The Black Hole On The West Coast

California Association of Realtors (CAR) came out with the most recent sales numbers for the 3Q of 2007 and in case you didn't hear (or notice), sales are off 40% from a year ago. The media might portray a downturn of 5-7% as a big deal, but try 40% from last October. Most developers and public builders (in this market) are scrambling for anyone to qualify, and then they'll see which house they can afford to lose the least on, with the 'one buyer in tow'.

LOS ANGELES (Nov. 28) – Home sales decreased 40.2 percent in October in California compared with the same period a year ago, while the median price of an existing home fell 9.9 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

“Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months,” said C.A.R. President William E. Brown. “The decline in sales at the upper end of the market contributed to a significant decline in the statewide median price as even well-qualified borrowers had difficulty securing financing.”

Closed escrow sales of existing, single-family detached homes in California totaled 265,030 in October at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local REALTOR® associations statewide. Statewide home resale activity decreased 40.2 percent from the 443,320 sales pace recorded in October 2006.

The statewide sales figure represents what the total number of homes sold during 2007 would be if sales maintained the October pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

The median price of an existing, single-family detached home in California during October 2007 was $497,110, a 9.9 percent decrease from the revised $552,020 median for October 2006, C.A.R. reported. The October 2007 median price fell 6.4 percent compared with September’s $530,830 median price.

“We expect further weakness in sales over the next few months as the liquidity crisis plays out,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Both the state and national economies remain fundamentally sound at this time, despite recent developments in the housing market. While there have been mixed signals in recent months, economic growth is expected to continue into 2008.”

Highlights of C.A.R.’s resale housing figures for October 2007:

• C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in October 2007 was 16.3 months, compared with 6.4 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
• Thirty-year fixed-mortgage interest rates averaged 6.38 percent during October 2007, compared with 6.36 percent in October 2006, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.68 percent in October 2007 compared with 5.56 percent in October 2006.
• The median number of days it took to sell a single-family home was 59.3 days in October 2007, compared with 56.5 days for the same period a year ago.

Regional MLS sales and price information is contained in the tables that accompany this press release. Regional sales data are not adjusted to account for seasonal factors that can influence home sales. The MLS median price and sales data for detached homes are generated from a survey of more than 90 associations of REALTORS® throughout the state. MLS median price and sales data for condominiums are based on a survey of more than 60 associations. The median price for both detached homes and condominiums represents closed escrow sales.

In a separate report covering more localized statistics generated by C.A.R. and DataQuick Information Systems, 13.9 percent, or 41 out of 296 cities and communities, showed an increase in their respective median home prices from a year ago. DataQuick statistics are based on county records data rather than MLS information. DataQuick Information Systems is a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. (The top 10 lists are generated for incorporated cities with a minimum of 30 recorded sales in the month.)

Note: Large changes in local median home prices typically indicate both local home price appreciation, and often, large shifts in the composition of housing market activity. Some of the variations in median home prices for October may be exaggerated due to compositional changes in housing demand. The DataQuick tables listing median home prices in California cities and counties are accessible through C.A.R. Online .

• Statewide, the 10 cities and communities with the highest median home prices in California during October 2007 were: Newport Beach, $1,575,000; Santa Barbara, $1,275,000; Cupertino, $1,033,000; Danville, $1,017,500; Los Gatos, $1,005,000; San Carlos, $927,500; Redwood City, $912,000; San Ramon, $835,000; San Clemente, $832,500; and San Mateo, $829,500.
• Statewide, the 10 cities and communities with the greatest median home price increases in October 2007 compared with the same period a year ago were: Santa Barbara, 24.4 percent; Arcadia, 21.3 percent; Redwood City, 20.6 percent; Newport Beach, 18.4 percent; San Ramon, 14.4 percent; Cupertino, 11.7 percent; San Carlos, 9.5 percent; Redlands, 8.8 percent; Redondo Beach, 8.7 percent; and Sunnyvale, 7.6 percent.

Leading the way...® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States, with about 200,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

October 2007 Regional Sales and Price Activity*
Regional and Condo Sales Data Not Seasonally Adjusted

