(Chicago) – A quiet revolution has hit wealthy neighborhoods: financial failure. The 90-day delinquency rate on home loans worth over a million dollars hit a high in February at 13.3 percent, much higher than the overall rate of 8.6 percent.
Financial failure on large-balance mortgages and high-end properties is 50 percent higher than the national average – and the national average delinquency-rate is at record highs (High-end Homeowners Falling Into Foreclosure Trap. 5/8/2010. CNBC). Given that cure rates are approximately zero percent at 90-days of delinquency (and I mean that literally), one of eight borrowers in expensive homes is dead-and-gone. This is not a trickle. This is a flood of “product” – houses that owners or banks must sell.
Current listings will not entirely reflect this dire payment-history picture. The higher the value of the property, the more likely it is to be sold off grid. So when the bank owns a house, or when the bank is near to taking the keys, you don’t end it all with a scene of furniture in the front yard.
“Lenders are far more likely to go the short sale route” for high-end properties, said Andrew LePage, an analyst at real estate research firm DataQuick. “There’s a lot more money at stake, and maintenance can be high if a foreclosure just sits there.”
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Foreclosures of homes worth over $1 million reached a high in February 2010, the last month data is available, when 4,169 homes were somewhere in the foreclosure process. It’s greater than double the level of a year ago.
Twelve percent of million-dollar sales (37 sales of 295) in the Chicago-area were distressed sales between January and April of this year, and I am confident in saying that stress plays a significant role in expensive markets all across the country – based upon the pay history with 13.3 percent of million dollar loans at 90-days past due. The same ratio-of-distress stood at only four percent in the beginning of 2009. The stress factor in sales has tripled this year.
While inventory for-sale may not yet fully reflect the delinquencies, foreclosures prove distress at the high-end. Thirty percent of foreclosures are homes in the top tier of local home values. They make up almost twice the proportion of foreclosures as they did three years ago, according to Stan Humphries, Chief Economist for Zillow (Please see the chart below. Click on the chart for a larger image.).
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Realtors and sellers of expensive homes are fighting a few new battles unique to our current time and place.
New appraisal companies, paid for production and speed, are churning out prices which make no distinction between a sale in distress and a normal sale. The bias in appraisal values has swung from high to low (Appraisers and Foreclosure Sales Bring Havoc to Housing Markets. Nov 2009. Foreclosure News Report.).
Before it was weird to have a distressed sale and that sale price wouldn’t be used as a comparable sale. Now it is normal to have a distressed sale and the appraiser will pre-judge the lower sale as better because he won’t be accused of high-balling the price. Today’s baksheesh is yesterday’s stale baklava.
The typically-priced homes (not high-end) also benefit from an encyclopedia of federal intervention in the conforming mortgage market (Conforming loans are less than $417,000.). Unlimited funds are available for smaller new mortgages. They are funded by the Treasury which is spending without restraint. The increased distress in expensive home prices and jumbo mortgages derives in part from the stricter standards required by private lenders for new mortgages in a higher-risk mortgage category.
Let’s not forget too that distress in expensive markets is part of a radical fall in property prices nationwide. Values have undergone a 120-year-severity bubble-and-bust. Thirty percent of high values have disappeared over the last four years. Does anybody still say a home will never lose its value? Only people whose thoughts have been recorded, but who are no longer speaking: The dead speak this way when they talk about Jack and the Bean Stalk and ever-higher property values.
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The “normals” market has also stabilized more because delinquent-mortgage borrowers may turn to modification programs to catch up. Buyers in general are also less ambitious today and more frightened of taking on big debts. The new higher priority is to have a home and mortgage which you can afford.
“We’re in a ‘trade-down’ environment for the first time since the 1930s,” says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley (High-End Homes Frozen Out of Budding Housing Rebound. 8/3/09. WSJ.).
High-salary white-collar workers are not immune to job loss. Investment banking bonuses may have changed from cash to stock that must be held for several years. Wealthier homeowners may have a pay-option or interest-only loan which is underwater and whose liberal terms are not available in a refinance even if there was equity in the house (Jumbo Mortgage Delinquencies Soar as High-End Home Inventory Builds. 1/13/10. Daily Finance.)
JP Morgan reported rising inventory for-sale over $750,000 at the beginning of the year and projected recovery is not in the cards this year and not in the cards next year but only in the year after that (2012). They also predict peak-to-trough declines greater than 60% in the high end. They estimated damage in a market-wide assessment at 40%.
