Slow decline or is a big chunk about to be ripped out?

[SD Realtor]

Hi Allan –

I know you were addressing sdr but I thought I would throw in my two cents. I do believe this will have an impact. I think there are alot of well incomed individuals or families looking to buy into the 700k-900k range who were going to rely on this sort of financing. This falls square into the 100k+ per year engineer type who has say 100-200 in cash for a downpayment. So they were going to buy that nice home from the builder in say CV or 4S and now they just saw the payment jump a few hundred bucks.

I do believe it will take awhile for this event to manifest itself into the statistics we always see. I doubt the median will get affected for many months. The volume and active/pending ratios will be the first visible signs of the change. Also as we are hitting the cyclical slow season it will further mask this out. I also feel that this REALLY adds vulnerability to the rate cycle. These risk premium additions imposed by the secondary market are hard to swallow but if the 10 year was at 5.5 then it would be a real gut punch.

So in summary I think this will manifest itself over the next few months to help suppress pricing. As always many of the sellers who just don’t get it will need to cycle through a few months of inactivity and then decide if they should cut bait or pull out of the market. Once that pipe is cleaned out, this should hit the “family looking for the nice home in the good school district” types the most such that they will sit for awhile longer. Thus I would expect the cookie cutter 4S, CV and those types of homes to suffer once it does kick in.

SD Realtor

[Allan from Fallbrook]

SD_R: Thanks. Since I have you on the line, what about the lag effect in reporting? My understanding on the majority of these numbers is that they are somewhat aged, meaning we are “looking in the rearview mirror” as regards some of these statistics.

Also, it appears that the real weight of the sub-prime resets is about to felt, starting in October 2007 and forward.

If this is true, and financing is both more difficult to acquire and more expensive once you do, and we are heading into the slow season, the real ugliness has yet to manifest itself, correct?

[Allan from Fallbrook]

SD_R: Thanks. Since I have you on the line, what about the lag effect in reporting? My understanding on the majority of these numbers is that they are somewhat aged, meaning we are “looking in the rearview mirror” as regards some of these statistics.

Also, it appears that the real weight of the sub-prime resets is about to felt, starting in October 2007 and forward.

If this is true, and financing is both more difficult to acquire and more expensive once you do, and we are heading into the slow season, the real ugliness has yet to manifest itself, correct?

[Allan from Fallbrook]

SD_R: Thanks. Since I have you on the line, what about the lag effect in reporting? My understanding on the majority of these numbers is that they are somewhat aged, meaning we are “looking in the rearview mirror” as regards some of these statistics.

Also, it appears that the real weight of the sub-prime resets is about to felt, starting in October 2007 and forward.

If this is true, and financing is both more difficult to acquire and more expensive once you do, and we are heading into the slow season, the real ugliness has yet to manifest itself, correct?

[one_muggle]

Two mostly educated views for consideration:

Wall Street Bond Trader says slow agonizing drop, with a few fits and spurts both up and down. He bases this on how long it took the Nasdaq to drop during the bust. Even though the market it mostly transparent and fungible, it took about 2 years to sort out. Since RE is not very transparent or fungible, it should take longer.

Econ Professor says that the increased availability of information has lead to market cycles that are faster and more shallow since. He says information asymmetry is declining.

If I knew nothing of the situation, which isn’t too hard to pretend, I would put my money with the trader. Real world usually has better incentives to be correct than academia.

-one muggle

[one_muggle]

Two mostly educated views for consideration:

Wall Street Bond Trader says slow agonizing drop, with a few fits and spurts both up and down. He bases this on how long it took the Nasdaq to drop during the bust. Even though the market it mostly transparent and fungible, it took about 2 years to sort out. Since RE is not very transparent or fungible, it should take longer.

Econ Professor says that the increased availability of information has lead to market cycles that are faster and more shallow since. He says information asymmetry is declining.

If I knew nothing of the situation, which isn’t too hard to pretend, I would put my money with the trader. Real world usually has better incentives to be correct than academia.

-one muggle

[one_muggle]

Two mostly educated views for consideration:

Wall Street Bond Trader says slow agonizing drop, with a few fits and spurts both up and down. He bases this on how long it took the Nasdaq to drop during the bust. Even though the market it mostly transparent and fungible, it took about 2 years to sort out. Since RE is not very transparent or fungible, it should take longer.

Econ Professor says that the increased availability of information has lead to market cycles that are faster and more shallow since. He says information asymmetry is declining.

If I knew nothing of the situation, which isn’t too hard to pretend, I would put my money with the trader. Real world usually has better incentives to be correct than academia.

-one muggle

[SD Realtor]

Hi Allan –

The biggest problem I have with the reported statistics is simply that the median is 99% of what is reported and I never really pay attention to the median anyway. I think sales volume is much more telling. Eventually medians will move down if volumes are consistently dropping. So my answer is that reported medians most likely will not reflect the impact. One thing that I believe has happened is that the volume drops from 2006 compared to 2005 were steeper then the volume drops of 2007 compared to 2006. This is more of a guess from memory but is most likely attributable to 2005 being the peak (in some areas).

