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Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

With all the discussion about the doubling of the foreclosure rate last month as compared to the prior month (based on RealtyTrac‘s stats), then it would follow that sub-prime resets are something to look at. David Berson of Fannie Mae, in his weekly column, took a close look at the numbers. [Note: Berson’s link lasts one week. On or after 5/25/07, go here and search for his 5/18/07 post.]

The 2006 loan status is a good summary because all those products have reset. 76% were paid off and 12% continue to be paid at the higher rate (88% in good shape). 10% are under some sort of stress. The 2007 are really too soon to rely on because this data is only through the 1st quarter. However the stressed loans (excluding payoffs and current) are nearly double the rate of last year at 18%.

This is probably something to worry about because mortgage rates are currently rising which will add to the stress level.

Tags: Fannie Mae, Getting Graphic, Bankrate.com, Sub-Prime

1 Comment

Weakness in the national housing market hasn’t really hit the banking sector results yet, or so it would appear to be the case. Here are a few thoughts:

Banking Profits/Credit Quality
On Friday the Federal Deposit Insurance Corp (FDIC) announced that banks and thrifts reported record earnings in 2006, the sixth yearly increase in a row. The FDIC is an independent agency of the federal government created to maintain public confidence in the banking system.

However, credit quality of mortgage loans has fallen as evidenced by the increase in mortgages that are more than 90 days delinquent and the increase in charge-offs.

Residential mortgage loans that were noncurrent (90 days or more past due or in nonaccrual status) increased by $3.1 billion (15.6 percent) during the fourth quarter. This increase followed a $974 million (5.2 percent) increase in the third quarter. Net charge-offs of residential mortgage loans totaled $888 million in the fourth quarter, a three-year high.

Exotic Mortgages
Even negative amortization adjustable rate mortgage (NegAm ARM) delinquencies, the universally loathed and blamed mortgage product of all that is bad with mortgage lending these days (excluding subprime) has remained relatively low so far. The risk of their delinquencies may rise as housing prices fall, especially since these products were more popular in markets that saw the largest levels of appreciation. Its a little premature to attribute the lack of significant problems with these types of loan products as a sign that they really weren’t a big problem to begin with.

Foreclosures
According to RealtyTrac, foreclosures are clearly on the rise. January 2007 versus 2006 saw an increase of 25%. A scary number but percentages can be a little misleading since the hard numbers are not presented as a percentage of the total mortgages outstanding. According to the Mortgage Bankers Association, the December 2006 total delinquency rate was 4.67%, which is not high by historical standards. The largest portion came from subprime loans. However, delinquency is a broader definition than foreclosure, but for argument’s sake, its getting worse.

Click here for full sized graphic.

Risk Assessment
One of the problems with mortgage underwriting during the housing boom was the lack of understanding of risk. Automation and detachment from the collateral itself allowed lending institutions to marginalize the risk, perhaps by pushing it off onto theoretically unaware secondary market investors.

One of my favorite, go-go 1980’s books was Liars’ Poker by Michael Lewis (along with Barbarians at the Gate: The Fall of RJR Nabisco and Den of Thieves).

One of the stars of Liar’s Poker was Lewis Ranieri who helped invent the mortgage backed securities concept – selling bonds tied to mortgages was part of an excellent James Hagerty piece in the WSJ on Saturday called [Mortgage-Bond Pioneer Dislikes What He Sees [WSJ]](http://online.wsj.com/article/SB117227957162518036-search.html?KEYWORDS=ranieri&COLLECTION=wsjie/6month).

Ranieri and his colleagues in the late 1980’s (thoughts of my Liar’s Poker readings included them bragging about having more powerboats than polyester suits and how they ate onion cheeseburgers for breakfast) combined

regular mortgages into giant pools of loans that could be divided up and resold as bonds to pension funds and other institutional investors. These bonds come with a variety of credit ratings and are repackaged in endless permutations to meet investors’ varying appetites for risk.

Ranieri’s current assessment of the problem is that today’s investors don’t understand the risk because the expansion of offerings has changed dramatically in recent years and they don’t have the historical perspective.