October-07	Median Price	Percent Change in Price from Prior Month	Percent Change in Price from Prior Year	Percent Change in Sales from Prior Month	Percent Change in Sales from Prior Year
	Oct-07	Sep-07	Oct-06	Sep-07	Oct-06
Statewide
Calif. (sf)	$497,110	-6.4%	-9.9%	-2.4%	-40.2%
Calif. (condo)	$416,210	2.7%	-2.1%	-4.6%	-31.9%
Region
Central Valley	NA	NA	NA	NA	NA
High Desert	$265,880	-2.2%	-19.1%	1.9%	-56.9%
Los Angeles	$533,070	-6.4%	-8.6%	-20.0%	-42.0%
Monterey Region	$714,550	-1.1%	1.7%	15.6%	-35.1%
Monterey County	$620,000	-10.1%	-5.3%	7.7%	-43.7%
Santa Cruz County	$735,000	3.2%	-2.5%	23.9%	-24.8%
Northern California	$373,790	-2.5%	-3.6%	20.5%	-16.8%
Northern Wine Country	$532,900	-3.4%	-9.4%	8.0%	-37.8%
Orange County	$673,770	0.0%	-1.1%	-11.3%	-41.7%
Palm Springs/Lower Desert	$323,440	-6.5%	-5.1%	16.4%	-30.1%
Riverside/San Bernardino	$344,370	-3.4%	-15.6%	15.6%	-34.4%
Sacramento	$309,360	-5.0%	-15.7%	9.1%	-30.5%
San Diego	$539,060	-3.9%	-6.2%	0.8%	-37.1%
San Francisco Bay	$810,490	3.3%	8.9%	9.0%	-41.5%
San Luis Obispo	$548,610	5.6%	-2.2%	-6.1%	1.6%
Santa Barbara County	$742,190	9.4%	-12.4%	1.0%	-29.5%
Santa Barbara South Coast	$1,325,000	-15.3%	18.8%	22.0%	-33.0%
North Santa Barbara County	$360,870	-1.9%	-18.5%	-22.2%	-23.6%
Santa Clara	$860,500	1.4%	11.0%	7.6%	-35.1%
Ventura	$650,570	-4.6%	-3.1%	-3.5%	-52.6%

na – not available

*Based on closed escrow sales of single‑family, detached homes only (no condos). Reported month‑to‑month changes in sales activity in October overstate actual changes because of the small size of individual regional samples. Movements in sales prices should not be interpreted as measuring changes in the cost of a standard home. Prices are influenced by changes in cost and changes in the characteristics and size of homes actually sold.

sf = single‑family, detached home
Source: CALIFORNIA ASSOCIATION OF REALTORS®

Median Prices By Region – Current Month vs. Year Ago

	Oct-07	Sep-07		Oct-06
Statewide
Calif. (sf)	$497,110	$530,830		$552,020	r
Calif. (condo)	$416,210	$405,360		$425,180	r
Region
Central Valley	NA	NA		$345,070	r
High Desert	$265,880	$271,940		$328,650
Los Angeles	$533,070	$569,390		$583,160
Monterey Region	$714,550	$722,500		$702,680
Monterey County	$620,000	$690,000		$655,000
Santa Cruz County	$735,000	$712,500		$754,000
Northern California	$373,790	$383,330		$387,560
Northern Wine Country	$532,900	$551,680		$588,330
Orange County	$673,770	$673,770		$681,340
Palm Springs/Lower Desert	$323,440	$346,080		$340,830
Riverside/San Bernardino	$344,370	$356,510		$408,170
Sacramento	$309,360	$325,550		$366,940	r
San Diego	$539,060	$560,840		$574,530
San Francisco Bay	$810,490	$784,220	r	$744,300	r
San Luis Obispo	$548,610	$519,740		$560,980
Santa Barbara County	$742,190	$678,570		$847,220	r
Santa Barbara South Coast	$1,325,000	$1,564,000	r	$1,115,000
North Santa Barbara County	$360,870	$367,860		$442,590
Santa Clara	$860,500	$848,950		$775,000
Ventura	$650,570	$681,820		$671,330

na - not available
r - revised
Source: CALIFORNIA ASSOCIATION OF REALTORS®

"Qui Tam" Suits - Interesting discussion

Interesting topic from the Housing Bubble Blog in one of the comments from Thomas:

On this topic, anyone who likes to read absurdly long posts can check out the following, which I recently submitted as a prospective column to a SoCal newspaper:

Yo ho, yo ho, a pirate’s life for me.

As financial markets reel from the biggest credit contraction in at least a decade, the world is getting a good look at just how buccaneering a business the mortgage industry got to be during the late boom. Amid the general fingerpointing, a basic truth is emerging: The real estate market can handle stated-income loans, or teaser-rate mortgages — but not both.

Stated-income loans, in which the borrower’s income isn’t verified, aren’t called “liar’s loans” for nothing. Until recently, though, financial reality placed a limit on how shameless cheaters could get. Since mortgages generally had to be fully serviced from the beginning, if a borrower’s ability to make the payments was overstated, he tended to default quickly. However, when stated-income loans are married to low initial “teaser” rates, a monster is born. Because only a minimal payment must be made at first, deceptions are masked, and the dishonest borrower can coast along for a year or so before his inability to fully service the loan comes into play. In that time, the originator of the mortgage can sell the loan into investment markets, offloading much of the default risk. The borrower, for his part, expects his property to appreciate rapidly, allowing him to refinance or sell at a profit before the payment adjusts beyond his ability to pay. Everybody’s happy — until appreciation stops. Then things get ugly.