Many wealthy property owners operated under the assumption that high-end properties do better at holding their value or never lose value, but there’s good reason to believe the opposite is true, and I will tackle that subject in a later post.
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To summarize, serious jumbo mortgage delinquencies are 50 percent higher than the overall market. The number of distressed sales in that category has tripled in the last year in the Chicago area; and that trend toward distress is probably true far and wide. It has to be given what we know of the mortgage-delinquency trend. Thirty percent of all foreclosures are top-tier properties and that is a doubling of the rate when compared to three years ago. Our current zeitgeist is a trade-down environment with low-ball appraisals. Government subsidies do not cover most mortgages in expensive-property markets. And values are projected to fall 60 percent for expensive properties from peak to broken-bubble bottom.
One other thing Mrs. Lincoln: Do you think you will come and see this play again?
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PRINT – Part 2 Jumbo Mortgage Delinquencies Bash High-End Properties
Thanks for carrying the story to Business Insider, Patrick.net.
Check back soon for Part 3 of our six part series “Accelerating Jumbo Mortgage Delinquencies Will Bash High-End Property Values”.
The URL for this story is: http://housingstory.net/2010/06/16/accelerating-jumbo-mortgage-delinquencies-will-bash-high-end-property-values-part-2-of-6-current-market-conditions-it’s-wild-and-weird-on-the-top/
Accelerating Jumbo Mortgage Delinquencies Will Bash High-End Property Values: Part 1 of 6 – Anecdotes on Inventory
(Chicago) Look at unit sales over $1 million in Sarasota County Florida and all appears well. Twelve-month sales equaled 128 units at March 1 versus 151 units the previous year. The 15 percent fall in sales is real, but it isn’t scary. If you want to sell your home there, you may not like the rest of the math as much.
Talk to Hannerle Moore, an agent at Michael Saunders & Co. She suggests a sobering strategy. Reduce prices at least 40 percent from 2005 highs.
“I tell them, ‘You could be the lady who has had her home on the market for 936 days, or you could sell,’” Moore told the Sarasota Herald Tribune (Are High-End Properties Going Down? 4/26/10).
In putting together this story, I was unable to get all the data I was after on high-end inventory. I am firing shotgun to lead to something worth knowing. My review runs near and far in six posts starting today and includes most importantly data on the mortgage performance of jumbo mortgages. My hypothesis is that mortgage performance serves as a leading indicator of both future inventory and price trends. The worse the payment performance, the more prices will fall. Signs of serious distress on many other measures have been in open evidence for expensive properties and we will see it most clearly in jumbo mortgage performance.
Consider the statement of National Association of Realtors’ chief economist Lawrence Yun. Almost exactly a year ago he said the supply of existing homes for sale over $750,000 had reached a forty-month supply (High-End Foreclosures Are Next, 5/27/09, CNBC). Translate that into something you understand: Inventory was SIX TIMES higher than it should be.
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Inventory is the king of the castle. We need to analyze it in guessing the direction of future prices. The high-end market is always a small presence, but also of peculiar significance — to the owners of those properties.
Some stories of the log-jam in high-end property are dramatic. In Charlotte in 2009, less than 3% of all homes listed above $500,000 closed each month. In 2007, homes sales in that category closed at a 33% rate. My pigeon math says the old times were ten times better than the new times. How else to describe this but as a frightening fall off (High-End home lending market has Wells Fargo on line. 4/9/10. Charlotte Business Journal)?
The Wall Street Journal reported in a front page story that supply in June of last year of unsold homes priced above $750,000 equaled 17 months of sales from an already high 14.5-months the previous year (I don’t know yet why Dr. Yun’s report had the supply at 40 months from a story in the same time period.).
An agent from the wealthiest suburb of Chicago had an unmixed report on supply last August.
“We’re extremely oversupplied,” said Sherry Molitor, a real-estate agent in Kenilworth Illinois – the boyhood home of your HousingStory.net blogger (High-End Homes Frozen Out of Budding Housing Rebound. 8/3/09. WSJ).
She reports today (June 2010) that the Kenilworth market supply equals 18 months, down from 22 months a year earlier. The average selling-period is 349 days and 49 homes are listed for sale of a total of 800 households. Ms. Molitor believes values have fallen about 25 percent in Kenilworth and in the other wealthy suburbs of the North Shore of Chicago (Wilmette, Winnetka, Glencoe, Highland Park, Lake Forest).
