A friend of mine has provided the following information to his consulting clients and others for the past decade. Take a look at the highlights of some of the old stuff here, and think about what this information could have done for you if you had access to it when we did . . .
US Housing Market Reality
May 2010 Wrong again . . . to date every time we have estimated the severity of the situation with the US housing market & economy, the global economy, etc we have been too conservative. This time is like the others, while we have shared until recently that we had reached the midpoint of the housing correction, we were wrong. We are no more than 1/3 of the way through it. Take a look at the pain, suffering and losses incurred thus far, double it and that is what still lies ahead of us. This of course creates enormous opportunities and many of our clients continue to position themselves to realize these once in a life time situations. Forget about the nonsense you are hearing regarding improvements to the economy. 1/3 of mortgage borrowers aren’t paying their mortgages, doesn’t it make sense that they are spending that money and therefore creating a situation wherein it appears the economy is recovering when in fact this is a last gasp before people are forced to be responsible?
March 2010 Discussions of a moratorium on foreclosures are becoming more frequent. Sad reality is if disgruntled home owners are told they can’t be foreclosed on, significantly more will stop making mortgage payments thereby only further “kicking the can” into the future. We are weeks away from seeing the impacts of the expiration of buyer tax credits and the Fed’s discontinuation of their supporting the housing market via their purchases of most mortgage paper generated over the past few years. Want to see what impact this will have? Ask yourself, how much money you would invest on mortgages secured by real estate in an ever declining market, where many of the borrowers have less than 5% of their own money in the game, low credit scores, face interest rates are near all time lows, there exists more pent up supply (shadow inventory) than will sell over the next several years combined, and foreclosures and delinquencies will continue to escalate until at least 1Q2013, longer if the government applies this newest band aid? My guess is you wouldn’t put what’s left of your retirement dollars in this type of investment. As pension funds continue to find themselves faced with the dire reality of not enough income and too many obligations they are beginning to become more and more aggressive in the investment vehicles they choose, thereby not only moving away from mortgage backed securities and other real estate related vehicles, but towards more risky options. Hmmm, good times ahead. We are now in the eye of the hurricane.
January 2010 New reports tell us foreclosures and serious delinquencies continue to hit record highs. While this spring will see the double whammy of an expiring buyer tax credit and the end of the Federal Reserve’s insane purchases of almost all newly originated mortgage related mortgage securities. click here for Reuters article With future supply growing faster than ever, buyer’s incentives expiring and the largest purchaser of newly originated mortgages winding down their purchase we will start to see the next leg of the real correction later this year.
November 2009 Supply and Demand is a Law, not a suggestion: Whether you believe in the law of gravity or not, it impacts you. Similarly, whether you believe in the law of supply and demand it too has an absolute impact. Let's start by looking at the supply side of the US Housing Market . . . In the 3rd quarter of 2009 almost a million homes in the US entered the foreclosure process, an increase of over 22% from the same period in 2008 click here for article This represents 1 out of every 136 homes in the country entering the foreclosure process during 3Q09, in some areas the number was as low as 1 in 20 homes entering the process during just this 3 month period!
During the same period, 3Q09, mortgage delinquencies across the country hit a new high click here for Realty Trac article having increased 58% from the same period in 2008! With unemployment continuing to rise, and maximum mortgage resets still not due for about another 2 years, which direction will this go?
Combined, this brings the total to almost 4 million homeowners who are either in foreclosure or at least 3 months behind click here for this article at the end of 3Q09.
Barry Sternlicht, CEO of Starwood Capital Group (who just cut a super sweet deal w/ the govt on distressed assets) stated recently that the total number of "Shadow inventory" could be as high as 12-15 million. While no one knows for certain exactly how many properties banks, financial institutions and investors are sitting on, we do know, for certain, that there are literally millions of people who have not made mortgage payments for months and in some cases for up to 3+ years without being foreclosed upon.
Ok, so what about demand?
According to The National Association of Realtors (notorious for misleading the public) the number of sales in 2010 should be approximately 5.3 million. This represents demand.
You do the math
With about 4 million homes 90+ days delinquent or currently in the foreclosure process, plus who knows how much shadow inventory, plus the rate of foreclosure filings and new delinquencies growing rapidly - what will happen to supply? for how long?
Even if we get to NAR's projected 5.3 million sales next year how will that level of demand even make a dent in the supply?
