This week’s Voice of San Diego article concerns wildly incorrect data in the NAR’s so-called Anti-Bubble Report for San Diego (which you can read here).
Buried in the middle of the report is this gem:
…only 3 percent of the  loans have loan-to-value ratios above 90 percent, so the foreclosure risk is rather minimal. (That is, prices would have to decline by more than 10 percent to have a measurable impact on foreclosure rates.)
At first glance, this statement appears to maintain that only 3% of 2004 San Diego homebuyers made down payments of less than 10%. Regular readers of this site know that this is categorically untrue. The correct number (per DataQuick) is that 38% of 2004 homebuyers made down payments of 10% or less. A full 27% of buyers made no down payment at all!
The other way to read this sentence is that only 3% of individual loans had LTVs over 90%. But this is irrelevant—a buyer with an 80% first mortgage and a 20% second mortgage has no loans with higher than 80% LTV… but the buyer is in the hole for 100% of the property value. The latter is, of course, the meaningful statistic when it comes to predicting foreclosures. But NAR goes on to cite this data as evidence that foreclosure risk is minimal unless home prices decline by more than 10%.
I suppose the sentence could also be read as saying that buyers who bought in 2004 have at least 10% equity now. Once again, though, it would make no sense to cite this as evidence that foreclosure risk is minimal—what about that 35% of buyers who made no down payment in 2005?
No matter how you read it, the net effect is that NAR is making a very deceptive statement. My suspicion is that it is a mistake, rather than purposeful chicanery. Unfortunately it appears to pervade all the anti-bubble reports—a quick check of the Los Angeles and Orange County reports revealed the same misinformation.
More unfortunately, NAR doesn’t seem to care. I have contacted them several times in an attempt to get them to rectify the problem, and they have completely blown me off. Considering that people may be using this information to make important decisions, it’s pretty reprehensible of an organization as influential as NAR to knowingly distribute incorrect information.
Check out the Voice article for more details.
March 16, 2006 @ 7:42 PM
The NAR statistic refers to
The NAR statistic refers to LTV, not to the CLTV. CLTV, combined loan-to-value, includes piggyback loans and home equity lines of credit. According to SMR Research Corporation, The Home Purchase Market Quarterly:
“In the nation’s largest county, Los Angeles, nearly half of all homes bought with financing in 4Q 2005 had CLTV ratios greater than 95%. Downpayments are frankly disappearing; foreclosure risk is rising.” CLTV is the combined loan-to-value, which includes 2nd loans and home equity lines of credit. The NAR loan-to-value figure conveniently excludes those second loans. Since most homeowners get two mortgages, the NAR figure is completely meaningless. The site states that all studies show that high CLTV is a measure of future risk default; thus the PMI is required when LTV is above 80%. Studies show CLTV above 90% is very significant risk, and above 95% is extremely risky. This is very interesting, and basically investors have agreed to take on an extreme level of risk when they buy loans from borrowers with 100% financing. Historically, those borrowers are going to default.
Regardless of the LTV, the main thing that is of concern, is whether folks can handle the new payment, after the interest rate adjusts and principal payments kick in.
It’s interesting what they choose to ignore!
Frank Nothaft, Chief Economist at Freddie Mac, cited serious concern of foreclosures as these adjustable rate mortgages do what their name states: adjust.
I just checked out the NAR report, which I’ve previewed before, and stopped reading, because it’s mostly lies and misinformation, and doesn’t educate me at all.
Page1: strong trends in job gains mitigate the risks from interest only and adjustable rate mortgages. NOT if the jobs are low wage and dependent on real estate.
Page 3: mortgage servicing cost/income ratio is constant since 1980, and that ratio is more important than median price/income. NOT, since today’s mortgage is most likely interest only, 100% financed, no doc, and in short, much riskier with looser lending standards. Quality of loans is reduced, risk of foreclosure is higher as these risky loans adjust over the next 2 years.
Page 4: housing shortage, strong job market. Really???
Page 5: a price decline of 5% or possible only under extremely unlikely scenarios, such as interest rates rising to 7% while 36,000 jobs are lost, or a mortgage rate of 6% with 100,000 jobs lost. NOT – we’ve had a price decline of 5% already, and interest rates are not near 7% and we still have job gains. The median price is up because lower end sales are way down, but each individual house in San Diego is selling for about 5-10% less than it would have a year ago. So we’ve reached their “extremely unlikely scenario” without losing any jobs. What will happen when half the realtors, loan officers, and contractors lose their jobs? And those low-level software coders are outsourced on top of it all?
I’m not reading the NAR report further, it’s a waste of time. NAR stands for No Accurate Reporting.
