2121 Belmont SE: Condo Defaults with 94% Occupancy

The glaring and growing gap between monthly rents and monthly mortgage payments in Stumptown rears its ugly head, despite 94% of the condo being occupied at some of the highest rental rates in SE Portland.

Telling quotes from the story are abundant, but this one takes the cake:

"Williams and Stehman launched the effort in 2006, when the housing market was still roaring. It was a bold move -- constructing a $30 million building with all the granite and hardwood-floor touches of the Pearl District in gritty Southeast Portland.

The units came to market in 2007 bearing price tags of $220,000 to more than $500,000. The timing was exquisitely bad. By early 2008, Stehman acknowledged that only four units had sold. Shortly thereafter, CityView converted the 123 units to apartments.

Monthly rents at the building range from $1,275 for the smallest 707-square-foot units to $2,275 for the larger corner apartments that boast 1,583 square feet."

Jeff Manning covers the story for the Oregonian.

Cartoon Sunday

Some housing humor from Mish...


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CASCADIA CABIN FEVER: A Weekend Editorial

Spring is right around the corner in damp/foggy Portland, and since we last had over a foot of snow on the ground (Dec 2008), many things have changed with respect our national real estate quagmire in just 14 short months. The housing bubble and our debt/credit/financial crisis has brought about many interesting phenomena since we've experienced anything resembling knee deep snow in Stumptown:

• Bailouts

• Stimulus

• Cash for clunkers

• 1st time home buyer tax credit

• Unemployment benefit extensions for 2 years +

• IOUs for 2009/2010 state tax refunds in California

• Significant tax/fee increases being legislated nation wide

• QE (US Treasury bond purchases by the Federal Reserve)

• MBS purchases by the Federal Reserve to keep interest rates low

• FHA insuring the overwhelming majority of US mortgages sold in 2009

• Unlimited taxpayer federal funding legislated to Fannie Mae/Freddie Mac rather quietly on Christmas Eve 2009

• HAMP

Where am I going with all of this you may ask? Knee deep snow? HAMP?

As of yesterday, we have this new and interesting proposal for the entire US housing market straight from the Obama White House:

"Feb. 25 (Bloomberg) -- The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program."

There would be various consequences and outcomes for all stakeholders in real estate if the new proposal were to become federal law. Inquiring Portland Housing Blog minds should consider what the stakes would be for the following "typical homeowners" facing foreclosure under such a new federal law:

• Homeowner #1 is no longer paying, but is doing so because they can simply no longer afford to pay. They don't want to leave, and they have every intention of paying the loan off in full. But hard times have struck them, and they have no real means of servicing most any loan on the asset, much less ever owning it outright.
  

• Homeowner #2 is no longer paying, but is doing so because they've chosen not to pay. They have no intention of ever paying the original mortgage -even if they can afford it. They know they can rent or buy a similar house for much less than what they currently owe to the bank/Fannie/Freddie on a monthly basis. Houses around them sell for significantly less than what they paid and it just doesn't pencil out anymore. Life is short! They purchased with poor timing, and they now readily recognize it's economically silly for them to service a bubble era mortgage. This homeowner is happy to quietly "squat" in the house for as long as possible essentially for free, and then move on whenever the inevitable happens.

• Homeowner #3 is no longer paying, and is doing so because they've chosen not to pay. But, this homeowner is not even living in the house. It's empty or rented at a cash flow negative monthly rate when compared to the mortgage. They just want the foreclosure transaction to be over with as soon as possible so they can figure out what it means for their income taxes.

Portland Oregon! You should find those three scenarios somewhat interesting, because yesterday's proposal from the Obama Administration would require HAMP to screen each and every one of those homeowners in foreclosure. All three examples provided above bring their own troubling yet telling questions to the housing market table:

• Would homeowner #1 be allowed to stay and never leave? For what monthly payment? With what type of mortgage terms?
  

• Will homeowner #2 get to stay for nothing? For how long paying zero monthly payments intentionally? Perhaps a HAMP form or two is filled out incompletely. They chose the old school paper based snail mail route for HAMP documentation. HAMP would be a huge, new, and inexperienced federal agency dealing with a growing wave of foreclosure volume. How long can homeowner #2 game the HAMP bureaucracy and live in that dwelling payment free?