The problem, he says, is that in the past few years the business has changed so much that if the U.S. housing market takes another lurch downward, no one will know where all the bodies are buried. “I don’t know how to understand the ripple effects through the system today,”

One of the reasons, has been the meteoric rise in collateralized debt obligations, or CDO’s which are sort of like mutual funds for mortgage securities investors who want to spread their risk. The problem is that he says that buyers of the debt don’t understand the risk like secondary market investors do because they don’t have access to the same level of information.

Take away:
Its ok to work hard for profits, and banks have every right to do that. In fact its their responsibility. However, its also their responsibility to understand the risks that are out there. Mortgage lending played a significant role in the housing boom. I am not confident that the banking industry can remain impervious to the by-product of the aggressive lending we’ve seen in recent years, characterized by the don’t ask, don’t tell mentality. I am surprised that more attention hasn’t been placed on the risks in the mortgage collateral pool (note: faulty valuation of assets).

There hasn’t been enough time for the housing slow down to affect banking’s bottom line yet. We are starting to see signs of weakness in terms of rising foreclosures and noncurrent loans. However, I wonder if there is greater long term risk associated with the lack of understanding of the risks themselves, or simply greater demand for a good polyster suit with cheeseburger grease stains.

Tags: Fannie Mae, FDIC, Sub-Prime

2 Comments

Priceless…

I got the idea for this post after trading emails with David Leonhardt of the New York Times the other day as he worked in his interesting Economix column: [The Hidden Truth About Home Prices [NYT]](http://www.nytimes.com/2006/12/06/business/06leonhardt.html) and the companion article [More on Housing Prices [NYT]](http://www.nytimes.com/2006/12/05/business/06leonhardt-side.html?_r=1&oref=slogin)

Its very difficult for most consumers, government officials, academia and real estate professionals to get a real world gauge on how a real estate market is actually doing. Tried and true methods all seem to have some sort of flaw and when a market is in transtion, the changes become even more pronounced. And then throw in the source of the information, with the presence of spin, makes the effort even more daunting. Those covering the market, whether it be Big Media and the blogosphere tend to gravitate towards whatever is released that day.

There are two schools of thought on housing stats:

• Price indexes– These are generally based on repeat sales of the same property over time or an aggregate analysis of housing prices, with some adjusted for seasonal changes and/or inflation.
  
• Housing prices – These results are based on an aggregate summary of the sales that transferred during the period and can be skewed by the mix.

You’ve got producers of indexes telling you that prices are less meaningful, yet users of the indexes often view them as a “black box” and don’t grasp how the information was calculated (do we hear “seasonally adjusted?”) Indexes tend to be created for macro markets because the data set needs to be large. Cycnicism has been a detriment to reliance on indexes.

Those that rely on housing prices tout that they are the real thing yet most resources for housing prices tend to be non-economist types, trade groups and real estate firms, because they tend to be easier to generate and report than an index. There are a growing number of market studies put out in the public domain by local real estate brokers and agents (and of course, appraisers) to try to bridge the gap between the national stats and local markets. However these reports are often limited by the size of the data, limited understanding of what the data really means and are clouded by their intentions.

There are generally four sources of housing stat interpretation:

• Government – namely Commerce/Census/OFHEO
  
• Economists – Chicago Mercantile Exchange (Shiller) and other “Starconomists” like Roubini, Zandi (Moody’s) and others.
  
• Real estate brokerage trade groups and firms – The National Association of Realtors (NAR) is the primary source of information on national housing and local brokerage firms. Regional MLS systems and brokerage firms are the other primary provider.
  
• Online services like [Zillow.com](http://www.zillow.com/), [RealtyTrac](http://www.realtytrac.com/), [ZipRealty](http://www.ziprealty.com/index.jsp) release housing stats but generally don’t provide historical trends to include for perspective.
• Real estate appraisers, consultants and analysts I would fall into this category as well as other housing stats from other markets presented on Matrix. We tend to relay on actual housing prices and interpret them without the trade group or incentivized spin, but its not without its faults either. The data is generally influenced by mix of housing stock that sells so its important that this group bridges the gap between the results and actual conditions.
  