So yes your conjecture is correct. I think that yes the real ugliness has yet to manifest itself. I don’t see a single wham month though. I just see continued sluggishness and in say 10 months or a year and we look back and go okay, it has really started crank down. Even the resets in October will not manifest themselves into trustee sales and REO for a spell. Remember, 3 months minimum until a NOD is even filed, then almost another 4 months to trustee sale, and as we have seen, REO properties are not being dumped onto the market all at once.

SD Realtor

[SD Realtor]

Hi Allan –

The biggest problem I have with the reported statistics is simply that the median is 99% of what is reported and I never really pay attention to the median anyway. I think sales volume is much more telling. Eventually medians will move down if volumes are consistently dropping. So my answer is that reported medians most likely will not reflect the impact. One thing that I believe has happened is that the volume drops from 2006 compared to 2005 were steeper then the volume drops of 2007 compared to 2006. This is more of a guess from memory but is most likely attributable to 2005 being the peak (in some areas).

So yes your conjecture is correct. I think that yes the real ugliness has yet to manifest itself. I don’t see a single wham month though. I just see continued sluggishness and in say 10 months or a year and we look back and go okay, it has really started crank down. Even the resets in October will not manifest themselves into trustee sales and REO for a spell. Remember, 3 months minimum until a NOD is even filed, then almost another 4 months to trustee sale, and as we have seen, REO properties are not being dumped onto the market all at once.

SD Realtor

[SD Realtor]

Hi Allan –

The biggest problem I have with the reported statistics is simply that the median is 99% of what is reported and I never really pay attention to the median anyway. I think sales volume is much more telling. Eventually medians will move down if volumes are consistently dropping. So my answer is that reported medians most likely will not reflect the impact. One thing that I believe has happened is that the volume drops from 2006 compared to 2005 were steeper then the volume drops of 2007 compared to 2006. This is more of a guess from memory but is most likely attributable to 2005 being the peak (in some areas).

So yes your conjecture is correct. I think that yes the real ugliness has yet to manifest itself. I don’t see a single wham month though. I just see continued sluggishness and in say 10 months or a year and we look back and go okay, it has really started crank down. Even the resets in October will not manifest themselves into trustee sales and REO for a spell. Remember, 3 months minimum until a NOD is even filed, then almost another 4 months to trustee sale, and as we have seen, REO properties are not being dumped onto the market all at once.

SD Realtor

[JPJones]

I’m having trouble getting my head around the build-up of REO properties. The longer banks hold these properties in this market, the more they’ll eventually lose on the sale, right? On the flip side, if they dump every REO into the market as they come in, the flood will push the market down faster. So they lose either way. What I can’t see is where the breaking point is where the banks have so much REO property in a declining market that they have little choice but to dump it all and realize the loss.

Other than not wanting to flood the market all at once, what factors keep banks from wanting to offload REO properties?

[JPJones]

I’m having trouble getting my head around the build-up of REO properties. The longer banks hold these properties in this market, the more they’ll eventually lose on the sale, right? On the flip side, if they dump every REO into the market as they come in, the flood will push the market down faster. So they lose either way. What I can’t see is where the breaking point is where the banks have so much REO property in a declining market that they have little choice but to dump it all and realize the loss.

Other than not wanting to flood the market all at once, what factors keep banks from wanting to offload REO properties?

[JPJones]

I’m having trouble getting my head around the build-up of REO properties. The longer banks hold these properties in this market, the more they’ll eventually lose on the sale, right? On the flip side, if they dump every REO into the market as they come in, the flood will push the market down faster. So they lose either way. What I can’t see is where the breaking point is where the banks have so much REO property in a declining market that they have little choice but to dump it all and realize the loss.

Other than not wanting to flood the market all at once, what factors keep banks from wanting to offload REO properties?

[Allan from Fallbrook]

I think it does have to do with trying to control the number of REOs hitting the market at once. However, at some point, the banks are not going to have a choice.

They are required to cut their losses on non- and sub-performing assets and, as most bankers will tell you, banks do not like being in the real estate business. As the number of REO properties pile up on individual balance sheets, the banks will realize that they have no choice but to bite the bullet and dump their REO portfolio.

I think there will be at least one bank that will take the lead and be the first to “fire sale” their REO portfolio and that would potentially trigger the rest.

When you look at the numbers, you are seeing tens of thousands of properties throughout the State of California that are going back to the bank. At some point, these properties will have to be unloaded by the banks. The question is when, and how, and what effect this will have on pricing.

[Allan from Fallbrook]

I think it does have to do with trying to control the number of REOs hitting the market at once. However, at some point, the banks are not going to have a choice.

They are required to cut their losses on non- and sub-performing assets and, as most bankers will tell you, banks do not like being in the real estate business. As the number of REO properties pile up on individual balance sheets, the banks will realize that they have no choice but to bite the bullet and dump their REO portfolio.

I think there will be at least one bank that will take the lead and be the first to “fire sale” their REO portfolio and that would potentially trigger the rest.

When you look at the numbers, you are seeing tens of thousands of properties throughout the State of California that are going back to the bank. At some point, these properties will have to be unloaded by the banks. The question is when, and how, and what effect this will have on pricing.

[Author]

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