• Can homeowner #3 just get it over with and foreclose already? When? Are renters living there? What happens to them? Perhaps homeowner #3 can actually afford the mortgage based on recent and documented income streams and/or liquid assets? What will the new federal foreclosure screening law allow to happen or not happen in this particular case?

The most important and forward thinking question in my opinion, is what would such a federally mandated foreclosure law do to our housing market long term with respect to actual free market prices?

Certainly above all else it would require one very fundamental change for 100% of America's real estate market, and its legal ability to seek out a natural price point with respect to local wages. Historically, mortgages have been considered private party contracts litigated locally. Foreclosures, deeds, and titles are handled in the local county/township level circuit courts. In most cases, the local police force executes eviction notices. A new federal law requiring all foreclosures to be approved by a federal agency, could be an unprecedented shock to the famous NAR slogan "Every market is different”. It would also challenge the legal jurisdiction that local courts have with respect to private property rights and contract law between two private parties.

Speaking of the NAR, what would such a law mean for the average realtor out there? On one hand, lots of foreclosures executed quickly would result in plenty of fresh sales volume. On the other hand, foreclosures and wage/price parity would mean falling prices and lower commissions per unit. Which matters the most right now to the NAR and those who make profits in the marketing, selling, and financing of our Oregon homes: Higher home prices -or- the annual volume of transactions and average market churn rate? The answer of course is "both".

And now for a summarized conclusion of this very long winded and cabin fever induced weekend editorial so full of questions:

Perhaps the FIRE economy and the federal government are setting up housing markets for a long, slow, steady, and controlled burn when it comes to the price of owning property in America. We are all stakeholders in the land are we not? More foreclosures are coming and that's a certainty.

Which court jurisdictions will ultimately decide when or if foreclosure is allowed to happen?

County? State? Federal? Supreme?

Only time will tell...

BUSTED: Clark County Banker Hiding Appraisals

As the many onion layers begin to peel away, the greater Portland area now begins to savor the fresh aroma of its late to the party housing bubble. Along with a decline in real estate prices, comes the discovery and prosecution of fraud. When the most blatantly corrupt local players in the real estate game are brought to justice, those tales inevitably serve as a dose of reality for the local housing market. We now have this story hitting homes oh so very close to Stumptown:

"If regulators forced the bank to adjust loan values down based on new appraisals, Worthy wrote, that could start a chain reaction that could ultimately force the bank to stop using brokered deposits, the "hot money" the institution used to fund its loans."

“ "If that happens, we will be out of business," Worthy wrote, according to the plea. Although his prediction ultimately came true, for 10 months the bank held on."

Also quotable, are these tale telling gems describing a local banking institution that had assets of roughly $440 million and is reported to have cost the FDIC between $120 and $145 million dollars:

"Before regulators arrived, Kennelly told a vice president identified as “K.B.” that there were several appraisals that Kennelly “did not want to see the light of day,” according to the plea agreement. Over a series of meetings, Kennelly instructed at least five bank employees, all identified only by initials, to hide appraisals from bank examiners, according to the plea agreement."

“Kennelly turned red, started to shake, and falsely responded that he did not think that BoCC possessed the requested appraisals,” according to the plea statement. “Within 20 minutes, however, Kennelly produced all of the requested appraisals.”

From the Portland Business Journal: 2010-02-19_by_Courtney Sherwood

Portland RMLS Market Action Report – January 2010

The Regional Multiple Listing Service released the Market Action Report this week and the median sale price for January 2010 was $240,000; this is a 4% decrease from the median sale price for January 2009.

The Portland residential real estate market peaked in August 2007 with a median sale price of $302,000. Prices have now fallen 21% from that peak.

Months of supply (total inventory/monthly sales) sits at 12.6 months compared to the 19.2 months of supply for the same month last year. A balanced market has about 7 months of supply.

The first graph compares the median and average sale price with the months of supply. Click on any graph for a sharper image.