Local, National and Internet:

• National housing stats are reported religiously by nearly all national media outlets yet don’t have a link to local markets. What happens in a neighborhood may or may not comparable to national markets and if the results are consistent, its really coincidence. NAR has touted national housing stats as an argument for real estate as a good investment but it doesn’t reflect local volatility.
  
• Local housing markets tend to have smaller data sets and are more affected by the mix of what sells. They can have a powerful affect on local moods but are often written by marketing departments as public relations pieces for trade groups and firms with a vested interest in the results and how it affects the bottom line.
  
• Internet is an important delivery mechanism for real estate stats, but are often less thought out than traditional sources because many producers of this information don’t have direct real estate experience, but rather have online experience from other industries. This isn’t necessarily a bad thing, because bad habits and bias may not be developed but often, inappropriate uses of month over month stats exagerate certain market conditions.

Pitfalls and/or spins betrays most sources:

• New home sales – Government stat quality is suspect and not necessarily unbiased. You just have to take a look at the widely quoted housing stats like [New Home Sales from the US Commerce Department [pdf]](http://www.census.gov/const/newressales.pdf). You just have to read an excerpt from the October release to see what I mean: This is 3.2 percent (±11.2%)* below the revised September rate of 1,037,000, and is 25.4 percent (±10.0%) below the October 2005 estimate of 1,346,000.
• Median sales price ([National Association of Realtors](http://www.realtor.com)) – There is an emphasis on the national numbers in their series of reports on new and existing home sales. They do break up the country into quadrants, but all real estate is local. They have such an opportunity to gain the public trust but usually provide hard spin to the results and are very inconsistent in the commentary from month to month.
• Sales price index ([OFHEO](http://www.ofheo.gov)) – The median sales price includes refinance data and excludes sales with non-conforming loans (mortgages greater than $400,000).
• Housing price index ([Chicago Mercantile Exchange](http://www.cme.com/)) – Robert Shiller’s repeat sale index lags the market by about 4 months and is targeted towards investors, not consumers. Trading volume is growing but is still too small to really provide a sense of market direction.

Since all politics real estate is local, but reporting of larger data sets is easier but less relevant, its very difficult for the consumer of real estate market information to know what, in fact, the truth is.

At the end of the day, real estate truth is open to interpretation.

Tags: Robert Shiller, Zillow, Commerce Dept, OFHEO, Census, Realtor.com, NAR, National Association of Realtors

Comments Off on Home Prices: To Tell The Truth, The Whole Truth And Nothing But the Truth (Sort Of)

[CNN/Money’s Business 2.0](http://money.cnn.com/magazines/business2/) has several top 10 city ranking features that are kind of fun to read about. I can’t figure out why we would be curious about a top ten list. After reading a feature like the top ten places to live, do we pack up and move there? Do we call our parents and thank them or give them a hard time for making it our home? Or is it more reassurance that we are living in the right place or simply affirmation that we made a terrible error?

Top 10 cities: Where to buy now
The real estate slump could get worse before it gets better. But these 10 markets offer great opportunities for those who have the patience to buy and hold.

1. Panama City, FL
   
2. Vero Beach, FL
   
3. Bridgeport, CT
   
4. Lakeland, FL
   
5. McAllen, TX
   
6. San Luis Obispo, CA
   
7. Wilmington, NC
   
8. Manchester, NH
   
9. Fort Collins, CO
   
10. Atlanta, GA
    

Comment: I don’t see how Florida would have 3 of the top 4 cities to invest in with all the indicators of overheating.

[Where not to buy](http://money.cnn.com/popups/2006/biz2/newrules_wherenot/index.html)
_These 10 overvalued cities have run their course, and home prices are expected to drop over the next year._

1. Stockton, CA
   
2. Merced, CA
   
3. Reno/Sparks, NV
   
4. Fresno, CA
   
5. Vallejo/Fairfield, CA
   
6. Las Vegas, NV
   
7. Bakersfield, CA
   
8. Sacramento, CA
   
9. Washington, DC
   
10. Tucson, AZ
    

Comment: Six locations in California made the grade and the rest have reputations for high investor concentrations.