Studies and anecdotal evidence suggest that this kind of activity was widespread during the past boom. Fraud ranged from simple exaggeration of income, either by the borrower or an unscrupulous mortgage broker, to sophisticated collusions between borrowers, brokers, agents, appraisers, and sellers to secretly kick excessive cash back to the buyer upon closing. The result is innumerable loans obtained on false premises, where the expiration of teaser-rate periods is exposing the disparity between what borrowers stated as their income and reality. Real economic destruction looms, as a result of this vast misallocation of credit resources.

Mortgage fraud is a federal crime, punishable by imprisonment. Unfortunately, law enforcement resources are limited, and the authorities can’t investigate a fraction of the offenders. General civil remedies may also be inadequate, since the parties most directly injured may have incentives to avert their eyes from fraud in loans sold to investors, lest contractual duties to buy back tainted loans or mark down their value be triggered.

Interestingly, the government sometimes enlists the help of private citizens to combat some kinds of fraud. The federal False Claims Act provides a procedure for private citizens to bring so-called “qui tam” suits (in which the citizen sues on behalf of the government) against perpetrators of fraud in government contracting. If they prevail, they share in the government’s recovery.

Many states, including California, have enacted similar laws. Intriguingly, California law also allows “qui tam” suits against perpetrators of insurance fraud. Thus, “qui tam” suits are not always limited to cases in which the government is a direct victim. They have also been authorized when private frauds have such a damaging effect on the general economy that the government is willing to essentially “deputize” citizens — and provide them with healthy financial incentives — to assist with enforcement that the government cannot handle alone.

In the golden age of piracy, governments often resorted to issuing Letters of Marque and Reprisal, authorizing privately-owned vessels to cruise as “privateers” against hostile shipping. The recent golden age of mortgage buccaneers calls out for a new birth of privateering. The federal and state governments ought to seriously consider authorizing qui tam suits against participants in mortgage fraud. Downsized employees of mortgage boiler-rooms, honest brokers, Realtors, and appraisers who lost business to corrupt competitors, and sharp-eyed amateur analysts would make excellent qui tam plaintiffs. Turn these citizen privateers loose upon the mortgage pirates, and watch how fast the bad actors shape up.

Credit Market Report

Credit Market Report August 7, 2007 (Requested by a client to forward as a post)

U.S. Treasury prices fell and yields rose as investors pushed money back towards stocks on Monday while the corporate bond market remains stagnant. The Dow Jones Industrial Average posted its largest gain of the year yesterday, helping to erase significant losses incurred last week. Corporate credit markets, notably investment-grade corporate bonds, have ground to halt making it difficult for firms to access capital and leaving investors with little good options. The dry-up in available capital is largely due to an increase in investor risk aversion caused by the problems of the sub-prime mortgage market. For July, U.S. corporate bond issuance was down 77% from June, with only 25 high-grade issuings for July, compared to 94 in June and 121 in May. Tuesday brings the Federal Open Market Committee’s meeting on interest rates and updates on productivity and consumer credit will be released. Sentiment among the investing community is for the Fed to keep the Federal Funds Rate, an overnight lending rate between banks, at its current level of 5.25%.

Treasury Rates are as of late-afternoon August 6, 2007 as reported in the Wall Street Journal.

Fixed Rate Indices
Maturity Coupon Yield
2-year..........07/09.........4 5/8%.........4.49%
5-year..........07/12.........4 5/8%.........4.55%
10-year........05/17.........4 4/8%.........4.73%
30-year........02/37.........4 6/8%.........4.91%

Floating Rate Indices
30-day LIBOR.................................5.33000%
90-day LIBOR.................................5.35625%
Six-month LIBOR............................5.25688%
1 Year LIBOR..................................5.11625%

Rates in the London market based on quotations at 16 major banks for August 6, 2007.


Prime..............................8.25%
Last Effective Change: 6.29.06

Spread Markets
10-year SWAP Spreads................................71.3 bps
10-year SWAP Rate......................................5.449

As reported by RBS Greenwich Capital 8.7.2007 8:52 AM EST

Foreclosures, Tax consequences & bankruptcies

Business bankruptcies are up 66% nationwide from the 1Q of 2007 to 1Q of 2006..

"Part of it certainly is a rebound from changes in bankruptcy law," said Daniel North, chief economist with Euler Hermes ACI, a credit insurance company in Owings Mills, Md. The changes attempt to shift filers away from liquidation into repayment plans.

