New Jersey Real Estate Report

From the Wall Street Journal:

The Rise of the Mortgage ‘Walkers’
By NICOLE GELINAS
February 8, 2008

Fitch Ratings, while telling investors last Friday to expect additional “widespread and significant downgrades” on $139 billion worth of subprime loans, has cited a new factor in their “worsening performance.”

“The apparent willingness of borrowers to ‘walk away’ from mortgage debt,” the analysts noted, “has contributed to extraordinary high levels of early default” on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.

Such behavior, where not precipitated by willful fraud, shows that American homebuyers supposedly duped by their lenders aren’t so dumb. They’re perfectly capable of acting rationally without political interference.

While mortgage fraud has abounded in recent years, voluntary foreclosures are not by themselves evidence of a newfound irresponsibility on Americans’ part. To be sure, until recently, mass-scale voluntary foreclosures were unthinkable. But markets have changed, and people are changing their behavior in response.

A decade ago, most people started off with enough equity in their homes to make foreclosure irrational from a financial standpoint. Consider: If you made a 20% down payment on a house, prices would have to fall by 20%, almost immediately, before you lost all your money and had much incentive to walk away. This scenario was unlikely, particularly since an independent appraiser had assigned a clear value to the home. Foreclosure was remote, absent a personal financial crisis, for another reason: Every month your mortgage payment would reduce your debt and increase your equity, giving you more room for prices to fall.

But over the past few years — until last spring — banks and the mortgage-backed securities investors who bought the loans the banks packaged weren’t demanding substantial down payments; they were happy with 5% or even nothing down. They also didn’t worry about whether or not borrowers were building up equity. “Interest-only” loans, quick mortgage refinancings to cash out any equity, and other inventions often led to just the opposite.
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Yes, this behavior is new — but only when it comes to houses. Americans have long been able to cut their losses from bad investments and start over. It stands to reason that when the market made houses into yet another speculative investment, Americans would do the same.

Borrowers acted rationally in response to market forces and incentives during the bubble: Buy a house because prices always go up; you can’t lose. Many are acting rationally now: Mail the keys back and un-borrow the money, because prices are sinking fast while the debt isn’t. When the house was purchased not as a first home but as a rental investment, the decision is even easier.
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Nobody is going to debtors’ prison. Nobody is going to have to toil for 30 years and sacrifice their kids’ future to pay off burdensome loans that they’re stuck with forever because they overreached. (Even if banks and mortgage administrators pursue judgments for post-foreclosure loan balances, there’s always bankruptcy as a last resort.)

As for Sen. Hillary Clinton and her proposed “moratorium on foreclosures”: She may soon find that borrowers, not just lenders, are screaming to let them act within their contractual rights.

From MarketWatch:

Pending home sales fall 1.5% in December

Sales contracts on previously owned U.S. homes fell 1.5% in December, the National Association of Realtors reported Thursday, in a sign that home sales will continue to decline.

The pending home sales index, based on contracts signed but not closed in December, was down 24.2% from the prior year’s period. The index, which is considered a leading indicator of existing home sales, had also declined in November, after gains in September and October.

In November, pending home sales declined about 3% from the prior month, compared with the prior estimate of a 2.6% decline.

Sales activity is expected to remain soft through the first half of the year despite low mortgage interest rates, according to Lawrence Yun, NAR’s chief economist.

The aggregate existing-home price is expected to drop 1.2% this year, according to NAR.

From Bloomberg:

Pending Sales of Existing U.S. Homes Fell 1.5% in December

The number of Americans signing contracts to buy previously owned homes fell in December for a second straight month, signaling the worst housing slump in 25 years will persist well into 2008.

The National Association of Realtors’ index of signed purchase agreements decreased 1.5 percent to 85.9, the group said today. The drop follows a revised 3 percent decline for November that was larger than previously reported.

Today’s report reinforces concern that the housing recession will linger as foreclosures add to a glut of unsold homes. The housing slump is weighing on the job market and consumer spending, putting pressure on Federal Reserve policy makers to lowering interest rates further to keep the economy out of a recession.

“The housing outlook has deteriorated significantly and I don’t see a bottom on sales and starts until the middle of the year at the earliest,” Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, said before the report. “And our outlook on home prices has gotten worse.”

Economists had forecast the index would fall 1 percent, according to the median of 33 estimates in a Bloomberg News survey. Projections ranged from a drop of 3 percent to an increase of 1.8 percent.