[Bubble-proof markets](http://money.cnn.com/popups/2006/biz2/newrules_bubbleproof/index.html)
_Short-term price drops are possible. But healthy economies and rising incomes will support these “superstar cities” over the long run._

1. Boston
   
2. San Francisco
   
3. New York
   
4. Los Angeles
   
5. Seattle
   

Comment: With the inventory overhang in Boston and LA, I am not sure why they make the grade. The rest seem reasonable choices relative to the remainder of the country. San Fran, New York and Seattle are characterized by low speculation and solid economies. Missing 6-10.

[Top 10 foreclosure markets](http://money.cnn.com/popups/2006/biz2/newrules_foreclosure/index.html)
_Where the action is – highest portion of households in foreclosure, from RealtyTrac._

1. Greeley, CO
   
2. Detroit, MI
   
3. Miami, FL
   
4. Indianapolis, IN
   
5. Ft Lauderdale, FL
   
6. Denver, CO
   
7. Dayton, OH
   
8. Dallas, TX
   
9. Fort Worth, TX
   
10. Atlanta, GA
    

Comment: With the exception of Florida and Georgia, all locations are not located near the coasts. The Midwest is seeing the auto industry struggle which is affecting employment. These Florida markets have heavy investor concentrations.

5 Comments

Source: Wachovia

According to the recent press release by the Mortgage Bankers Association [Some Delinquency Measures Tick Upwards in Latest MBA National Delinquency Survey](http://www.mortgagebankers.org/NewsandMedia/PressCenter/44582.htm):

2Q 06 delinquency rates fell 2 basis points to 4.39% from 1Q 06 and were up 5 basis points from 2Q 05. The decline from the prior quarter was attributed to the surge in delinquency after Hurricane Katrina.

“In previous quarters we indicated a number of factors including the aging of the loan portfolio, increasing short-term interest rates, and high energy prices have been putting upward pressure on delinquency rates. To this point, generally healthy economic growth and labor markets have kept delinquency rates from rising. However, we are seeing increases in delinquency rates for subprime loans, particularly for subprime ARMs. It is not surprising that subprime borrowers are more susceptible to these changes.”

Foreclosure rates, the next stage of the delinquency process were 0.99% in 2Q 06 up from 0.98% in the prior quarter. The RealtyTrac foreclosure rates that are released each month [infer much higher foreclosure levels](http://matrix.millersamuel.com/?p=852) which I discussed in an earlier post. Overall foreclosure rates are still considered low but a weakening economy is bringing additional concerns.

Source: Wachovia

[A Wachovia Corporation Economics Group report [pdf]](http://mediaserver.fxstreet.com/Reports/df0150b8-eddf-4233-8d92-3c0995725393/4aa167ab-6aaa-4d72-a334-6ddd55ae9638.pdf) (via [FXstreet](http://www.fxstreet.com/fundamental/economic-indicators/us-mortgage-delinquencies-low-but-trouble-lurking/2006-09-18.html)) suggests that the delinquencies are concentrated in a few states yet the projected income growth in these states is above the national average. The article suggests that the growth in income will temper some of the problems as mortgage rates reset over the next 12-18 months. Since the delinquencies seem to correlate in markets known for investor and flipping purposes, the numbers don’t show a national problem, yet.

In David Berson’s weekly commentary post, he wonders [Mortgage Delinquencies remain low, but will they stay that way? [FNMA]](http://www.fanniemae.com/media/berson/weekly/index.jhtml)

First of all, the behavior of home prices is an important determinant of serious delinquency rates. If a household has enough equity in a home it could either sell the home or extract some equity, so a delinquency resulting from a negative shock to a household (e.g., job loss, serious illness, etc.) should not lead to a foreclosure. The rapid home price growth seen over the past few years in much of the country should mitigate the risk of foreclosure. However, we expect national home price appreciation to slow this year and next, and some areas of the country could see declines. In those areas, a decline in home prices could leave some households with a mortgage balance significantly in excess of the value of the home. Increases in interest rates that would cause payments on adjustable-rate mortgages (ARMs) to rise sharply relative to incomes could also lead to increases in the serious delinquency rate. While only about 30 percent of prime conventional mortgage originations last year were ARMs, the ARM share was significantly higher in the subprime market. Many of these subprime ARMs have short fixed-rate periods and will be adjusting in the next year, which could lead to rising serious delinquency rates.

