Read It All Here: Gary Watts' Mid-Year 2007 Report--Foreclosures, The Media, The Subprime Market and Where It's Going

"I am holding to my original forecast for this year. I knew the 1st and maybe the 2nd quarter would be a rough one. I think the Fed will cut the interest rates later this year, and home prices will begin to firm up and even appreciate in the fall, especially as we head to 2008 and the election year!" Gary Watts.
Mid-Year Real Estate Update By Gary Watts, Orange County Economist, Real Estate Broker:

"I. Three Decades of Real Estate

A. It was 36 years ago, after graduating with a degree in Economics and advanced studies in psychology, that I landed a job (during a recession) as a salesman at a television and appliance store in a new community called El Toro, California. One Saturday morning, a real estate agent “floated” into the store. I asked him why he was so happy. He replied, “Yesterday I closed my biggest deal ever. I sold an oceanfront home in San Clemente for $28,000!

1. Loans were at 7% that year. Today they are 6.33%. I have seen 3 recessions, 3 recoveries and a year when lenders had absolutely no money to lend. I have seen an inflation rate of2l%, home loans at 18% and worked through a 15 year period of double-digit interest rates for home loans. Today, we are within 1% of a 40-year low for home loans.

2. Before beginning my career in real estate, the experts like those in Business Week in 1969 said: “The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000.”

3. Six years after getting into the business (1977), National Business magazine said: “The median price of a home today is approaching $50,000 ... housing experts predict price rises in the future won’t be that great”

4. I remember in the early ‘80’s a seller telling me that he had owned a lot of real estate for a long time but the glory days were over and we would never see price increases like in the past. Maybe he was reading Money Magazine in 1985 when they reported: “The golden-age of risk free run-ups in home prices is gone.”

5. My all-time favorite was when the San Francisco Examiner said in 1996: “A home is where the bad investment is.”

B. Since the Early 1990’s

1. The early ‘90’s was the only time in my 36 years that the median home price here in Orange County declined. Over those 6 years, the median home price declined 19.33% or a yearly decline of only 3.22%.

2. However, it only took the following two years to erase almost the entire loss, and before the decade ended, real estate had gone up 37 ~6% -almost twice the decline of the previous 6 years!

3. Since 2000, homes have appreciated over 100%!4. If I add up the appreciation rates for each of the 4 decades here in Orange County, the 37-year average comes to 14.9% yearly!

II. The Media

A. Today’s media plays up bad economic news now more than ever, which leads to misconceptions about economic realty.

B. And since our potential buyers and/or sellers have greater access to this mis­information, it is more important than ever for all of us (as real estate professionals) to be well informed.

C. Historically, housing downturns last only 27 months, and if you begin counting from late 2005, we are in the 20th month. Maybe, just maybe, the end is in site!

1. Since the 2005 downturn, our home prices are still on the positive side.

2. If we take just the past 12 months, our resale homes are down 0.07% from May of last year, while condos are down only 1.6%.3. The condo market has been most affected by the sub-prime issues; these effects are quickly disappearing.

III. The Sub-Prime Market

A. The worst is over, which helps explain why the sub-prime loan problems have almost left the front pages of the media. It might surprise you and your clients to know that only 1/2 of 1% of all loans in the U.S. are sub-prime!

1. These exotic loans became a major influence in the early 2000s. but anyone obtaining them up through 2004 had very few problems due to rapid equity growth. Many with no-money-down purchases soon found they had 20% (+) equity within a year or two!

2. So most of the problems were with the loans that originated in 2005 and2006. During that time, they represented approximately 23% of all loansbeing funded.

3. In Orange County, 2005 was our peak sub-prime funding year. Yet these loans represented only 20.9% of all the mortgages funded that year.

4. Today, sub-prime lenders that need to sell their loans are liquidating their paper for $.96 on the dollar.

5. For some of the banks that provided the sub-prime money:
a. Bear Sterns 1St quarter profit slipped to $361.7 million.
b. Morgan Stanley (holding $5.2 billion in sub-prime loans) had a 60% jump in earnings.
c. Goldman Saks earned $2.33 billion in the past year.

B. The media will still report about massive delinquencies and huge foreclosures in the sub-prime market but those reports will not be accurate.

