Present-Value ?Mix-Shift? by Mark Hanson

by 09 Apr 2009
The First Available ?Forward Look? at House Price Movement - What is Present-Value ?Mix-Shift?? - Bottom-Line - CA Housing Market - Detailed Charts Highlighting CA Present-Value Mix-Shift --------------------------------------------------------------------------------------------------------------------- Housing is close to ?bottoming? but only in the headlines. The truth and the ?reported? national, statewide and MSA housing statistics are completely different stories. Most are affected by the headlines but make wise decisions and real money by knowing the facts. These new data sets highlight the facts. Based upon our research, we saw that median house prices were very close to ?bottoming? a couple of months ago. Then February California (CA) house prices did bottom as reported by DataQuick on March 19th ( When the national February Existing Home Sales headlines are released the week of March 22nd they should also show a much smaller fall in median prices than February?s number did -- perhaps even a leveling out of prices at least in the entire Western Region. But this does not mean the housing market is improving. On the contrary, due to most of the existing sales are resulting from the foreclosure stock, it means conditions are worsening in the mid-to-upper end. What is Present-Value ?Mix-Shift? Our research is based upon mortgage defaults and foreclosures. Defaults are a very leading indicator of ?everything housing? while actual foreclosures ? a byproduct of defaults ? have more of an immediate impact on supply and prices. For months I have been closely watching all loan defaults and foreclosures for a shift in the loan-level detail ? specific loan types, loan amounts and UPB?s. My thought was that when higher paper grades/loan amounts go through their respective ?implosions? and the higher value property values attached to the loans resell, it will push up median prices and cause the housing head-fake of the century. Although the housing implosion did swim up-stream in 2008, average original deed-of-trust amounts on defaults and foreclosures did not rise that much throughout the year; certainly not enough to offset the house-price depreciation. With most of the foreclosure-related sales being from the lower-priced Subprime stock, median values have been pushed down fast. We have yet to see large numbers of higher original loan amounts/paper grades make it all the way through the foreclosure and resale process due to the lengthy foreclosure timeline. From the time a borrower gets a Notice-of-Default -- after three to four months of missed payments -- to the time the home is taken back at foreclosure can be seven to ten months. Then, the resale cycle can take another three to six months. Therefore, a foreclosure-related resale that goes off today may have been from a first payment missed in 2007 ? the heart of the Subprime crisis. Because of this, most have not been able to catch much of a glimpse of anything in the ?default and foreclosure mix? that would push up house prices, especially if it is looking at specific loan-level detail as I had been. At present -- in California and most other bubble states ? the majority of total sales are foreclosure-related with organic sales (Ma and Pa Homeowner) being at the lowest levels on record. In my opinion, organic sales are one of the most important metrics of the true health of the housing market but that is for a different story. It is the massive group of foreclosures and subsequent REO resales that most influence future median house prices. Never before in history have we seen the majority of properties for sale being controlled by so few entities ? the banks and servicers. Epidemic Negative Equity Epidemic negative equity is another reason why looking to loan-level detail for a mix-shift comes up short. With present values down so much and depreciation so volatile from city to city, loan level detail is virtually useless. In its latest CA monthly foreclosure report our data partner -- ForeclosureRadar -- highlighted the problem: ?the average property sold at auction in Feb had $201,052 in negative equity, based on an average value of $250,030, $422,349 in loans, and an additional $28,733 in negative amortization, interest and fees. The average foreclosure a year ago had $69,529 in negative equity, based on a value of $378,578, loans totaling $423,111 and negative amortization, interest and fees or $24,997.? Rise in Prices will be caused by More Higher-end Foreclosures Despite positive, potentially market-moving headlines about the end of the housing crisis that may accompany a ?reported? median house price stabilization or slight move higher -- ultimately it will be caused by a collapse in higher-priced properties going through their respective ?implosions?. Obviously, on a macro-economic level this is a very bad thing. The consequences of body-slamming the mid-to-upper end earner/homeowner at this point in the economy?s fragile state are unknowable. Bottom Line - The present value of the massive pool of properties in the foreclosure process -- that make up 60% of total sales in California ? most influence reported median house prices. Therefore, tracking the real-time present value of properties throughout all stages of the foreclosure process should be the best indicator of future reported house prices near and long-term. As the foreclosure mix shifts to mid-to-upper end houses presently in the foreclosure pipeline, it will push up reported median house prices making is seem as the market is bottoming. California Housing Market - Detailed Charts Highlighting Present-Value Mix-Shift The following reports show average present values of California properties at specific foreclosure stages highlighting the REO stage as the most important. When the bank buys the property back at the courthouse steps, which happens in the majority of cases, it goes into the REO resale pool and is sold through a real estate agent. This counts as a comparable sale and effects similar house prices in the appraisal zone. The reports below are California statewide but can be sliced and diced down to MSA or even street level giving a much clearer picture of future house prices for specific purposes. REO - Most Important Stage - The chart below shows the monthly aggregate average present value of all actual foreclosures that have become REO. Present values of properties at this stage are still falling especially in the lower value tranches, but at a much slower pace ? this is due to more mid-to-upper end houses entering the mix. From here, these properties may go straight to the Realtor network and be only one to six months away from final resale. With virtually flat pricing for the past four months, this likely portends at least a temporary fall in median house prices in the state of California. Properties in this foreclosure stage will have the most impact on house prices in the near-term. The following chart cuts all foreclosures into multiple present value tranches in order to track more closely, exactly what is happening within the mix. The percentages on the left side of the chart clearly show the mix-shift of property values entering the resale stream over time. The lower value tranche(s) is still expanding which will have the effect of pushing down median house prices. With the sales cycle anywhere from one to six months, this gives a great forward indication of the direction of reported median house prices. NOTICE-OF-DEFAULT ? Very Leading Indicator Stage: The chart below shows the monthly aggregate average present value of all Notice-of-Defaults (NOD) ? the first foreclosure stage. Prices are rising for the first time due to higher priced homes entering the stream. This may be the earliest look available of ?present value mix-shift? as the average price here is 10 percent higher than at the REO stage shown previously. But from here the properties are five to seven months away from foreclosure and perhaps over a year away from being resold to a private party. Properties in this stage of foreclosure will not have any impact on house prices in the near-term. The following chart cuts all Notice-of-Defaults into multiple present value tranches in order to track exactly what is happening within the mix. At the NOD phase the mid-to-upper end present value tranches are now expanding. Mark Hanson is a 20-year mortgage banking veteran, specializing in wholesale and correspondent sales and sales/operations management and bringing financial institutions into new lending markets. For more information in our default/foreclosure related research including real-time mortgage default, foreclosure and loss tracking across large-named publicly traded companies please email Hanson at the address below. Analysis by Mark Hanson, Field Check Group Real Estate & Finance Data in partnership with


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