[Note: Berson’s link lasts one week. After 9/24/06, go here and search for his 9/18/06 post.](http://www.fanniemae.com/media/berson/weekly/archive/index.jhtml;jsessionid=GQATCTK1I5SX1J2FQSHSFGI?p=Media)

I think the overall problems related to the mortgage delinquency rate will be strongly influenced by how quickly mortgage rates move upward. Right now mortgage rates are projected to be stable as the economy continues to weaken and inflation is held in check. However, mortgage rates are already higher than when many adjustable rate mortgages (approximately 30% of the all mortgages) were issued.

Rising personal incomes may serve to contain the problem since the areas with the highest real estate investor concentrations are located in areas with the largest personal income upside. I wonder if good job prospects in these areas helped fuel the speculative characteristics of local markets.

Tags: Hurricane, Hurricane Katrina, Sub-Prime

1 Comment

This week, there was no hot air in the Zeppelin commentary. In fact it was so heavy, I don’t think it got off the ground. Here’s a sample:

• It’s interesting reading everyone talk about the inpact of interest rates on the slowing real estate market. “Rates when up .24356, that’s why real estate is slowing” etc. That is nothing! I live in Florida. I paid $3500 for my home owners policy last year. I thought that was too high. I just got my renewal notice. My new premium is $12,500! That’s an increase of $700 per month! Florida and the coastal areas of the US are in a free fall in property values as it is. This new wave of insurance hikes will be a disaster for coastal property values!

• Are you allowed to say “in a gentrifying area”?

• I have come to belive all news is presented in the most negative light possible, especially news about the economy. I have also come to believe that most people who post comments to blogs or news stories want the sky to be falling (I don’t know why – but it appears to be the case). I expect that you will be bashed for trying to “keep it in perspective”. [as I suspected, Matrix readers didn’t do that – Jonathan]

• We can strip away all the information overload and focus in to what real estate pricing is all about which is simply supply and demand.

• You definitely pinpointed the limited usefulness of the RealtyTrac report in that the comparison should be to the national housing stock that has mortgages. That’s exactly what the Mortgage Bankers Association did in a survey out today, which puts the foreclosure rate for the second quarter at .99 percent — up 1 basis point from last quarter, but down 1 basis point from the same quarter last year. If you have a lot more people taking out loans, as they did in the boom years, the (raw) number of foreclosures is naturally going to go up, even if people are just continuing to default at the same old rate. The real question is what’s the number of homes in foreclosure as a percentage of all loans. The MBA survey did show a pretty good bump in the number of delinquencies on subprime and FHA loans, however (and even prime ARMs), but chief economist Doug Duncan said he doesn’t expect “order of magnitude” increase in delinquencies next year. Companies like RealtyTrac are in the business of selling info about foreclosed properties to investors, and maybe the raw numbers mean something to that crowd — like more opportunities to cash in on others’ misfortunes. Which doesn’t mean their numbers aren’t true. They just, as you say, lack perspective.

• Here in Southern California, foreclosures (Notice of Defaults, actually) are sky-rocketing. In the first year of this housing market down cycle, the monthly number of NODs is already nearing the worst monthly levels of the 1990’s housing market down cycle. Yes, this is perspective. This is going to get very ugly before the sun starts to rise again.

