And we thought that some sort of rational thinking had permeated the California Senate when we learned this morning that the California version of the Mortgage Debt Relief Bill (SB30)  had been delinked from the California Homes and Jobs Act (SB 391) a bill that imposes a $75 fee on all new recorded documents earmarked to support affordable housing.  

Alas, rational thinking is nowhere to be seen in an apparent game of political football.

Apparently, SB30 will be re-amended tomorrow to re-link the two bills. 

Well, it isn’t game over yet.  We will continue to follow the progress of these two bills and call it as we see it.

We just heard the language that joined  the California version of the Mortgage Debt Relief bill (SB 30) to the California Homes and Jobs Act (SB 391) has been deleted.  SB 391 is a bill that would impose a new $75 recording fee for every real estate document or notice that is required to be recorded.  For background on the debate see our previous blog post here.

While we do not know exactly why the two bills were delinked, we suspect public outcry against the joining of the two bills may have played a roll.  

Regardless of the reason, we applaud the action as we believe it was the right thing to do.

Market Activity

April 2013 California real estate sales – the sum of distressed and non-distressed property sales – declined 4.0 percent year-over-year, continuing the March 2013 year-over-year decline of 12.9 percent.  Driving the overall decline in market activity is the tug-of-war between the drop-off in distressed sales and the increase in non-distressed sales. Despite the fact that non-distressed sales have posted healthy increases as a percentage of total sales in the past two months, the gain has not been enough to offset the larger decline in distressed property sales.

The decline in distressed property sales appears to be driven, in part, by the uncertainty surrounding the requirements of the California Homeowner Bill of Rights that depressed foreclosure activity late last year.  Also, the new foreclosure prevention guidelines issued by the Office of the Comptroller (OCC) appears to have caused a temporary decline in foreclosure sales.  Given the large numbers of California properties in the foreclosure pipeline, the magnitude of the decline in distressed property sales is likely temporary.

Source: PropertyRadar - PropertyRadar.com

In April distressed-property sales fell 39.4 percent year-over-year.  In contrast, non-distressed sales increased by 36.6 percent year-over-year.  While the year-over-year increase in April non-distressed sales was impressive, the gain was not enough to push overall market activity higher. 

Distressed sales have been declining steadily as a percentage of total sales since the beginning of 2012.  In January 2012 distressed sales were 61.6 percent of total sales and ended the year at 44.8 percent of sales.  In April 2013, distressed sales were 34.2 percent of total sales, down from 36.6 percent in March.   Over the same time period, non-distressed sales started 2012 at 38.4 percent of total sales and ended the year at 55.2 percent of total sales.  In April 2013, non-distressed sales were 65.8 percent of total sales, up from 63.4 percent in March.

The recent increase in non-distressed sales as a percentage of total sales is encouraging, but needs to rise further if this category of sales is to propel overall market activity higher.

Source: PropertyRadar - PropertyRadar.com

Cash Sales

Since 2008, total cash sales have increased dramatically.  From 2001 through 2007, cash sales ranged from a low of 27,381 to 51,387 and represented only 6.2 percent to 8.4 percent of total market sales.  In 2008, as the housing market collapsed and prices plummeted, real estate investing became more attractive and cash buyers returned to the market.  In 2008, cash sales were 57,019, or 15.9 percent of total sales.  By 2012, cash sales had swelled to 116,549, or 29.2 percent of total sales and have stayed in that range ever since.  In April 2013 cash sales are 29.3 percent of total sales up from March’s total of 24.7 percent. 

Source: ForeclosureRadar.com

Institutional Purchases

An important component of cash sales are institutional purchases.  Reports of institutional investor interest in buying California properties inspired us to take a closer look at institutional purchases of California single-family residences and condominiums from 2006 to 2012 and year-to-date 2013. Specifically, we were interested in identifying institutional purchasers, where the purchase activity was occurring and whether or not that activity was changing given the rapid increase in California real estate prices.