Bottom line:
US Housing Markets are at least another 5 years from a bottom and will return to price levels similar to those seen in 1996-1998.
Want to understand more about where we are and how we got here? Visit www.SmashedFeet.com
Now that you have been shaken and awakened, what are you going to do to improve your situation?
Don’t believe it? Consider this. . .
October 2009 Financial institutions currently own enough housing inventory to supply the entire nation’s housing demands for the next year and a half. This doesn’t include the inventory they already have currently on the market and listed for sale. There is another year and a half that they haven’t yet made available for sale. The amount they don’t yet own, but will be foreclosing on in the next few years makes the amount they currently own appear minuscule. 3Q2009 foreclosure filings were at the highest levels on record. As our dollar continues to weaken we are rapidly approaching a point where we will no longer be able to subsidize artificially low interest rates and guarantee mortgages where borrowers have little to nothing at risk. The next step is rapidly approaching, watch for the collapse of the dollar. A weakening economy, rising unemployment, rising interest rates and rising distressed inventories will have a significant negative impact on housing prices. The good news? From a pricing correction standpoint residential real estate is approaching the midpoint (commercial trails residential by at least 30-36 months in this correction.)
April 2009 Our clients were informed that multiple games are being played to manipulate both markets and the public’s perception of the economy. Expect a rebound to simply set up a stronger leg down later this year and well beyond.
September 2008 We alerted clients that the stock market correction was simply the first, in what we believe will be a series of steps towards an ultimate bottom and possibly a collapse of not only our global financial system, but the demise of the United States of America.
April 2008 We have seen lots of changes in just the past few months. Lenders and courts are overwhelmed with the number of defaulting loans. The properties that banks have actually foreclosed on and are just now selling were those where rates typically adjusted in the later part of 2006. With sub prime rate adjustments due to hit their peak in the 2nd and 3rd quarters of this year, and with borrowers frequently being 12, 18 even 30+ months delinquent before lenders and courts actually even initiate the foreclosure process it is probable that we won’t see a peak of bank related sales until at least 2011 or 2012, perhaps even later. I was just interviewed by The Wall Street Journal and asked who benefits from this process taking as long as it is and why does it take so long? Let’s ask ourselves a few questions:
Are there are fewer loans defaulting each month now than were being approved a few years ago?
When a loan was approved did the borrower have to be approved?
Did the property have to be appraised?
Did the borrower and property package have to be underwritten and ultimately approved by the investor who would own the paper?
Did this routinely all happen in 2-4 weeks?
Is there anyone relying on the income from servicing this loans who would not want them to go away?
December 2007 Sellers are finally starting to accept that the days of excessive real estate speculation are over and prices WILL in fact correct, unfortunately many sellers are still unable to accept that whatever price they will get today will be higher than any price they will sell for at any time over the next 10+ years. Lenders are still overwhelmed by the defaulting loans and associated properties nationwide. We are seeing lenders take 3, 4, even 6+ months to address offers on defaulted properties.
October 2007 In Lee and Collier counties (SW Florida, the rest of the nation’s crystal ball for housing) we have just started to see the number of foreclosure filings exceed the number of properties selling each day, this trend will increase until sometime in early 2009 by which time the number of foreclosure filings will have peaked. As lenders become more and more motivated to get or keep nonperforming real estate holdings off their books the prices they accept will continue to decrease putting a great deal of downward pressure on the overall market prices. This will result in prices most likely hitting a bottom by no earlier than 2011. They will then remain flat until the excessive supply which has been created, or built, is absorbed. Best guesstimates are this process, which will begin in 2011 will be completed by no earlier than 2015-2017 at which time we will potentially start to see prices move up. It is realistic to see prices back to today’s levels by 2025 at the earliest.
August 2007 There are now more properties going into default and/or being foreclosed on each month than there are selling in many parts of FL, AZ, NV and CA. This trend will gain momentum until 4th quarter 2008 or first quarter 2009 when foreclosures should peak. By late 2010/early 2011 the foreclosure wave should have worked itself out and prices will be close to a bottom. This could be extended if lenders are unable to manage the huge # of foreclosures and simply take their time to work through all of it. In that case, or if there is another extenuating circumstance (i.e. bad hurricane season(s) global economic turmoil, governmental intervention, war or terrorist episode) we will most likely see this process lengthened. Once a bottom is reached it now appears that we will stay relatively flat for at least 4-7 years at or near the bottom.