The second graph shows the total supply of homes available for sale. This is simply a calculation of the closed sales for the month multiplied by the months of supply. There are currently 12,423 homes for sale; this is a decrease of 12% from the same month the year before.

The third chart shows closed sales by month. There were 986 closed sales during the month; an increase of 35% from the same month the year before.

The fourth chart shows new listings by month. There were 3,937 new listings during the month; a decrease of 6% from the same month the year before.

The final graph shows how affordable the median priced home is for a family of four. History indicates the ratio is usually between 2.5 and 3.0. Prices would have to fall 13.0% from the current median for the ratio to reach 3.0.

Oregon Housing Prices Converge

The January 2010 "Trends in Delinquencies and Foreclosures in Oregon" report from the Federal Reserve Bank of San Francisco was recently released to the public. Of particular interest, is a graph depicting four of Oregon's major housing markets price indexed for the last decade. As you can see below, after 10 years of varying growth rates, Oregon's home prices are once again converging back toward a common historical point of reference -regardless of where you live in the state.

Source: Federal Reserve Bank of San Francisco

The report also finds that Oregon home prices were largely spared from the subprime carnage -unlike our neighbors to the South and in the South West. Home prices in Oregon are significantly higher than the rest of the country at this time, although that was certainly not the case for at least half of the last decade.

Source: Federal Reserve Bank of San Francisco

The report paints a rather dark picture for Oregon employment when compared to the rest of the country. Worse, the graph detailing the entrenchment of Alt-A / Option-ARM loans in Oregon ominously shows that we are in fact not "different" this time. Although Oregon avoided the subprime wave, it is right in line with the rest of the country for Alt-A / Option-ARM loans outstanding. In most cases these types of loans are headed for reset / recast from 2010-2012.

Source: Federal Reserve Bank of San Francisco

Oregon has about half as many Jumbo loans outstanding when compared with rest of the country, and one can expect that the Portland market has the majority of these types loans in the state. This phenomenon may adversely effect Portland's higher end prices as incomes remain stagnant and credit tightens -especially for Jumbo loans. However for the State of Oregon outside of Portland, the Jumbo market should not be a significant source of risk with respect to price compression in lower sectors of the housing market.

I plan to provide newly published data from this report as it becomes available from the Federal Reserve Bank of San Francisco. The full report can be found here in .pdf format. The first half of the report is national in scope, while the second half (starting on page 13) focuses exclusively on Oregon -complete with foreclosure trends and foreclosure heat maps for the entire state. The commentary is exactly what you'd expect from a Federal Reserve Bank, however the data and graphs are well worth the 30 page read.

FHA Defaults Soar, HAMP Fails on Option-ARM Loans, and 1 in 5 Homes Are Underwater? Questions Abound!

It's mid February 2010 and the housing market finds us here and now:


Story #1:

FHA backed loan defaults have increased 34% year over year from 2009-2010. Mind you, the FHA does not actually originate real estate loans, it sells insurance. The FHA is a federally funded entity that simply pledges to make a home loan good if it goes bad for the banks holding the mortgage note.

From DSNews:

"The FHA currently backs about 30 percent of all new loans for home purchases and 20 percent of refinanced loans. Those figures represent an increase of nearly 1,000 percent since 2006, when private lenders began to pull back and the credit crunch set in."

"Foreclosures on loans guaranteed through FHA soared 41 percent in the fourth quarter from year-ago levels"


Story #2:

BofAML (aka Bank of America Merrill Lynch nowadays) found that Option-ARM loans don't fare so well under HAMP (Home Affordable Modification Program) and that the taxpayer funded bailout will do little to prevent the inevitable.

From Housingwire:

"Researchers found that, in general, collateral with higher delinquencies see higher modification rates. But despite the wave of option ARMs set to recast monthly payments over the next several years, these types of loans fall in “the least modifiable sector” under the Home Affordable Modification Program (HAMP) because of their failure to measure up to eligibility requirements and net present value (NPV) test requirements."


Story #3:

There's really not much to say about this story, except that mathematically if you take into account the dwelling on the left, the right, the front, and the rear of where you live (your dwelling included) -one of those deeds is held by an entity that owes more to the bank than the property would sell for on the open market today.

