more than 90% of them have or will sell.

Granted that this is just my experience but that should at least lead you to question how many of those NOD/NOT will ever end up as REO's.

Good, I find this statement heartening. By your own estimate, 40% of shortsales are pre NOD/NOT. People trying to get out from under the gun before it all goes south. Of the 60% that are NOD/NOT, 90%get offers, presumably significantly below bubble prices considering CS trends over the past 3 years, and are selling off to much stronger hands that at least hopefully are more like me than the 'investor' of yesterbubble. I dont care if the house was REO or not, I care if the distressed loan impacts the price of housing, making it affordable for me to actually buy a house.

Submitted by sdrealtor on August 27, 2009 - 11:44am.

Three additional points. Some of the pre NOD homes havent paid a mortgage in many months. Second, Houses are selling at retail and not distressed discounts. The 3rd is something I am seeing more and more of lately. Young professional bought nice but small place at peak that they can afford between 400 and 600K in a central location. Prices came down and the upgraded to a nice, new 4,000 sq ft McMansion in the outlying areas (Otay, CV, Escondido etc.) for around 500K and now they want to get rid of the small peak purchase property that has non-recourse loans. They have the house they always wanted at a very attractive rate and are willing to take the credit hit to move on.

Submitted by sdcellar on August 27, 2009 - 12:27pm.

...and those people suck.

Submitted by Nor-LA-SD-guy on August 27, 2009 - 1:16pm.

sdrealtor wrote:
Just one data point from my corner of the world but maybe this will help some of you shadow inventory onslaught expectors.

I have listed about 50 short sale properties in the last 12 months. I would say that about 30 of them had NOD's filed. Most of those also had Trustee sales scheduled and they usually were postponed a few times while we were in the approval/escrow process.

So far I have had 1 property go back to the bank. It was a small house in Menifee that I couldnt get an offer on no matter how low I dropped the price. Sellers just walked on non-recourse loans.

A couple homeowners decided to stick it out and keep the house but more than 90% of them have or will sell.

Granted that this is just my experience but that should at least lead you to question how many of those NOD/NOT will ever end up as REO's.

I would add this,
What happens when builders for all practical purposes stop building for three years ???

If there is a big wave coming , we are going to need it just to keep up with demand.

Submitted by DWCAP on August 27, 2009 - 2:11pm.

Nor-LA-SD-guy wrote:
sdrealtor wrote:
Just one data point from my corner of the world but maybe this will help some of you shadow inventory onslaught expectors.

I have listed about 50 short sale properties in the last 12 months. I would say that about 30 of them had NOD's filed. Most of those also had Trustee sales scheduled and they usually were postponed a few times while we were in the approval/escrow process.

So far I have had 1 property go back to the bank. It was a small house in Menifee that I couldnt get an offer on no matter how low I dropped the price. Sellers just walked on non-recourse loans.

A couple homeowners decided to stick it out and keep the house but more than 90% of them have or will sell.

Granted that this is just my experience but that should at least lead you to question how many of those NOD/NOT will ever end up as REO's.

I would add this,
What happens when builders for all practical purposes stop building for three years ???

If there is a big wave coming , we are going to need it just to keep up with demand.

No we wont, atleast not in the next 1-2 years. Right now all the activity is on the low end. Everyone is buying the cheap houses. Builders have been building mostly high end houses for years, and have few plans to build sub 400k sfr's. There is adquite supply for what the builders want to build right now. What we need are more cheap stuff.

Submitted by Nor-LA-SD-guy on August 27, 2009 - 2:56pm.

DWCAP wrote:

No we wont, atleast not in the next 1-2 years. Right now all the activity is on the low end. Everyone is buying the cheap houses. Builders have been building mostly high end houses for years, and have few plans to build sub 400k sfr's. There is adquite supply for what the builders want to build right now. What we need are more cheap stuff.

Yea OK I would say you are right about the demand not being answered at the low end, But I would put that marker a little higher in the coastal area's (say sub 500K).

I guess I show a little too much about myself, as I really don't think about 500K - Mil+ homes, really can't figure why anyone would want to spend that much when you can get a real nice BMW for under 30K and drive to the beach in 30-40 minutes from even Temecula on most days, and get a water front position next to the 12 Mil+ house.

Submitted by SD Realtor on August 27, 2009 - 3:10pm.

I do not agree at all.

I have seen alot more activity now spreading into the 500, 600 and up range.

Submitted by DWCAP on August 27, 2009 - 3:20pm.

SD Realtor wrote:
I do not agree at all.

I have seen alot more activity now spreading into the 500, 600 and up range.

I reserve the right to be wrong if things are substantially changing. I am only as terrible as most current analysists and am only able to project past results into the future, all be it with some interpertation for expected changes in the future. If things are rosie all over now, then builders will be selling, and building, very soon. But the latest evidence I have to form an opinion was that builders were struggling to sell as must sell inventory was being reduced.

Submitted by SD Realtor on August 27, 2009 - 4:10pm.