We define institutional purchase activity as transfers in quantities greater than 10 either by a limited liability corporation (LLC) or a limited partnership (LP).  We focused on quantities greater than 10 to filter out mom-and-pop investors.  In 2012, for example, nearly 8,000 LLCs and LPs purchased California single-family homes and condominiums.  Of those, only 511, or 6.4 percent, purchased more than 10 properties.  The annual trend of institutional purchases from 2006 through 2012 is illustrated in the following graph.   Not surprisingly, the number of LLCs and LPs increased dramatically beginning in 2009 as real estate prices fell and return on investment became increasingly attractive. 

Source: PropertyRadar - PropertyRadar.com

The Top-10 Institutional Purchasers

The top ten institutional purchasers of California single-family homes and condominiums in 2012 and year-to-date 2013 are listed in the Table 1.  Note that the first four companies in the 2012 top-10 list are the same four that appear in the 2013 top-10 list, in slightly different order.  The Blackstone Group topped the list in both years. In fact, in 2012, Blackstone Group’s purchase activity was more twice that of Waypoint Real Estate Group. So far in 2013, Blackstone has purchased nearly one-and-a-half times as many properties as Colony Financial.  The next six LLC and LP purchasers in 2012 and 2013 are not the same.

Table 1

Top-10 Institutional Purchasers of

California Single-Family Homes and Condominiums

2012 versus 2013 

Source: PropertyRadar – www.propertyradar.com

Top-10 Counties Where LLC and LP Purchases are Concentrated

In 2012 and so far in 2013, LLC and LP purchases in the top-10 counties represented only a small percentage of total transfer activity statewide: 5.1 percent of total transfers in 2012 and 4.5 percent in 2013.  When totaled by individual county, however, it is clear that LLC and LP purchase activity was concentrated in only a few counties but in those counties was a significant percentage of total sales.  Solano County, for example, topped the list with LLC and LP purchases representing 16.1 percent and 21.5 percent of total sales in 2012 and 2013, respectively.  Sacramento County came in second with LLC and LP purchases representing 11.0 percent and 13.9 percent of total sales in 2012 and 2013, respectively. The top-10 counties with the highest LLC and LP purchases as a percentage of total sales are listed.

 Table 2

LLC and LP Purchase Activity

as a Percentage of Total California Sales

(Single Family Residences and Condominiums) 

Source: PropertyRadar.com – www.propertyradar.com

So far this year, LLC and LP purchases, as a percent of total sales, have increased in nine out of the 10 counties.  Despite rapid price increases, housing prices remain low enough to attract professional investors.  Will this trend last? We will continue to monitor these trends closely as cash purchases represent a large percentage of total transaction volume.

Foreclosures

California April Notices of Default (NODs) jumped 13.9 percent and were up 108.0% since the beginning of the year. While the increase in NODs might appear dramatic at first glance, the increase simply reflects a return to a longer-term trend that was interrupted by the implementation of the California Homeowner Bill of Rights, which went into effect January 1.

Foreclosure filings, on the other hand — Notices of Default plus Notices of Trustee Sale — were up only 1.0 percent for the month and down 45.8 percent for the year. 

 Source: PropertyRadar - PropertyRadar.com

A great deal of interest was generated by the following graph, which illustrates that the time to foreclose increases with the size of the outstanding loan amount. Specifically, if the loan amount in default is less than $425,000, the time to foreclose averages 315 days.  If the loan amount in default is between $580,000 and $729,750, then the time to foreclose averages 619 days, 304 days longer.

Source: PropertyRadar - PropertyRadar.com

Madeline’s Take – Director of Economic Research, PropertyRadar

While rising home prices and bidding wars make good headlines, the missing piece in these stories is the decline in property sales.  It is hard to imagine a sustainable housing recovery with fewer homeowners. 

The good news is we believe some of the drop-off in distressed property sales is temporary, driven by uncertainty surrounding recent legislation and new foreclosure prevention guidelines.  Also, non-distressed sales have posted dramatic increases; just not fast enough to offset the decline in distressed property sales.  The rising trend in non-distressed sales is likely to continue given the fact that rising home prices reduce negative equity.  Large numbers of formerly underwater homeowners can now become both sellers and buyers.

One of the unusual characteristics of today’s housing market is the large percentage of cash purchases by investors and institutions.  These purchases are heavily concentrated in markets hit hard by the housing bust and are partially responsible for the sharp run-up in prices in those areas.  This trend shows no sign of slowing and investors and institutions will continue to play an important role in the housing market this year.