"The other part is a deteriorating economy due to high energy prices, a tightened monetary policy and the housing meltdown," he said. "We're seeing pressure, particularly on suppliers of building materials and anybody who relies on the housing industry."

Locally, the crunch is most obvious in real estate deals and transactions, said Dale Ginter, a bankruptcy attorney with Downey Brand LLP, Sacramento's largest law firm.

"People who were able to refinance or sell their way out can't do it now," he said. "And my guess is it will continue for another year or so."

The other problem that foreclosed subprime borrowers will feel is the tax consequences of cash received from defaulted equity lines of credit.. forcing more bankruptcies..

There's another downside to the housing meltdown that's driving people toward bankruptcy court: Owners with second mortgages who owe more than their home is worth might face income tax consequences from foreclosure. Bankruptcy can wipe out the tax debt.

"People are filing bankruptcy to avoid this nasty, horrible tax," Gibbs said.

The Credit Peloton

Let's start out with the peloton (French, meaning a small military group or platoon), which is most notably recognized as "the pack" in the annual Tour de France, cycling's premier race. Friday's troubles in the credit markets reminded me of this year's tour, which was riddled with controversy over doping issues from several lead cyclists (remembering that last year's US tour winner - Floyd Landis - may still be stripped of his title pending further investigation).

There are "to good to be true" mortgage products (along with lead cyclists) that race out ahead of the peloton pushing the limits of stamina, endurance and fatigue to provide the best investments to the secondary (hedge fund) markets. Then, one of two events occur (and has occurred). Either, the drugs wear off and the sprinter can't sustain the pace, burning out during the race and being overtaken by the peloton; or, the drugs don't wear off and the cyclist wins the race, but skeptical officials (the "market") test the cyclist and discover what looked like incredible production is only an artificially enhanced performance that doesn't have the fundamentals to belong in the race. Either eventuality results in disqualification and the peloton is affected. If you weren't paying attention on Friday (8/3/07), jumbo loan buyers just got affected in the credit race.

Friday saw Wells Fargo Jumbo loans jump in rates from 6.78% to 8.00%, as noted on the Housing Bubble Blog:

One said, “If we are going to see credit tightening in the mortgage lending arena, then how can that not affect the rest of our economy as the FED would have us believe. Take crack away from a crack head, cold turkey and you have a problem on your hands.”

A reply, “I don’t think it is a question of ‘if we are going to see credit tightening in the mortgage lending arena,’ we are seeing it. Just how bad did Alt-A get hurt yesterday? Just grazed, or was yesterday really a gut shot like many people think? How long until conforming follows the same path?”

One pointed out. “Wells Fargo just raised the interest rate on their jumbo mortgage to 8% this morning. Last week the rate was 6.78%. The meltdown is in full swing. Hold on the drop is going to be very steep. Ouch!!!!!!!!!!!!”

The sprinters in the credit race got caught "doping" their loans and the market is now faced with "what to do". The first step is the classic "knee jerk" disqualification of the sprinters, slowing the peloton to a crawl as the market continues to correct itself, exposing these loan products for what they are, doped products sold as derivatives in the secondary markets:

The highest rated tranches of The ABX Index, credit-default swaps based on bonds consisting of 20 subprime mortgages , for the 07-2, 07-1 and 06-2 series all settled on their lifetime lows again today (as per Markit). These tranches, AAA, AA and A, are the "most secure" investment series of the subprime mortgage derivatives indices. The lower BBB tranches are off their lifetime lows. Source: Markit.

Housing futures and forwards are showing increasing lower housing prices into 2008 and 2009 in all US metro areas. Of note is that the Miami, Las Vegas, San Diego and Los Angeles futures for May 2008 are 5% to 8% lower from spot index.

As is the case in any housing cycle, the credit peloton ("the pack" of conforming AAA, AA and A loans) will be effected as the market evaluates the pool of "doped" loans and disqualifies them from the race. This credit tightening will effect all buyers' ability to find and obtain credit and all builders' ability to sell inventory.

Banks and securities firms are trimming loans, especially to companies tied to the mortgage market. But it is a balancing act: Cutting back too far could make matters worse by accelerating corporate bankruptcies and causing more turmoil in financial markets.

Banks facing the prospect of taking on billions of dollars in buyout-related debt are starting to trim lending to companies that need to refinance loans or restructure their balance sheets.

As banks rein in riskier lending, companies could find themselves unable to refinance loans coming due or to overhaul their businesses. Some companies may be forced to seek bankruptcy protection, a development that would exacerbate bond-market turbulence.

Timing this cycle is the ultimate question as the credit peloton won't return to a "normal" pace again until the "bad apples" are pulled from race.