• Now that you mention it, Lereah has been MIA for the NAR — hadn’t noticed that. Stevens tenure is about to end, so we soon won’t have him to kick around any more. But let’s give it one more shot. The Washington Post carried a piece last Saturday about (essentially) NAR President Stevens getting caught in the market … um … correction. “his old house in Great Falls has now been on the market for a year at the price of $1.45 million.”What I should have done,” confessed the senior vice president of NRT Inc., parent of Coldwell Banker Residential Brokerage, “was listened to my agent and cut the price by $50,000 to $100,000 early on, and the property would have sold last October.” Or, even better, he said, “I should have listed it a month earlier,” when the market was only just beginning to lose air.” [And on, and on he goes.](http://www.washingtonpost.com/wp-dyn/content/article/2006/09/08/AR2006090800760.html) I don’t know what average days on the market is in the DC area, but I bet it is less than 365. And Stevens hasn’t sold yet…

• I was under the impression that prior to the impending bonuses of 2006, 2005 was also a record year. However, it didn’t seem to do all that much for housing – maybe in the luxury/ultra luxury area, but not overall. We still had a lousy spring. So I can’t see why that would change this year, with inventory so much higher. Besides, don’t all those rich guys own by now?

• New York’s economy is strong, and people are pouring in. In the short run, therefore, any price decrease would be the result of prices being too high relative to income to being with, and nothing else. I think that may happen. Next year, however, it may also be that weakness in the housing market elsewhere causes weakness in the economy elsewhere and weakness in the stock market, working its way back to NYC. Bonuses will be at record levels this year, but Crains reported on Monday Wall Street’s three-year bull-run is losing steam. “After a terrific first half, earnings are expected to fall 40% in the second half…The slowdown is hitting virtually every trade plied on Wall Street. Stock and bond underwriting volume plunged nearly 50% in the summer quarter compared with a year earlier. The hugely lucrative businesses of advising on corporate mergers and taking companies public are also slumping.” Perhaps, with a slowdown coming, those high flying finanical geniuses won’t blow their bonuses this time around. Naaaah.

• But you DON’T have perspective until you can answer the question, “What is the impact of NODs (or foreclosures) on the market?” Are they affecting inventory? By how much? What other pressures are there on inventory? The RealtyTrac survey reports 12,506 California homes entered into foreclosure in August — up 25 percent from July and 160 percent from the year before. That sounds pretty serious, right? Well, maybe not if foreclosures were at historic lows. Maybe not if some 500,000 homes change hands in the state every year. Which is not to say that the market’s not soft, especially in particular areas. Inventory in the state is up — CAR puts it at 7.5 months in July, versus 2.9 months same time last year. But what is causing inventory to rise? Is it because more homes are going into foreclosure, or because houses are just sitting on the market because they are overpriced? The bottom line is that the raw number of foreclosures, by itself, doesn’t tell you that much about supply and demand.

Tags: FHA, Wall Street Bonus, David Duncan, Sub-Prime

Comments Off on [Matrix Zeppelin Series] Coastal, Gentrifying, Negative Light, Overload, Raw Numbers, Get Ugly, Lereah Is MIA, Bonuses, Slowdown Coming, Going Into Foreclosure

In Les Christie’s article [Foreclosures spiked in August [CNN/Money]](http://money.cnn.com/2006/09/13/real_estate/foreclosures_spiking/index.htm?postversion=2006091305) foreclosures are beginning to be a worry. According to Realty Trac, 115,292 properties went into foreclosure in the month of August, up 53% from last year. Florida saw the highest year over year change in the nation at 62%.

The takeaway here is that foreclosures are way up on a percentage basis and the market is looking at a large number of mortgage rate resets this year. Actually mortgage resets will probably be a way of life for the real estate economy and not a new phenomenon anymore if mortgage rates trend up further or remain where there are since they are still above levels of a few years ago.

While this sounds like a lot of foreclosures and it seems scary, the numbers still need some perspective. Realtytrac provides a great service but since it is only a few years old they don’t seem to have historical data beyond a few years ago. In other words, I want to know how these numbers compare to the last couple of recessions, rather than to last month or last year.

So do the August foreclosure numbers seem large? Not really.

The National Association of Realtors’s existing home sales and new home sale stats total about 7 million homes. With 11,292 forclosures nationally for August or 135,504 annually, thats about 1.9% of all homes sold this year would be in foreclosure.