Meaning that we are looking at prices dropping steadily for about 4 more years and then staying flat until 2015-2018. It’s reasonable to expect that prices will be similar to those seen between 2000 and 2002 during this extended bottom, but as with all cyclical markets, supply will eventually be absorbed and demand will someday increase again forcing prices to escalate. This next escalation most likely will begin between 2015-2018 and will be slow at first as many people will be afraid to venture back into the real estate market. Their apprehension will create huge opportunities for those of us who will know when the bottom is approaching and when it will be over.
July 2007 we are seeing the number of traditional sellers willing to enter the market starting to slow down. In June 2007 we saw new listings slip back to levels of late 2005. While even this level is still resulting in approximately 4 homes coming on the market for every one selling each month, it is an indication that many sellers simply can’t see a way out and are hoping for better times ahead. Unfortunately, we are just beginning to enter a period that will most likely last 2-4 years during which the vast majority of properties that sell will be foreclosures where the lenders who end up in possession of the homes simply have no option but to sell and get the non performing assets off their books. This will result in a great deal of downward pricing pressure while we work through this. All indications are that we should see prices hit a bottom within the next 3-5 years. Demand has already returned to a level slightly higher than the pre speculative boom and will most likely stay constant over the next several years despite the difficulties still developing in the financing industry.
May 2007 we saw the rapidly approaching wave of foreclosures no longer on the distant horizon. There are currently about as many homes entering the foreclosure process each month as there are actually selling. These homes will only add to the downward pressures already on pricing from the continuing increases in housing inventory (new construction,) financing reform and the media’s gloomy picture of the housing industry. Builders and developers are continuing to struggle to stay in business, by offering huge incentives as attempts to avoid the inevitable. In many situations, the cost of construction (labor, materials, permits, fees, holding costs etc) have already reached a point where it equals the market value of the end product, effectively requiring that land receive little or no value simply for projects to break even. As pressure mounts from the federal government, lenders continue to tighten lending guidelines and programs effectively minimizing the number of people who can buy a home.
January 2007 we predict huge opportunities in pre-foreclosure, rehab/renovate and flip, and for new construction workout specialists, just to name a few. We also see savvy investors liquidating holdings in “high appreciation markets” and moving their money to “cash flow markets.” Opportunities exist today, and many more will be created to get guaranteed 8-12% returns on real estate investments while minimizing any down side risk. These opportunities, while not glamorous will be steady and consistent. Strong similarities exist when we compare real estate investment opportunities with the old fable of the Tortoise and the Hare. As in any correction many fortunes will be lost, and some enormous fortunes will be made.
December 2006 we predicted that the ever softening real estate market, already down 20%+ from the peaks would see an additional 4-6+ years of decline and in South Florida specifically an additional 25%+ reduction in prices. We are starting to believe that history will look back upon the upcoming years in a manner similar to the way we currently view “The Great Depression,” only this will be more significant.
April 2006 we forecast that at least ½ of builders and developers in South Florida will be out of business within 5 years. As demand normalizes they will be forced under by the weight of overly leveraged projects. As lenders see this coming they will begin to look for “workout specialists” who can take over failed projects and minimize the damage done to the lenders.
April 2005 we forecast that foreclosures would ultimately reach record levels due to the alarmingly high number of ARM’s and creative loans with negative amortizations and the like. This wave of foreclosures would put even more downward pricing pressure on the market due in part to the large number of appraisals that will be impacted by the flood of foreclosures.
December 2004 we predicted that many over appreciated markets would see prices correct at least 20-35% from the peaks. We predicted that this correction would last at least 3-5 years.
October 2004 we foresaw and again warned clients of decreasing demand and increasing supply in most of the over appreciated real estate markets across the country. Nowhere was there a more gross demonstration of this than in FL, NV and AZ. We informed clients that a pricing peak would occur in most areas within the following 6-12 months.
November 2001 we foresaw and warned our clients of the coming market where speculative demand fueled partially by artificially low interest rates, an unstable stock market, the events of 9/11 and a staggering over estimation of the baby boomer effect would create a rush to meet this demand with additional housing supply. The problem we foresaw at that time was that by the time land was acquired, plans approved and supply was actually made available the demand would have dissipated.
September 2000 we noted and started sharing that nationally, the real estate market was indicating a peak would occur within the next 6-12 months.