That is the problem. Things are not all rosie now. Not in my book. There is nothing that is fundamentally right about what has gone on and what is going on. It doesnt make sense to me but homes that show decent and are priced well are moving. I am seeing homes in PQ and Sabre Springs and RB moving.

To be very clear, what I am seeing is alot of activity and it is not confined to the "low end" that bears have been falling back on for the past many months.

It is not that "things" are substantially changing. Lets be specific. The amount of activity specifically sales since February has increased substantially for homes under 700k. It has not abated and continues to be strong. Things are VASTLY different then they were last year at this time. I suspect it will continue for awhile. I have no clue what the builders will or will not do.

If you were a potential buyer looking at homes right now you would have a much different opinion because your evidence would be formed by the competition you have been facing.

How long this will last, I think fundamentally we have big problems with employment and foreclosures but seems like those sure have been overcome from a sales and manipulation of inventory standpoint. Perhaps that will change this winter but I think it will take interest rates to really change things.

Submitted by Nor-LA-SD-guy on August 27, 2009 - 4:31pm.

I live in TV, The tract where I lived just sold the last homes (build out complete once
these are finished),

The same model sold for the same price as what we bought in September 2007 (a very good deal at the time I will admit), it had fewer upgrades and the lot was not as good.

I don't see builders starting new projects however but maybe I am not looking in the right locations.

Submitted by moneymaker on August 27, 2009 - 8:02pm.

Maybe there were many people that were smart like us and are now buying. What I don't understand is why Case-Schiller would be going up on the high end places.Higher interest rate,speculation on wether we are at the bottom, maybe people are upset with what the market did to them so are pulling out and buying real estate? I don't have a clue, the only way I would buy a house in the million dollar range is if I owned a wildly successful business or win the mega tomorrow night.

Submitted by CA renter on August 28, 2009 - 4:25am.

threadkiller wrote:
Maybe there were many people that were smart like us and are now buying. What I don't understand is why Case-Schiller would be going up on the high end places.Higher interest rate,speculation on wether we are at the bottom, maybe people are upset with what the market did to them so are pulling out and buying real estate? I don't have a clue, the only way I would buy a house in the million dollar range is if I owned a wildly successful business or win the mega tomorrow night.

But, if you had a million dollars+, and thought the USD were going to depreciate, and your purchasing power has been greatly diminished over the past decade (thanks Greenspan/Bernanke!), you can't earn anything on your cash, and you saw a house that sold for $1.8MM in 2006 now being listed for $1.1MM, you might be tempted to buy.

I'm seeing what SDR has said. The higher-ish end is not dead. Things are moving in the $900K-$1.5MM range. Not a lot, but if it's a decent place at a price that's around 2003/2004 levels, it will probably sell within six months.

Submitted by CA renter on August 28, 2009 - 4:35am.

More anecdotal stuff on bulk sales and "shadow inventory":

Recently talked to some people who are involved in some bulk purchases from banks. Sounds like the banks are requiring a minimum of $10MM or more.

Supposedly, the banks really are keeping homes off the market because they are selling them at a 40-45% discount from their current market value (BPO) in these bulk deals. They want a quick close @ 14 days or less, all cash. Sounds like the govt is then covering some portion of their losses via the TARP (??? need to confirm this). They want them off their books within a year because the TARP (???) will be depleted.

Some of these deals have pre-arranged end buyers (many appear to be foreign nationals), many don't. There is a ***LOT*** of money going into these deals. Some single deals are well into the hundreds of millions.

Yes, there is foreign money involved, too. Hearing some interesting stories. Will try to get more info and confirm a few details.

Not sure what all these investors intend to do with the inventory once they buy all this real estate...

Just FYI...

Submitted by SD Realtor on August 28, 2009 - 1:31pm.

CAR I am hearing the same things that you have heard about the bulk purchases. Also the backstops are not just TARP but PPIP as well... who cares where it comes from! It's all good right? I am not sure of the timeframe for PPIP money expiring.

Submitted by Eugene on August 28, 2009 - 1:36pm.

CA renter wrote:

Supposedly, the banks really are keeping homes off the market because they are selling them at a 40-45% discount from their current market value (BPO) in these bulk deals. They want a quick close @ 14 days or less, all cash. Sounds like the govt is then covering some portion of their losses via the TARP (??? need to confirm this). They want them off their books within a year because the TARP (???) will be depleted.

What would be the point of trying to move this stuff at such a huge discount? Does the government reimburse them all the way back to BPO? 'Cuz that would be the only reason I can think of for such weird behavior.

Can you give an example of a house in San Diego that was sold to such an investor?

Submitted by CA renter on August 28, 2009 - 2:31pm.

SDR,

Yes, I was told TARP is covering some portion of the banks' losses from the sales to the wholesale buyers, but imagine the PPIP is in there somewhere.

Everything is anecdotal at this point, but want to get it out there in case anyone else has any sliver of info from any other sources/perspectives, and we can try to patch in the holes and see what bigger picture we come up with.

