Housing Remains Bleak. Cash Buyers Not Helping.

A Merrill-Lynch housing report came out today that said  in November, they forecasted that home prices would fall another 8% from 2Q11 through 1Q13. Since then, the 3Q and 4Q data releases showed actual home prices dropped 3.2% in the second half of 2011, implying another 4-5% decline remained based on the earlier forecast.

More information has come their way since the initial forecast, including favorable developments on the policy front, better economic data and a decline in the supply of homes on the market. They have therefore updated their home price model and believe that prices are bottoming now. However, they continue to believe the recovery will not begin in earnest until 2014.

I have trouble believing that, since there is no mention of the inventory overhang from the 4,000,000 foreclosures going through the process right now, which will essentially more than double the 3,000,000 foreclosures that have been finalized, written off, or are up for sale as REO or short-sale properties. 38% of the National RE transactions in January and February were all cash deals. Indicating that opportunists are buying 4 in 10 homes that are on the market. And, it is not helping the recovery.

And, those all cash buyers are expecting and getting 15-25% discounts in price, further exacerbating  the falling housing prices. If sellers have a choice between selling to an investor for cash or to a buyer who plans to seek a mortgage, the investor is a safer choice, even if that means a lower sale price.  Also, cash buyers can close more quickly, usually in less than 30 days, which is attractive to lenders selling off real-estate-owned properties. Buyers seeking a mortgage usually need 45 to 60 days to close, even when everything goes well. Finally, buyers don’t have to deal with bank-ordered appraisals that come in lower than asking price. In a cash deal, the price is what the buyer and seller agree upon, regardless of appraisal.

In Miami-Dade County, for example, cash sales accounted for 63% of closings in December of 2011.

NAR said a survey of its members showed that 31 percent of Realtors experienced contract failures in February, often because buyers saw their mortgage applications turned down, or because appraisals came in below the negotiated price. That compares with 33 percent reporting contract failures in January, and 9 percent in February 2011. Average sales price fell from $166K to $157K and actual sales rose from 3,787,000 to 4,060,000 comparing February 2001 to February of 2012. If you subtract the all cash deals, you will see an increase of only 2.7%. Hardly robust.

Here’s an example from South Florida reported just yesterday, and you can get a sense of what’s coming: 

Foreclosure activity in the area surged in February as lenders sought to clear a backlog of properties from their books.

Foreclosure petitions — the first step in the process — more than doubled in Bristol County, rising from 68 in February 2011 to 158 last month. Plymouth County petitions jumped 57 percent year over year, increasing from 97 to 152, according to a report released Wednesday by The Warren Group, publisher of Banker & Tradesman.

Banks were reluctant to launch new foreclosure proceedings a year ago in the aftermath of the “robo-signing” controversy, when lenders were accused of improperly handling paperwork, experts said.

“Now they have got their act together and they’re not waiting any longer,” said Peter S. Barney, administrative assistant to New Bedford‘s Board of Assessors. “Now they are going to take care of it. They want to clear their books.”

The problem of delinquent homeowners never went away and bankers want to get control of those properties and sell them, he said.

Statewide, foreclosure petitions also doubled, rising from 694 a year ago to 1,394 last month. The activity was still tame compared with recent years. More than 2,000 foreclosure petitions were filed in February 2010, according to The Warren Group.

My guess is more like a bottom in 2014 and the beginnings of a recovery in 2015. Barring any European contagion. Hold on to your hats!

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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