The 12 Steps To Housing Recovery
Beyond reporting the numbers/charts, I didn’t comment on Case Shiller’s April home price report yesterday because I’ve covered the two most important points repeatedly in recent months. But after sleeping on it, I decided I should reiterate them:
(1) Nationally, housing is bumping along the bottom and will continue to do so.
(2) Home prices are local, period. And even Case Shiller’s “cities” are highly misleading.
On the first point, distressed sales will drive this trend. After the robo-signing foreclosure controversy blew up late 2010, banks slowed on foreclosures. Distressed sales close for less—19% less for foreclosures and 14% less for short sales according to May NAR data. So when foreclosure inventory is artificially lowered by banks pausing on foreclosures, home prices look higher because fewer distressed sales put less of a drag on pricing.
Money manager Barry Ritholtz points out that, according to April NAR data, foreclosures and short sales were down to 28% of existing home sales vs. 37% a year before (for May it was 25% vs. 31% a year before). He thinks that number will climb back up as banks resume foreclosure processing on “2.8 million Americans who are 12 months or more behind on mortgage payments.”
Yesterday, Wall Street Journal housing reporter Nick Timiraos underscored this point of fewer distressed sales helping to inflate prices by using Phoenix as an example. Distressed sales there were 44% of activity in May, down from 65% a year earlier.
And Zillow chief economist Stan Humprhies sums it up by revising his outlook to one that basically describes a bumping-along-bottom market that I think could happen for a couple more years on a national level:
“…an environment in which constrained supply (due to negative equity), together with robust demand from investors and first-time home buyers (not weighed down by negative equity), combine to create cycles of home value spikes followed by cooling periods. These cooling periods are created once local home values have risen enough to free some homeowners from negative equity at which point some of these resurfacing homeowners attempt to sell their homes, thus creating additional supply which tempers price appreciation.”
This brings us to point number two above: all pricing is local and there are always deals to be found. But Case Shiller data isn’t relevant for local decision making. Especially because of distressed sales and/or negative equity, you need to get to street-level analysis to find the good deals.
Below I’ve linked to all pieces cited in this post, including my own recent Case Shiller posts on how to price a home and how to interpret Case Shiller reports.
I jokingly closed my last Case Shiller post by rewriting step 1 of AA’s 12 steps—We admitted we were powerless over alcohol, that our lives had become unmanageable—and substituted “housing” for “alcohol.” It makes a good point about what’s been going on across the U.S. since mid-2006.
So I’ll close on that same ligher note again today … below are the full 12 Steps rewritten for recovering bank CEOs by my friend and industry colleague Ted Rood. It too makes a good point that a sustained nationwide housing recovery is complex and elusive.
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12 STEPS FOR RECOVERING BANK CEOs
by Ted Rood
Step 1: We admitted that we were powerless over housing values, that our mortgage portfolios and default rates had become unmanagable.
Step 2: We came to believe that a Federal Reserve Chairman greater than ourselves could restore our housing market to sanity.
Step 3: We made a reluctant decision to turn our origination disclosures, appraisal procedures, and loan officer compensation over to the care of Bernake as we understood him.
Step 4: We made a searching and fearless inventory of all stated, subprime, and pay option ARM loans we had written.
Step 5: We admitted to Bernake, to a congressional oversight subcommittee, and to our auditors the exact nature of our risky loans.
Step 6: We were more than entirely ready to have these loans removed from our servicing portfolios.
Step 7: We humbly asked Bernake to have the Treasury Department purchase these defective loans.
Step 8: We made a list of all borrowers we had harmed through robo-signed foreclosures, and, after protracted multistate legal action, became willing to make amends to them all.
Step 9: We made direct amends to such borrowers whenever possible, except when to do so would severely injure our earnings or reserve ratios.
Step 10: We continued to monitor our servicing portfolios, and when we found defective loans promptly admitted it.
Step 11: We sought through news conferences, intense lobbying, and congressional testimony to improve our public image and concious contact with Bernake as we understood him, hoping only for knowledge of his will for our business practices and the power to carry them out.
Step 12: Having had a spiritual and financial awakening as a result of these steps, we tried to carry the message of responsible lending to all our employees through endless mandatory training classes, and to avoid closing imperfect loans in all our offices.
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Reference:
Why Home Prices Are Rising Again-According To Case Shiller (Nick Timiraos, WSJ)
Here’s How Our Thesis On A Housing Bottom Is Changing (Stan Humphries, Zillow)
Housing Recovery Elusive As Foreclosures Creak Back To Life (Ritholtz, WashingtonPost)
No Seriously, THIS Time Housing Has Bottomed (Julian Hebron, TheBasisPoint)
How To Price A Home. Hint: It’s Not Using Case Shiller (Julian Hebron, TheBasisPoint)