Compared with a year earlier, the measure was down 24.2 percent.
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The Realtors lowered their forecast for existing-home sales in 2008 to 5.38 million from a January forecast of 5.7 million. Last year, 5.65 million homes were sold. Purchases of new homes will decline to 637,000 from 774,000, the group said today.

Pending resales fell in three of four regions. Purchases decreased 3.1 percent in the West, 3 percent in the South and 1.7 percent in the Northeast. They rose 3.4 percent in the Midwest.

From Fortune:

Home equity loan defaults soar

One of the last sources of ready cash for homeowners looking to get money from their house appears to be shutting down and the results aren’t likely to be pretty for the economy.

Last week, buried deep in the ugly details of Countrywide Financial Corp.’s (CFC, Fortune 500) earnings release, was the news that its $32.4 billion portfolio of prime HELOCs – home equity lines of credit – had begun to rapidly deteriorate. The reeling Calabasas, Ca.-lender was forced to take a $704 million charge related to homeowners’ inability to pay back equity they extracted from their homes.

The structure of these loans appears to spell trouble for Countrywide and other home lenders with big home equity loan books. According to an overlooked Moody’s Investors Services note that came out last Wednesday, once a certain threshold of losses is achieved in a home equity loan securitization pool, the bond holder is paid off ahead of the lender.

What’s worse is that it’s difficult to see how large a lender’s exposure is to home equity loans. Known as rapid amortization, this risk is treated as a contingent liability for Countrywide and other home equity loan lenders and is carried off balance sheet, until deterioration occurs and the lender goes on the hook for the loans. Countrywide is the nation’s biggest home equity lender, with around 9% of the market.
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To head off more defaults, Countywide sent out letters to 122,000 homeowners last week informing them that their home equity credit lines were shut down since their estimated home values had dropped below their loan amounts.

Right behind Countrywide was Chase Home Lending, which notified borrowers in Los Angeles, Imperial and Orange Counties that they could tap their credit lines for no more than 70% of the value of their house. Previously, the limit had been 90%.

Interesting piece in the NYT this morning covering the early 90’s real estate crash. A few years back I put together a compilation of stories from the NYT during this period that illustrated the similarities with the current boom, and now the current bust.

Home Prices Do Fall
A Look At The Collapse Of The 1980’s Real Estate Bubble Through The Eyes Of The New York Times

From the New York Times:

Home Prices Start to Dip, Recalling ’90s Slump

For homeowners in the metropolitan area, all of the talk in the past year about a real estate collapse may have sounded as foreign as a Bollywood musical.

After all, the value of the typical home in the area has more than doubled in this decade. And at the region’s core, the prices of apartments in Manhattan have floated upward on seemingly unquenchable demand.

But lately, more cracks in the housing market have begun to show, and the trend is reminding some analysts of the severe downturn in the region during the recession that followed the boom years of the late 1980s.

Even in Manhattan, signs of weakness have appeared beneath the headlines about ever-rising average sale prices of condominiums and co-ops.

A report last week found that rents in Manhattan declined in January, by more than 7 percent in some neighborhoods, according to the Real Estate Group New York.

The latest set of numbers “reinforces our sentiment that the market has, in fact, turned,” Daniel Baum, the chief operating officer of the company, said in the report.

Economic distress signals are not nearly as widespread as they were in the early 1990s, and economists are still debating whether there will even be a recession this time.

Nonetheless, the long advance and subsequent retreat in house prices in the region bear an eerie resemblance to the rise and fall of two decades ago. It is too soon to tell just how deep the current decline will be. But James W. Hughes, who has tracked the market for homes around New York City through cycles of boom and bust, said he expected it to be worse than — maybe twice as bad as — the fallout from the “real estate bubble” of the 1980s.

Mr. Hughes, the dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said that housing prices in New Jersey rose 145 percent from 1980 to 1988, then fell about 9 percent by 1992.

The pattern for the suburbs in New York and Connecticut was similar, he said. That flow and ebb left people who stayed in their houses during that period with property values that more than doubled, on average.

But the people who bought near the peak in 1988 faced significant losses if they had to sell quickly. Indeed, it took 10 years for house prices in New Jersey to return to their 1988 level, Mr. Hughes said. (Taking inflation into account, the recovery was not complete until 2002, he said.)

“A lot of the pain was felt by peak-of-market buyers that bought in ’88,” Mr. Hughes said. “Those are the ones that really got stuck.”