Since the 1.9% figure I estimated is only based on 1 year’s worth of sales, and assumes that no sales from any prior years have mortgages (which is silly), the demoninator in the equation should be significantly larger, so the foreclosure rate should be a far less than 1%. That might be another interesting way for RealtyTrac to present their results. They could compare their numbers to the national housing stock that has mortgages.

Most lenders I talk with are experiencing foreclosure rates of less that 1/2% of the loans outstanding yet the number is rising slowly. In the bleak foreclosure years of 1990-1991, the national rates were averaging 3-5% if memory serves me correctly.

My assumptions are consistent with the findings of [Property Shark](http://www.propertyshark.com). For example, [in Miami, the posterchild for housing bubble markets, the foreclosure rate [BW]](http://www.businessweek.com/the_thread/hotproperty/archives/2006/09/a_mixed_message.html?campaign_id=rss_blog_hotproperty) is four times that of New York yet the rate is still only .066% of the housing stock. If the foreclosure rate doubles over the next 6 months, its still only 0.13%. Thats not 1.3% nor is is 13%. Its 0.13% That seems pretty small.

I am not suggesting that foreclosures are not a growing problem, but please, lets keep things in perspective.

Tags: NAR, National Association of Realtors

11 Comments

Well, not really, but please read on.

Rising fixed and ARM mortgage rates are expected to slow the housing market [SFGate.com] The nearly always pessimistic UCLA Anderson Forecast, confirms this line of thinking but goes a step further, by saying that the rising rates are not the only factor in the slowdown, saying:

Rising interest rates “are just one tiny little (impact), like a guy standing in the middle of a hurricane throwing a bucket of water.”

Actually, I strongly disagree. Rising mortgage rates are the catalyst for other problems. Thats were the problems started. Low rates fueled optimism that caused many to spend beyond their means with the understanding that things can only get better. The wealth effect of housing was the elixor.

Mortgage rates climbed this week with 30-year fixed-rate mortgages hitting their highest point in almost four years, an increase that could dampen home sales and refinancing. This illustrates the compounded problem facing many homeowners. From my favorite personal finance blog: My Open Wallet, she espouses upon her new favorite quote

People who are living beyond their means are going to have a harder time making ends meet than ever in history.

She found quote by Rick Sharga of RealtyTrac Inc., who is a refrequent commentor in Matrix, in the article by one of my favorite New York Times writers Jennifer Steinhauer: Statistics Aside, Many Feel Pinch of Daily Costs [NYT]

I just had to laugh and see it as a sign of the times. To me, anyway, it would seem that “living beyond their means” and “making ends meet” are mutually exclusive things by definition. Therefore, for people who are living beyond their means, making ends meet is impossible, not just something that may be more or less difficult depending on economic conditions.

[There’s a certain element of six degrees of Kevin Bacon going on here. -ed]

Tags: Hurricane

1 Comment

In a post I made a few days ago: [Foreclose Already So We Can Get Back To Normal](http://matrix.millersamuel.com/?p=568), RealtyTrac’s blog: [foreclosurepulse](http://foreclosurepulse.com), the people that bring you national foreclosure statistics every month, shed some light on the correlation between exotic mortgages (option-arm, interest only, etc.) and foreclosure rates in their post [ARM’d and Dangerous? [ForeclosurePulse]](http://foreclosurepulse.com/archive/2006/04/21/29.aspx).

I had questioned why the Midwest seemed to have more foreclosure activity than the east and west coasts where more price appreciation has occured, and specifically the west coast, where there are higher loan to value ratios on average and greater use of exotic mortgages.

RealtyTrac says theres more to it than that.

The common assumption (aka mine)

a popular bias these days towards directly linking the rising foreclosure rates to default rates on some of the higher risk loans that have become increasingly popular – ARMs, interest only, negative amortization, etc. There’s undoubtedly some truth to that: high risk loans are more likely to be defaulted on than traditional loans

What is likely happening we’d probably look at the Midwest rates and chalk them up to higher-than-average unemployment rates (a very strong predictor of foreclosure rates) and lower-than-average house appreciation rates coupled with weak housing demand. That’s a pretty reliable formula for high foreclosures: No job + no equity + no homebuyer = distressed homeowner.