IV. Delinquencies vs. Notices of Default vs. Foreclosures

A. Delinquencies cover any missed payment — even if it is just one month, it gets reported as a delinquency.

1. The delinquency rate on sub-prime loans is running 13.77%, which is up13.44% from the previous year.
2. The delinquency rate on prime loans is only 2.57%.3. Combining the two rates with the loan volume gives you a delinquency rate in the U.S. for all loans of 4.84%. The record low is 4.0%.4. California’s delinquency rate is 3.25%.

B. Notices of Default are filed when lenders’ loans have been delinquent for a specific period of time. These loans begin the foreclosure process. The four states of California, Florida, Nevada and Arizona currently have the largest amount of loans in the foreclosure process. Yet, in their 1st Quarter, 24 states saw a decline in foreclosure starts!

1. Only 3.23% of all sub-prime loans have entered the foreclosure process, with most of the defaults occurring on loans from Jan. 2005 to Feb 2006.
2. Only 1.28% of all 1st Quarter of 2007 saw 46,760 Notices of Default filed by lenders. California has 8.2 million homes and condos with 5.6 million mortgages. Therefore, in the 1st Quarter of this year, only 0.008% of all mortgages entered the foreclosure process for the quarter.
4. The all time record for filings was the 1st Quarter of 1996, with 59,987 notices filed. However, since then, California has built almost 2 million more homes, so the percentage of Notices of Default is still very low!

C. Foreclosures occur when the buyer has been unsuccessful in curing the debt and either a lender or an investor has acquired the property.
1. For sub-prime loans, 68% of the buyers are able to prevent the foreclosure by either refinancing the property or successfully selling their home.
2. For prime loans, the foreclosure rate is 0.86%. Last year, the U.S. saw a combined foreclosure rate of only 1.09%!
3. During 2006, California saw a foreclosure rate of only 1.17%!
4. Last year in Orange County, 5,680 defaults resulted in 697 foreclosures. This means only 12.2% of the defaulting homeowners actually went to foreclosure. We could also say that 87.8% were successful in either selling or refinancing their properties. This rate is below our 17-year average. Of that 12.2% of defaulting homeowners, only 38% of them experienced an actual loss at the sale!

D. A final note about foreclosures: The #1 reason they occurred was due to fraud. The # 2 reason was unethical lending, followed by #3 - loss of job, and finally #4 was medical reasons. By the way, the mortgage insurers are in a good position to cover losses at these (high) levels.

V. The Orange County Real Estate Market

A. There is no doubt that this market has its challenges, but for those of us who have been in the business for many years, this market, although weak, is so much stronger than during previous market downturns.
1. Orange County has the 2nd lowest unemployment rate in the State.
2. Labor analysts forecasted our job growth at l%, but it ended the year at 2% with a total of 29,100 new jobs created.
3. This has helped prices (for the most part) to remain neutral.
4. The wealth of this County is quite incredible and it will continue to keep the local economy growing.
5. Last year, our population increased by 21,200 people.

B. Sales:
1. Home sales are down by 24.8% and condo sales are down by 40.9%.
2. If you remove the flippers and speculators, and have fewer investors and second home purchasers, one can easily see why sales are down.
3. Year to date we are at 13, 336 total sales. If we stay at this pace, we will have sales of 32,006, which is 10% below last year’s sales.
4. Outlook: stronger sales for the later half of the year equaling or surpassing last year’s total sales.

C. Listings:
1. Last year our listing inventory grew, from the beginning of the year to the peak summer months, in excess of 100%!
2. This year, our listing inventory has grown by only 50%!
3. As of two weeks ago, there were only 209 bank owned properties in our MLS, which represents 0.013% of our inventory — not enough to put pressure on the housing market.
4. Although foreclosures may triple this year, this amount will still not be enough to hurt the housing market.

D. Forecast

I am holding to my original forecast for this year. I knew the 1st and maybe the 2nd quarter would be a rough one. I think the Fed will cut the interest rates later this year, and home prices will begin to firm up and even appreciate in the fall, especially as we head to 2008 and the election year!

Please remember that every decade someone thinks the housing market will collapse. Every decade someone wants to tell you that housing appreciation is over, but in my 36 years of meeting people, I never have met a person who regretted buying their first home!"

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