From Bloomberg:

"More than a fifth of U.S. homeowners owed more than their properties were worth in the fourth quarter as the number of houses and condominiums lost to foreclosure climbed to a record"

"Almost 29 percent of homes sold in the U.S. went for less than their sellers originally paid for them"

-----------------------------------------------

Now for the fun part!


Question #1:

If the FHA hadn't increased their guarantees of mortgages by 1000% since 2006, and if the Federal Reserve hadn't purchased $1.2 trillion in MBS (mortgage backed securities) from March 2009 - present, what would 30 year mortgage rates be for buyers today? What would that new interest rate mean for Oregon's housing prices based upon a constant/fixed monthly payment?


Question #2:

How many Option-ARM / Alt-A loans were originated in Oregon from 2005-2007 in the heat of the housing bubble? What percentage of homes sold in Oregon during that time frame were using these types of mortgages? Which is more dangerous/risky with respect to monthly payment shock on Alt-A/Opt-ARM loans: The 5yr reset or the 5yr recast? (the interest rate or the LTV/NPV calculation)


Question #3:

Do you know someone underwater? A relative? A friend? A neighbor? What are they saying about it? The news from Bloomberg seems to point out that one of your immediate neighbors and/or you (1 out of 5) are underwater. Better yet, what are those folks actually doing about it?

A Measure of Januaries - Your Call

Let's all take a short trip back in time to February 17th, 2009 when Clint posted the RMLS report for January 2009. At that point, home prices had fallen 17.2% from their peak in August 2007.

Year over year from January 2008-2009, home prices fell 10.7% in the Portland area.

Here we are in February 2010, and before too long, Clint will be posting the January 2009-2010 price change. One can find a dozen examples in the main stream media of so called "experts" extrapolating as to why this is the bottom and now is the time to buy, or many others espousing that this is just the eye of the storm, and we in Oregon have much further to fall until reality is reached.

What is your best guess for the January 2009 - January 2010 price change in the RMLS data?

What say ye Portland?

Blog update

I'd like to thank everyone for continuing to visit the blog despite my lack of posts. I've received a few emails from people regarding my health. I'm in great shape! I caught mono about 18 months ago and it knocked me off my feet for a few months. Other than the mono my health has been fine but I'm very busy so the blog has taken a backseat to everything else in life.

A frequent visitor and commenter has volunteered to become a co-blogger. He will post under the name MontyB503. It sounds like we will complement each other fairly well. I'll continue to post the monthly RMLS reports and other economic data while he focuses on monetary and economic policy.

Please welcome MontyB to the blog!

Thanks for visiting the blog.

Oregon economy is clearly out of the recession

Professor Duy released the U of O Index of Economic Indicators for December this week.

The University of Oregon Index of Economic Indicators™ rose 1.2 percent in December to 86.8 (1997=100) from a revised November figure of 85.8. Since reaching a low in July 2009, the UO Index has risen for five consecutive months as the Oregon economy pulled out of recession.

As a general rule of thumb, a decline of 2.5 percent (annualized) over six months, coupled with a decline in more than half of its components, signals that a recession is likely imminent.


On the job market

Labor markets firmed somewhat during December, showing welcome but modest signs of improvement. Initial unemployment claims continue to edge down, signaling a slow but steady reduction in the pace of layoffs, although they still remain above the highest levels of the 2001 recession. Notably, employment services payrolls—largely temporary imployment firms—extended the previous month’s modest improvement, rising to the highest level since last July. This is a sign that some firms need to bolster their workforce in the face of firming economic activity. Still, unemployment remains high, and will only be reduced with many months of sustained job growth.

On housing starts

Residential building permits (smoothed) rose again, continuing the path of improvement that began in October 2009. It is increasingly likely that new residential construction markets bottomed last fall, although it is important to note that activity remains well below the height reached during the recent housing boom. The December 2009 level of 678 permits compares to 2,651 permits in December 2005.

It sounds like the bottom is here for construction permits. This is one of the the 'market bottoms' I've been tracking. The other two are sales volume and median sales price (more on those two when the Market Action Report is released in a few weeks).

Please visit the blog on Monday for some exciting news about the future of the blog.