March 16, 2006 @ 10:19 PM
Good detective work by the
Good detective work by the professor (we never get anything less), and the new photo accompanying his byline is 10x more GQ than the previous one. Things are definitely styling up in Piggingtonville.
March 16, 2006 @ 11:21 PM
I wouldn’t be surprised if
I wouldn’t be surprised if the “3% of loans have LTV > 90%” comment actually refers to all outstanding loans. I have seen that macro view espoused by bulls who state that avg mortgage payment is X, which represents only 20% of income. They are including all mortgages, many of which are nearly paid off.
March 17, 2006 @ 7:38 AM
This is a little off comment
This is a little off comment from Rich’s analysis, but its too funny not to comment.
Has anyone seen the new commercials from the NAR recently. (they may not be “new”, I TIVO everything and skip commercials). The commercials speak of the NAR code of ethics and the high standards that Realors uphold. I found it quite laughable. Their code of ethics must not include providing “objective” research.
March 17, 2006 @ 8:53 AM
I’ve heard the radio ads,
I’ve heard the radio ads, and it makes you wonder: why the sudden need to advertise realtors?
March 18, 2006 @ 9:36 AM
Professor, I applaud your
Professor, I applaud your thinly veiled insinuation that the NAR is a group of lying thieves….but thats EXACTLY what they are. You took the “high road” in saying they “used the data incorrectly, could have been an honest mistake” Honest mistake ?… My a$$….its more spin and there’s a sucker born every minute, they are outright lying and intentionally I might add.
Reminds me of a textbook case of cognitive dissonance. The new buyers WANT to believe the bubble is not happening. Why ? I havent a clue ? Who wants to be the last person dumb enough to buy ?
March 18, 2006 @ 11:00 AM
The NAR needs to stop their
The NAR needs to stop their idiocy. They need to take responsibility for their research reports. If an investment bank had put out an article like this, they would most likely fall under scrutiny by the SEC or NASD. There needs to be some regulation and accountability for their reports.
March 19, 2006 @ 12:03 PM
I really do think that the
I really do think that the 3% applies to the larger pool, not just 2004. Last year’s 100% loan, or 0 equity/down- through the benefit of price appreciation (inflation) is now down to perhaps 82-85% generating an equity of 15-18%(depending of course, on locale).
All of which probably tends to overlook the fact that a large concentration of low equity positions is centered in California and a few other high-cost areas.
March 25, 2006 @ 9:06 PM
I know that most people don’t go back a few threads to look for new comments, so I want to address this one here. A few days ago, a poster had a comment regarding some info posted by the San Diego Association of Realtors. If you go to the website, you will see a box on the right hand side with the heading “NAR Economic Outlook”. You can download a 10 page PDF from there. On page 5 of the PDF, there was the stat that was in question: “However, only 3% of the loans have loan-to-value ratios over 90%, so the foreclosure risk is minimal”. The reader was bothered because they thought this number should be much higher…BUT I have very little doubt in my mind that the stat is true! WHAT?!??!? Are you kidding me?!?!?! BUT SoCalMtgGuy, YOU are the one who says people are doing lots of 100% financing…what gives?!?!?
Here is the problem. Loan-to-value (LTV) is NOT the same as combined-loan-to-value (CLTV). That stat is ONLY taking into loans that have an LTV over 90%. That stat does NOT take into account somebody that has an 80% first, and a 20% second for a 100% CLTV. The subprime industry used to do a lot of 95 and 100% 1-loan deals. These deals did not have PMI, and the borrower did not have to take on a higher rate 2nd mortgage. Yes, they paid a slightly higher rate because the LTV was high, but they could also get interest only in the full 95 or 100% of the loan, instead of just 80% had they done a combo loan.
A 100% LTV means 1 loan. A 95% LTV is not the same as an 80/15 which is 95% CLTV. An 80/20 is an 80 LTV loan and a 20 LTV loan, for a combined 100% CLTV loan.
Have I lost anybody???
Many months ago, I used to do a lot of 100% 1-loan interest-only loans. Since then, the rates have gone up dramatically as most investors do NOT want to lend 100% of the value of a property in 1-loan. They would rather do 80/20’s in case the borrower defaults, this way they will probably only lose on the 2nd lein. Most A-paper lenders will NOT do a loan over 90% LTV. They will primarily do 80/10, 80/15, or 80/20, and each of these loans will NOT fall into the 3% of loans with LTV’s of 90% or more. These loans have high CLTV’s, and first leins of 80 LTV.
The same can be said for people that might have taken out a HELOC to push their CLTV over 90%. I have seen plenty of people that put money down on their property, only to turn around months later and pull it out, or get a HELOC.
NOW, does it make sense why that statistic doesn’t mean very much. Most people don’t know the difference between LTV and CLTV…but now you do. Aren’t you glad you didn’t sleep through this?