High-end Dallas also looks long in tooth. At the end of this March, listings over $500,000 provided 20 months of supply and 4500 units. Overall that market had six months of supply. This obvious indicator of high-end distress may be true in all markets across the United States. Each one is different and needs to be studied on its own, but national trends are real and must also be considered.
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The element of subterfuge is highest in expensive neighborhoods. You can expect ambitious concealment when a thing which requires massive sacrifice – blowing 5k or 10k out the door every month just to keep running in place — has a price falling in the wrong direction.
One Russell Shaw of John Hall & Associates (self-reporting as in the top 1% of all property agents nationally) says that real estate owned by banks following a foreclosure is big business in high-end homes and the only game in town for asset managers whose work is reselling homes lost after payment failure and bank seizure.
“Those high end agents are getting inventory, lots of it,” Mr. Shaw said (The Shadow Inventory Equals Shadow Gibberish. 5/8/10, AgentGenius.com).
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The fall in price can be wicked. If you think your digs are north of $13 million in value, take note that a Walla Walla Washington residence boasting 15,000-square-feet listed for $13 million and closed last spring for $3.5 million. Truly a Hannibal haircut (You remember the scene where one’s scalp is now outer brain – as the scalp has been neatly removed by Hannibal. So much better for your brain to take in the sun and produce vitamin D.).
Beware the ghost of Patty Hearst (and headless Thompson gunners who prey upon teenage girls). Veronica Hearst, the widow of Randolph and stepmother of SLA Patty, she kicked back to the bank her 52-room oceanfront Palm Beach Florida cottage. The mortgage on it: $22 million. For the curious, the monthly payment there is $131,901 based on a rate of 6% and a 30-year amortization.
Here in Chicago, the land of Lincoln and Blagojevich, big hair will take you to the governor’s mansion. On the other hand, real work over long periods of time is required to off-load either the $3-million-type inventory or the $5 million-category inventory.
In Chicago’s land of horses, Lake Forest, more than 50 homes were listed for sale for at least $3 million last fall. Yet in the prior 12 months only 11 residences in that price range had sold. Typical marketing period: 500 days.
Rise up to homes listed for at least $5 million and there were more than 20 Lake Forest properties for sale. Yet the 12 month-clearance on these super-fives brought only one little close. The Chicago Tribune called this a 20-year inventory (Ultra High-End Homes Slow To Sell in Crowded Market. 10/18/09). I haven’t heard of that number before, but essentially it means selling your home requires the same planning, patience, and follow up as saving for college when your newborn first arrives and carrying through all the way to graduation.
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So what do we know so far about the direction of inventory of expensive properties? A pro says to knock down prices 40% to list in Sarasota County. The National Association of Realtors reported a high-end supply of 40 months — or more than SIX TIMES higher than it should be. Charlotte is selling out ten times slower than in better times. Kenilworth Illinois is “extremely oversupplied”. And in Lake Forest power houses are selling, but it takes 20 years to get rid of the thing. Does anybody see a trend? I have one question for you Mrs. Lincoln: Did you love your husband?
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PRINT – Part 1 Jumbo Mortgage Delinquencies Bash High-End Property Values
Check back later this week for Part 2 of our six part series “Accelerating Jumbo Mortgage Delinquencies Will Bash High-End Property Values”.
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Realtors Forecast End of Falling Prices While Inventory For-Sale Approaches Peak Crash Levels
New Observations estimates excess inventory for sale equals 1.4 million units with over 4-million homes on-the-block, a figure hovering just 11 percent below peak-crash inventory, while at the very same time the realtors’ chief economist forecast Monday that “the housing price correction appears essentially over.”
A respectable 521,000 units sold in April, yet inventory for sale increased by 418,000 units. On average inventory is 2.66 million units and currently 4.04 million homes are for-sale (Please see the chart nearby of units for sale. The red line represents an average. Click image for a large view.).
Inventory increased to 8.4 months of supply versus the long-run average of 5.8 months and the recent low of 6.5 months last November. The crash high inventory was 11.3 months in April 2008.
“Although inventory levels remain above normal and much of the gain last month was seasonal, the housing price correction appears essentially over,” said Lawrence Yun, chief economist for the National Association of Realtors (NAR). “In fact, a majority of the markets have seen price gains recently. A return to old-fashioned responsible lending and buying will help the housing market avoid disruptive and painful bubble-bust cycles.”
Last week the Mortgage Bankers Association said that a record 4.63 percent of homes are in foreclosure. Foreclosures are a major contributor to falling prices.
On the positive side of the ledger, interest rates are outstanding right now and affordability has dramatically improved following a 30 percent national loss in home prices which started four years ago.
