The Real State of Real Estate
Presented by:
Gary Watts – Real Estate Economist, California Previews Retreat, Monterey, August 2007
Brief History of Real Estate
Historically, housing downturns average 27 months. We are in the 23rd month of the current downturn, so once we are past this financial over-reaction, things should improve. The national median price of a resale home is 3.4% higher than a year ago and the pending sales index is moving back up. There may just be some light beginning to shine at the end of this tunnel!
1970 to 1980
Prior to my entering real estate in 1971, a quote appeared in Business Week (late 1969) due to an increase in housing prices: “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. “In 1972, interest rates were 7% and it would take over 24 years before a home buyer could be able to obtain those low rates once again - today, we are in the low 6’s. In 1973, banks had a run on deposits and for a period of approximately 8 months there were no lenders who were in a position to make loans to home buyers. This should have caused a collapse in the real estate market, but home prices continued to rise. In 1977, the National Business magazine stated: “The median price of a home today is approaching $50,000. Housing experts predict price rises in the future won’t be that great.”
1980 to 1990
At the end of the 70’s and into the 80’s, inflation hit 21.5% and home loans were reaching 18%! This was followed by a crash (and later bail out) of the savings & loans industry in America. Although large job losses were creating foreclosures, home prices continued to rise. By 1985, Money Magazine made this prediction about home prices: “The golden-age of risk free run-ups in home prices is gone.”With a build-up in defense spending and huge growth in manufacturing sector in the late 1980’s, increased job creation led to a boom in home construction and home prices continued to rise. Then on November 11, 1989, a dramatic event took place: the Berlin Wall came down! With the Evil Empire (the Soviet Union) breaking up, things were going to change around the world and change quickly!
1990 to 2000
In early 1990, Congress began slashing funds for defense spending. Within a very short period of time, a lot of highly paid workers in both defense and manufacturing had lost their jobs. California home prices declined about 12% by 1996 when the San Francisco Examiner said: “A home is where the bad investment is. “In the following 3 years, California home prices rose 19.7% wiping out all the losses of the early ’90’s and ended the decade with a net gain of 9.35%. The median price in California has not declined since 1996.
The Media
Today’s media plays up bad economic news now more than ever, which leads to misconceptions about economic realty. Our economy is extremely strong, profits are superb and the world economy is exploding. All you read and hear is that real estate is going down, yet last month, prices in the U.S. rose 3.4% from a year ago and California is up almost 1%. The Bay Area prices have gained 4.1% over the last year and southern California median price is up 3.7%. Foreclosures are supposed to be at a record high - but last year 98.83% or mortgages did not go to foreclosure. Today, the Bay Area’s foreclosure rate is up only 1.5% over last year while southern California’s foreclosure rate is up 2%. The media reported 53,942 notices of default for the 2nd Quarter - a near record high. They are comparing it to the 1st Q. of ‘96 when 61,541 notices were filed but fail to mention that 2 million more home have been built in California since then! What if the media’s headlines read: 99.2% of Mortgages are Not in Foreclosure? The media and the financial markets have greatly over-reacted, to the real problems that have been revealed in the lending marketplace, which is typical.
The Sub-Prime Market
It may surprise you to know that sub-prime loans make-up only 5% of the U.S. total loan market and Alt - A loans (those with credit better than sub-prime but less than prime) total only 8% of all loans in the U.S.!
1. These exotic loans became a major influence in the early 2000’s, 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. Most of the problems with sub-prime loans originated in the summer of2005 through 2006. In California, 43% of all loans funded during that time were sub-prime loans.
3. Sub-prime loan investors that needed to sell their loans were liquidating their paper for $.96 on the dollar. There has been no current data on sales since August 5th, but with the current turmoil in the financial markets, I am sure they are being “dumped” for less.
4. Here is a financial report on some of the banks that provided the sub-prime money: Bear Stearns 2nd quarter revenue was $2.512 billion - a new record! Merrill Lynch saw 2nd quarter profits rise 30.2% Morgan Stanley (holding $5.2 billion in sub-prime loans) had a 60% jump in earnings. Goldman Saks earned $2.33 billion in the past year. Bank of America (#2 U.S. bank), after putting aside $1.81 billion for potential credit losses, saw net income rise to $5.76 billion - up from $5.48 billion last year.