Inventory, unfortunately, will likely remain scarce.  The good news is builders are jumping into the market with both feet.  New home inventory will likely appear in meaningful quantities later this year or early next year.  In the meantime, sellers are in the driver’s seat and buyers will continue to face tough competition in inventory-constrained markets.

 Sean’s Take – Founder/CEO, PropertyRadar

Institutional investors have been attracted to the California market by the strong return on investment that rental properties have offered since 2008. As prices increase, however, the potential return on new investments decline. As such the rapid increases in prices we have recently seen are a double-edged sword. On the one hand the increases reduce negative equity helping underwater homeowners. On the other, they reduce affordability for homebuyers and the potential returns for investors. Sales activity is already being hurt by low inventories, primarily due to government intervention in foreclosures.  We need to prepare for further declines in sales volume as prices exceed what homebuyers can afford, and what investors can pay to achieve decent returns.

“Among California homeowners encountering foreclosure, those with higher loan amounts tended to hold on to their homes longer than those with lower loan amounts, according to this month’s report from ForeclosureRadar.“

“The firm, which observes foreclosure trends in five Western states, determined a difference in foreclosure timelines of 270 days between loans of less than $417,000 and loans of more than $550,000.”

“This appears to be a relatively recent anomaly, according to ForeclosureRadar’s findings. In January 2009, foreclosure timelines in California for all loan amounts were relatively equal.”

““Perhaps the difference lies in the fact that more affluent homeowners have the means to tap into resources to help delay foreclosure, or that larger loans on expensive homes are more complex and take longer to disentangle,” ForeclosureRadar stated in its report.”"

Source: DSNews

Link: http://www.dsnews.com/articles/report-foreclosure-timelines-lengthen-with-higher-loan-amounts-2013-05-16

Jeff Horowitz, a journalist at American Banker, came to us last night with a rumor that a guidance letter from the Office of the Comptroller of the Currency (OCC) had caused several large servicers to stop foreclosure sales.  Please read Jeff’s excellent article, where he noted that within two weeks of the release of the letter, Wells Fargo (Wells), Citigroup (CITI) and JP Morgan had all but stopped foreclosure sales.

Our real-time foreclosure sales data confirmed the rumor.  The data also showed that foreclosure sales at Bank of America were little affected.  Finally, it appears that on May 14, JP Morgan renewed its foreclosure sales activity. We fully expect Wells and Citi to follow in the footsteps of JP Morgan in the next couple of weeks.

Madeline Schnapp

Director of Economic Research

PropertyRadar.com

530-550-8801 x27

The Huffington Post recently published an essay optimistically titled “How to Fix the Great Real Estate After-Bubble.” The “fix” proposed by Mary Manning Cleveland, a professor of environmental economics at Columbia University, is to get Congress to force banks to write down the principal balances on millions of underwater mortgages to their post-bubble market values.

This “fix,” unfortunately, ignores a critical question: Where would the estimated $2 to $3 trillion cost of the program come from?The answer is overlooked because there is no easy answer.

Make no mistake: The government and banks have collaborated in a major game ofextend and pretend favoring the banks at the expense of homeowners and taxpayers. The problem with Manning Cleveland’s proposal is that the financial system, and perhaps even the dollar, might not survive if it were enacted. It’s not about the proposal setting a “bad precedent” if it comes to pass; it’s about survival. It should be clear by now that our government is more concerned about the survival of the “too-big-to-fail” banks than it is about the millions of homeowners who remain mired in debt while the taxpayer shoulders the bills for massive bank bailouts.

Finally, the rule of law in the United States makes it a global safe haven for investment capital.  Suppose a mortgage product existed whose terms state that if home values fall below the amount owed anytime over the next 30 years, borrowers get a windfall. What lenders in their right mind, other than the government, would agree to such terms?

Know that I do blame the banks and flawed government policies for the housing bubble. But I don’t blame pension funds and taxpayers who now hold the debt the article proposes to forgive. If we want solutions that make sense, we’re going to have to get real and give up the fairytale that we can wave a magic wand and conjure up trillions of dollars in debt forgiveness without unintended consequences.

Madeline Schnapp

Director of Economic Research

ForeclosureRadar.com

530-550-8801 x27