Trying to find more out, and will post whatever I find out (if anything).

Submitted by sdduuuude on August 28, 2009 - 4:09pm.

CA renter wrote:
More anecdotal stuff on bulk sales and "shadow inventory":

Recently talked to some people who are involved in some bulk purchases from banks. Sounds like the banks are requiring a minimum of $10MM or more.

Supposedly, the banks really are keeping homes off the market because they are selling them at a 40-45% discount from their current market value (BPO) in these bulk deals. They want a quick close @ 14 days or less, all cash. Sounds like the govt is then covering some portion of their losses via the TARP (??? need to confirm this). They want them off their books within a year because the TARP (???) will be depleted.

Some of these deals have pre-arranged end buyers (many appear to be foreign nationals), many don't. There is a ***LOT*** of money going into these deals. Some single deals are well into the hundreds of millions.

Yes, there is foreign money involved, too. Hearing some interesting stories. Will try to get more info and confirm a few details.

Not sure what all these investors intend to do with the inventory once they buy all this real estate...

Just FYI...

I have no info about this wholesle market, but it is about the only thing I have heard that sensibly ties all this together.

If there are such institutional buyers, what they do with that inventory is, indeed, the million dollar question. OH. A million isn't much anymore? The trillion dollar question, then.

Instituional buyers picking up US real estate reminds me of that Saudi prince that dumped a whole bunch of money into Citibank. It can't possibly be a winner.

Submitted by SDnonSerfer on August 28, 2009 - 9:10pm.

I know of at least 1 co-worker who is buying inland empire homes at relatively low prices as rental properties. He has a friend up there who tipped him off to neighbors who were badly underwater and near the breaking point. This is all well and fine since he used his own cash to buy 2 homes. (He seems to think he can make this work for the long haul but also talks about being able to "flip" the properties within about 5 years.)

He also mentioned trying to access additional financing for his nascent business to expand his holdings. One thing he said bothered me a bit. He claims he can also get federal grant money for "urban renewal" since, despite the fact that the homes he is eyeing are new construction, in many cases the original buyers were unable to afford landscaping etc. and he will be handling this. Is this possible? Do low-end properties here in S.D. also qualify as "urban renewal" investments?

Submitted by boomer on August 28, 2009 - 10:54pm.

The bulk sales are a myth for the most part. If you know a small player going after these, they will give up in short order. There have been some bulk sales that I know of in SD county, but they were in the 10M+ range.

I think everyone pissing their pants at the moment worrying that the market is going to take off need to take a deep breath and relax. Take a look at the price charts from the 90's. There were multiple rallies within the fall.

A family member recently purchased a home in the 700-800K range. The price explosion of the early 2000's is still fresh in their minds and as they went looking, they upped their price from the high 500s. They took the first nice house that they could get an offer accepted on. They still think that you are a shmuck if you rent. We sold in '05 and my wife recently made the comment that when she tell folks we are renting, more and more she hears that we are lucky. In '05 most thought we were nuts.

I firmly believe that we will see prices come down for a few years to come in the higher price ranges. My neighbor makes little money (unless they have some family money I don't know about) but have their home leveraged to 700K on an option arm that WILL blow up. The higher price ranges where I pay attention are going to get killed by the option arms.

Relax people....

Submitted by peterb on August 29, 2009 - 9:31am.
Submitted by Mr. Drysdale on August 29, 2009 - 3:36pm.

I work for a large financial institution with offices here in San Diego and I can assure you, there's still far more of a drop in property values coming. You can't rely on the integrity of the data anymore because the "resale market" that the data is based on has been eggregiously manipulated by the government.

In case any of you are unaware. FASB (Financial Accounting Standards Board) recently allowed suspending "mark to market" accounting. Read about it here.

"Mark to Market" means (for banks and other financial services companies holding loan portfolios) adjusting your company's Balance Sheet to reflect the current value of the real estate assets your loans are secured by. However, if banks did this based on currently depressed market conditions, following all the high LTV loans that were taken out just a few years ago in an artificially inflated market, they would all be insolvent, WHICH IN REALITY THEY ARE!

This is also why banks are not foreclosing on as many defaulting borrowers as you would expect, and explains why they are going to great lengths to offer loan workouts to borrowers who threaten to walk away. If they can keep the loan on the books, they can say the real estate it's secured by is worth whatever they want to say it's worth, but once they foreclose and sell a property for what it will really fetch, they have to acknowledge what it's real market value is. Read this short article and watch this short video here. This is precisely why you're not seeing more REO made available for sale. There should be significantly more, and eventually there will be because the government and financial institutions can only keep this charade up for so long.

By the way, this doesn't even address the effect loan workouts are having on traditional valuation models. Appraisals include a line item adjustment for financing concessions, but what happens when financing concessions are offered to borrowers (under NDAs) in the form of loan workouts, as a payoff for not walking, long after the original loan was made? How do you adjust for the value of competing properties under these circumstances? You can't.

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