The media will still report about massive delinquencies and huge foreclosures in the sub-prime market, but those reports will not be accurate because they don’t explain the difference between a delinquent payment, a notice of default or a foreclosure. They tell us “Foreclosures at Record High!” but that is not accurate.
Source: Mortgage Bankers Association, National Homebuilders Association, Inside Mortgage Finance
Delinquencies vs. Notices of Default vs. Foreclosures
Delinquencies
Delinquencies cover any missed payment - even if it is just for one month, it is reported as a delinquency.
1. The delinquency rate on sub-prime loans was running at 13.77%, which is up 13.44% from the previous year. In the last quarter, the delinquency rate dropped to 12.4%!
2. The delinquency rate on Alt-A loans is only 2.69%, while prime loans are at 2.57%.
3. Combining the three rates with the loan volume gives you a delinquency rate for all loans in the U.S. of only 4.84%. The record low is 4.0%.
4. On jumbo mortgages (anything larger than $417,000) the delinquency rate is 0.37% 5. California’s delinquency rate is only 3.25%.
Notices of Default
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 the 1st Quarter, 24 states saw a decline in foreclosure starts and 36 states saw a decline in the 2nd quarter!
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 June 2006.
2. Only 1.28% of all prime loans have entered the foreclosure process.
3. In California, the last quarter saw 53,943 notices filed, with most filings being on loans from the summer of 2005 to the summer of 2006.
4. The lowest number was 12,417 in the 3rd Quarter of 2004.
Foreclosures
Foreclosures occur when the buyer has been unsuccessful in curing the debt, and either a lender or an investor has acquired the property. As of last month, there was 1 foreclosure filing for every 693 homes in America.
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% while California’s rate was 1.17%!
3. California now ranks #4 in the nation in foreclosures - down from #1!
The media will try to scare you with numbers like $1 trillion in loans needs to be recast this year and that foreclosures could cost lenders as much as $2.3 billion dollars! They never mention that there is $10.4 trillion of mortgages with $56 trillion dollars of equity in American households. Add to that the wealth of the U.S. at $70 trillion, with the value of stocks between $15 and $20 trillion, while the bond market is even larger. So these loses (should they occur) should not have any great effect on home prices.
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, mortgage insurers are in a good position to cover losses at these (high) levels.
Source: Mortgage Bankers Association, Federal Reserve, Federal Bureau of Investigation
Why the World Changed in 1979 Baby Boomers’ Impact
Never before in the history of the world has a generation accumulated so much wealth as the baby boomers. The Internal Revenue Service will tell you that from 1945 to 1979, incomes increased at the same rate for all tax brackets. By 1979, the early baby boomers had been in the workplace for over 10 years. They were the most educated generation to enter the work force, and they had the skills for our changing world. Today, the IRS tells us that, from 1979 to 2004, the median income in the U.S. rose 18%. From 2004 to 2005, incomes grew 5.8%.
The number of taxpayers making more than $100,000 grew by 3.4 million and accounted for more than two-thirds of the growth vs. 2000! Half of Americans make less than $30,000 and two-thirds make less than $50,000.
Those making more than $1 million grew by 26% and numbered 303,817 in 2005! These individuals, who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005.
The top 85% of the nation’s wealth resides with the richest 15% of Americans; the bottom 50% of Americans holds only 2.5% of the nation’s wealth.
Over the next decade, there will be a 25% increase in the population over 50 years of age. They have more money than any preceding generation, due to having dual incomes, equity growth, and record inheritances (60% goes to the top 40%)! This age group is spending $2 trillion dollars annually! Last year, 2.1 million boomers turned 60, with 25% planning on not retiring.
They found a way to mix leisure with work and are not ready to fully retire - they have money and income and they are still investing in real estate.
Article courtesy of:
Karin Hamm
Loan Consultant
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