New Jersey Real Estate Report

From the WSJ:

Number of Foreclosed Homes Keeps Rising
Lenders Cut Prices To Jump-Start Sales As Inventory Grows
By JAMES R. HAGERTY
June 2, 2008; Page A3

The number of foreclosed homes owned by lenders continues to rise despite signs that they are increasingly willing to slash prices to sell those properties.

Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks. The April total works out to about one in seven previously occupied homes available for sale nationwide.

A surge in defaults has increased the inventory of bank-owned homes, known in the trade as REO, for “real estate owned.” By cutting prices, lenders have managed to increase sales of such homes sharply in recent months in some cities hit hard by foreclosures, including Las Vegas, Detroit and Sacramento, Calif., local real-estate brokers say.

With home prices falling, “holding the assets means further losses,” said Mark Fleming, chief economist for First American CoreLogic. Some lenders now are cutting prices as often as every 20 days on homes that aren’t selling, said David McCarthy, chief executive officer of Integrated Asset Services LLC, a Denver-based company that helps banks value and sell REO homes.

But lenders haven’t yet managed to catch up with the inflow of foreclosed homes. Mark Zandi, chief economist at Moody’s Economy.com, forecasts that the inventory of REO homes won’t peak before the end of 2009.

In dollar terms, foreclosed one- to four-family homes owned by lenders whose deposits are insured by the Federal Deposit Insurance Corp. more than doubled to $8.56 billion at the end of the first quarter from $3.59 billion a year earlier.

The REO glut is weighing on house prices in many areas, as banks tend to cut prices faster than other sellers. A new set of local home-price indexes, to be introduced this week by Integrated Asset Services, shows that the median price of homes sold in Riverside County, Calif., in April was down about 29% from a year earlier. The median price fell about 13% in Clark County, Nev., and 12% in Arizona’s Maricopa and Pima counties. Median-price comparisons can be skewed by shifts in the proportions of high- and lower-priced homes sold from one year to the next but provide a broad indication of market trends.

From the Wall Street Journal:

Lessons From the Housing Bubble
By DAVID WESSEL
May 29, 2008

Before we replace angst about housing, mortgages and credit markets with anxiety about rising oil prices, consider what we’ve learned in the past several months. We had a housing bubble; that’s now obvious. But how did it happen? Why was its bursting so painful? Without answers, we can’t hope to reduce chances of a repeat.

Boil it down to the three R’s: rocket scientists, regulators, and ratings agencies.

The rocket scientists are the wizards of Wall Street who invented securities that supposedly dispersed risk widely but actually created much more leverage than proved wise.

There is a good case that the savings-and-loan mess of the 1980s was made in Washington, the inevitable result of government deposit insurance that led to tails-you-lose, heads-I-win banking. The current mess was made on Wall Street.

A bubble so large also required aggressive mortgage originators, imprudent home buyers and myopic investors. But it wouldn’t have been as bad if not for the paper factories that sliced up individual subprime mortgages and assembled the pieces into securities, each with its own acronym, that were deemed safer than the underlying loans. They behaved as if they were taking a little poison and diluting it in a big reservoir; instead, they poisoned the entire water supply.
…
“The idea of risk dispersion is nice in theory, but in practice it depends on who it gets dispersed to,” says Peter Fisher, a former Federal Reserve Bank of New York official now at money manager BlackRock Inc. “It turned out we weren’t dispersing it to strong hands who could hold it through the volatility. Rather, we were dispersing it to weak hands who couldn’t hold it, and ended up adding to the volatility.”

The cost of delinquency, default and falling house prices often was passed to entities (some linked to brand-name banks) that lacked the financial strength to weather a storm. As the entities couldn’t bear the burden for long, they had to sell mortgage-linked securities into a hostile, illiquid market, pushing down already depressed prices.

In a modern capitalist system, regulators provide guardrails to keep markets from driving the economy off a cliff. The regulators failed. Whether regulators should or could have restrained innovation on Wall Street or prohibited business deals between consenting, sophisticated adults is a tough question.

But regulators failed to protect unsophisticated consumers from mortgage loans that they simply couldn’t afford or didn’t understand; they’re now fixing that. And regulators misunderstood the risks that banks were taking and failed to stop lenders from lowering standards too far in their frenzy to attract business; fixing that will be tougher.

Among their many failings, the regulators allowed lenders to make a fundamental mistake: To lend not against the borrower’s cash flow and income, but instead to lend against the seemingly inexorable increase in the value of the collateral. Mortgages were made to people who couldn’t afford the payments because the lender (or investor) figured that if the borrower defaulted, the house would always be worth more than the loan.

“It is the hallmark of a credit bubble when lenders think that because collateral is going up in price they can ignore the borrower’s ability to pay,” says BlackRock’s Mr. Fisher. “Collateral should only be a backstop.” When lenders forget that, regulators must step in. “Lenders need someone to prevent them from competing their way to the bottom,” he says. Let’s put those words on a laminated card and hand it to every banking supervisor.
…
The flaws of rating agencies are a mélange of conflicts of interest, misleading grading systems that classified complex securities as if they were much like simple corporate bonds and a backward-looking approach that proved particularly useless. They were the enablers. They are atoning and changing their ways, as they should. Their business model will change; government oversight will be strengthened.

But investors who relied on the rating agencies — particularly supposedly sophisticated pension funds and other institutions — are at fault, too. Rating firms became a crutch for investors who simply didn’t want to spend the time and money required to be prudent investors at a time when low interest rates had everyone reaching for higher returns without contemplating the higher risks.

A little “back to basics” in banking and investing would go a substantial way toward avoiding a repeat of the Panic of ’08.