The national median existing-home price was $173,100 in April, up 4.0 percent from April 2009. Distressed sales accounted for 33 percent of the total and all-cash sales clocked in at 250 percent of their normal tally.
“Buyers are focused on finding the right house and taking advantage of favorable affordability conditions,” said Vicki Cox Golder, NAR president and owner of Vicki L. Cox & Associates. “For many buyers, owning a home is a lifestyle choice. They want a place of their own to raise a family, build memories, and be part of a larger community.”
Nearly 10 percent of current mortgage borrowers are seriously delinquent, being 90-days late or more. New Observations estimated last week that a minimum of one in ten mortgage borrowers will lose their home to the bank in a distressed sale or foreclosure in the next two years.
Our real estate market rests on a razor’s edge. On the edge lie high mortgage delinquencies, 12 million homeowners who have no equity or negative equity, high unemployment stuck at 10 percent, an unprecedented loss in house values following a bubble greater by far than any in the last 120 years, and a frightened Fed and Treasury who literally own the new mortgage market in the United States. Predicting that we are done with falling prices may end up landing the speaker north of reckless. Desperation hides behind a mask of confidence.
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PRINT — Realtors Forecast End of Falling Prices
Please see more on NAR at Calculated Risk for inventory and sales. Click for press release from NAR. Thanks for carrying the story to Business Insider, Mortgage News Clips, Seeking Alpha.
Please forward questions, corrections, and reactions to comments below or send me an email. Please send an email if you would like to take out a new mortgage. mike@mynewmortgage.com
New Observations is forecasting that a minimum of one in ten homes with a mortgage today will be lost to foreclosure in the next two years and that this loss represents a staggering five-million-unit addition to inventory-for-sale.
A record high 4.63% of mortgages were in foreclosure at the end of March The Mortgage Bankers Association reported Wednesday. Much worse, a mammoth 9.54% of mortgages are 90-days or more past due.
Given cure rates are slim-to-nothing-at-all beyond a 60-day delinquency, in practical terms, all of these seriously-delinquent homes will be lost through a sheriff’s auction, a short sale, a deed-in-lieu passing title from borrower to bank, or some other variant of distressed sale. Amherst Securities Group in a Sept. 2009 report said of the cure rate: “The cure rate on 60+ loans has decreased from 66% in early 2005 to 5% in Q2 2009.”
What is obvious and apparent from the cure-rate chart (see above-click for a clear view) is that borrowers who miss a payment are giving up quickly. After two payments are missed, the mortgage is a goner. It’s a new phenomena and adds a serious risk of falling prices for those who currently own homes.
If 50 million homes carry a mortgage, and with 10 percent lost to the bank in the next two years, five million units will be added to the current for-sale inventory. The five million bank-repo homes works out to about 10 months of sales at an average rate. Amherst estimated 7 million liquidations to the bank, but it was unclear over what period of time. The numbers will have even a more exaggerated impact if mortgage-payment performance continues to fall.
Current inventory is at eight months. The recent inventory high was 11 months in April 2008. Our figures already show current supply for-sale at 3.6 million units 
– which we have estimated is excessive by over 900,000 units (see chart “Units For Sale”-click for a clear view). In an average month 500,000 existing homes sell.
In another derogatory sign, purchase applications fell 27 percent to their lowest point since May 1997. A government-paid down-payment program ended April 30th.
The guesstimate that one-in-ten mortgage borrowers will lose their home is not a wild proclamation. It’s basic math based on the cure rate. What is wild is considering what will happen to real estate prices should mortgage failure gain greater momentum. Serious delinquencies are 30% greater today than a year ago.
A crash has the same irrational exuberance as a mania, except that greed is liberating and fear is terrifying. We have already lost 30 percent of house prices nationwide. There is simply no question that a radical loss in value may still lie ahead. Mortgage performance has gone down hill, and only a strong employment recovery can change the math.
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PRINT — One in Ten Mortgage Borrowers Will Lose Their Home
On the mortgage-payment data see also Calculated Risk.
Thanks for carrying the story to Business Insider, Jesse’s Cafe Americain, Mortgage Lender Implode-O-Meter, Patrick, Yahoo. Please forward questions, corrections, and reactions to comments below or send me an email. Please send an email if you would like to take out a new mortgage. mike@mynewmortgage.com
T2 Charts on U.S. Housing Market
T2 writes a housing report filled with charts which is second to none. Click on the blue cover to see a recent 34-page update. It’s a quick easy read.