We should be concerned with the looming re-sets next year to the tune of $1B and keep our eyes on California due to the loan volume, high housing prices and heavy use of exotic loans.

I’ll look to RealtyTrac’s [ForeclosurePulse](http://foreclosurepulse.com/) to keep me informed on this topic in the future.

[Home Foreclosure Rates Soar [NYP]](http://www.nypost.com/business/67467.htm)
[Which End Is Down? The Problem With Foreclosure Stats [Matrix]](http://matrix.millersamuel.com/?p=284)

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In [The Cost of America’s Pastimes Keeps Rising [Barrons]](http://online.barrons.com/article/SB114506023545326674.html?mod=googlenews_barrons)

Arguably the most broadly pursued pastime in the country that’s becoming pricier is borrowing money, specifically borrowing to buy houses. With the bearish turn in the Treasury market driving the 10-year note yield above 5% last week, near a four-year high, Freddie Mac’s benchmark 30-year fixed-mortgage rate rose to just below 6.5%.

[A survey by RealtyTrac](http://www.realtytrac.com/), reported Friday, showed a 68% increase in mortgage loans in foreclosure in February over the year-earlier period. Foreclosures are still relatively low by historical standards, but the trend is directionally discomfiting.

The Fed is between a pair of pincers. On one side, the policy setters understand that higher rates act with a lag, and that the ascent in long-term rates will likely assist their own efforts to slow the economy. That argues for a pause in the tightening campaign. But, then again, going too far, kneecapping the housing market, antagonizing the stock market and pressuring consumer spending could invoke those downside economic risks that don’t seem to be bothering Fed officials these days.

In Danielle Reed’s article, I think she really gets whats going on in [Rising Foreclosure Rates Point To a Normalizing Home Market [WSJ]](http://www.realestatejournal.com/buysell/markettrends/20060417-reed.html?rejcontent=mail).

While the foreclosure rate is higher than in the past few years, the number of foreclosures are within historical norms.

Nationally, the number of mortgage loans that entered some stage of foreclosure rose to 117,259 in February, up 68% from the same month a year earlier, according to Irvine, Calif., online foreclosure-data service RealtyTrac.

Whats really interesting about the foreclosure stats is that the Midwest was hardest hit. I find that hard to understand since the coasts saw higher price spikes and greater use of exotic mortgages.

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[RealtyTrac, an online marketplace for foreclosure properties, this week released its November 2005 Monthly U.S. Foreclosure Market Report](http://www.valuationreview.com/ME2/Audiences/dirmod.asp?sid=270E8EBA5AF64172B917EBD588EDB85A&nm=Daily+News&type=news&mod=News&mid=5F249E552B2C49509BC41751816632F3&AudID=F0F48C5C19CB47B3A675FD6074A3CB8A&tier=3&nid=B52CEB4FAC3F41D69E4CAA682051D137), which showed 71,606 properties nationwide entered some stage of foreclosure in November, a 12 percent decrease from the previous month.”

The report shows a November national foreclosure rate of one foreclosure for every 1,615 U.S. households.

Now what does this mean? In October, RealtyTrac says foreclosures spiked 19% to set a new record. Is there a lot of volatility in foreclosures nationwide?

The November stats are not available on their web site to the general public as of this posting so we can’t look at it more closely.

I think the problem with RealtyTrac’s press release philosophy is their propensity to release their headline figure as a month over month change – this month a 12% decrease instead of an annual change. Last month this indicator jumped 19%. The month over month change shows the most volatility. They should be presenting a yearly change when dealing with monthly figures. They are not considering seasonality by using this method but it definitely gets everyone’s attention. Case in point, last month [Connecticut foreclosures increased](http://www.realtytrac.com/news/press/pressRelease.asp?PressReleaseID=67) 7,710.71%. Sounds pretty serious, but its actually pretty ridiculous.

Small stat universe + month to month volatility = misleading results.

[In a previous post, I had similar concerns but for different reasons with the monthly stats released by foreclosuremass.com [Matrix]](http://matrix.millersamuel.com/?p=276)

Tags: Seasonal Adjustment

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