Pressure on Home Prices ?

One of the themes TBP has developed over the years was that of the Slow-Motion-Slow-Down: As rates ticked higher, home sales would slow, refis and MEW would decrease, inventory would build, and prices would come down. Add to that the ARM resets and increasing foreclosures, and you have the formula for:

1. Decreased Consumer Spending
2. Falling Home Prices
3. Economic Slowing

Whether or not this causes an actual recession is yet to be determined, but the statistical odds of one occurring keep moving higher. Even the runaway Chinese Markets will eventually be impacted by the slowing US consumer.

In today’s WSJ is an article that sums up how all of these elements combine: Mortgage Woes Force Banks To Take Hits to Sell Homes:

"An auction of nearly 100 foreclosed homes
here Saturday showed that mortgage lenders are having to accept huge
discounts in some cases to unload such properties.

A surge of foreclosures over the past year or so has
left lenders struggling to sell a growing backlog of homes. Rather than
relying on real-estate agents, the usual practice, some are turning to
large-scale auctions to speed up the sale process.

Real Estate Disposition Corp., the Irvine, Calif.,
company that organized Saturday’s auction of lender-owned homes, plans
similar sales May 19 in Los Angeles and May 20 in Riverside, Calif.

At the San Diego sale, houses and condos typically
sold for about 30% below the previous sale or appraisal prices. In a
few cases, the discounts were around 50%

A four-bedroom home in Oceanside, Calif., attracted a
high bid of $495,000 at the auction, 33% below the sale price recorded
in November 2005
for the property. One condo in San Diego sold for
$120,000, less than half of its previous value.

This raises a wealth of issues, including the absurd Appraisal Inflation we have mentioned in the past. 

How might this resolve itself? As foreclosures continue to surge higher, lenders-in-possession will find themselves with an increasing number of homes. Indeed, so many so, that the only solution has becomne large scale auctions — 100 or so prpoerties at a time. As you can imagine, the impact of so much supply hitting the market all at once means that buyers can be quite picky, and bidders are free to low ball.

The net result, as seen above, are enormous price decreases from the loan amount, appraised value, or recent selling price.




Mortgage Woes Force Banks To Take Hits to Sell Homes
WSJ, May 14, 2007; Page A2

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. jmf commented on May 14

    think this from the china link is not correct

    “The total value of all stocks on the Shanghai Exchange exceeds the value of all other Asian stock exchanges combined — including Japan, the second largest stock exchange in the world”

    this was the news from last week

    Bourses in China eclipse all of Asia

    Wednesday’s figure of $49bn was nearly double Japan’s $26.9bn turnover, and triple the $16.5bn combined trading volume of Australia, Hong Kong, Thailand, Singapore, Malaysia, Korea, India, Taiwan, Indonesia, New Zealand and Vietnam. It was still less than half Tuesday’s $122bn trading volume in the US, but well above London’s $29.4bn on Tuesday…….

  2. Bill commented on May 14

    Yes … but incredibly decreased prices in an area that was/is WAY over inflated – California . Gee maybe all of us will afford to live in Ca soon . San Diego sounds good !

  3. wally commented on May 14

    Could be – perhaps we should… but if we all move there we will have to put our homes in Omaha and Indianapolis up for sale, thus depressing those markets.

  4. tjofpa commented on May 14

    And if u we’re planning on selling in any of the areas where these auction sales took place, its not going to matter if u had purchased with a sub prime, Alt-A or Prime loan. The pressure to sell as soon as possible will be intense.

  5. Michael Schumacher commented on May 14

    That auction was full of shills…..the people that run it employ the same people that it does at several auto auctions I have taken part in. it also does’nt talk about the reality of people who are still holding out (the majority of buyers in the 2005-06 range( who still refuse to believe that prices have come down.

    That auction is only the tip of the iceberg. Those same properties will be cheaper in 6 months time….especially the one example in oceanside… a little DD and you’ll see why it;s overpriced even with a 100k discount from the price reportedly paid just recently.

    Just starting…


  6. iy commented on May 14

    Sweet, I’m an SD resident and am looking into buying a property within the next year or so. As much as I’m *not* rabid about home ownership, if prices keep on tumbling down the way they are now, I think I’m going to be forced to buy sooner or later :)

  7. Christopher Laudani commented on May 14

    Maybe all the laid off loan officers can get jobs conducting auctions on homes they approved?

  8. Shrek commented on May 14

    In Chicago, my hometown, I’m still amazed by the amount of properties that still haven’t been completed. You can’t talk about a bottom until construction has slowed considerably. I’ve been looking for a new place to rent for one year and supply on craigslist has gotten much bigger. Last year in february/march it was around 17,000 listings now it is around 24,000. A pretty large jump in homes for rent. Another thing I have noticed is there are more higher end homes on the rental market. 6000-11000 a month range. I can’t imagine thats a huge market.

  9. Michael Schumacher commented on May 14


    in a year or so you will see substantial discounts from prices of today. The big question is: in a year’s time will we be looking at the bottom??? based on growing inventories I suspect not. But it may not have farther to go down in a year’s time too.

    All depends on the veracity of the people who bought in 2005 and 06 and how long they are willing to shoulder the carry costs. Some may not have a choice in the matter ala repo’s however that market will be substantially different than “normal”-whatever that looks like then and now…..LOL


  10. KirkH commented on May 14

    I just wonder how far it’s going to over correct. Seems like the reversion to the mean always goes a bit too far before appreciation begins anew. Considering the huge econo-dent from the death of housing and considering the last recession was artificially delayed, you’ve gotta wonder just how cheap it’s going to get here in San Diego.

  11. Greg0658 commented on May 14

    IMO it all hinges on American manufacturing/mining in borders not the services industry.

  12. rouss commented on May 14

    The lending industry’s “creativity” will help to defer but not avoid the day of reckoning. See today’s story about Countrywide.

    I especially like this paragraph: Countrywide plans by the third quarter to finish rolling out 50-year subprime loans nationally, though Mozilo said “(we) will not be putting these products in our bank’s portfolio.” In other words, “at some point in the next 50 years these borrowers may be creditworthy but we’re not crazy enough to hold the loans ourselves”!

  13. howard commented on May 14

    this strikes me as not a bad time to put a pool of capital together and become a real-estate magnate! take, say, six months to organize your financing, and by year end, you could be picking up some real bargains….

  14. DP commented on May 14

    Can anyone comment on how these auction values will affect tax appraisals? Would a 40% haircut on a property provide neighbors evidence that their tax bills are too high? If this is true what would it mean for state budgets down the road? Given that states have the greatest pension underfunding this must be a bit of a concern, no?

  15. Kevin commented on May 14

    I’m in the LA area. Does anyone know where I can go to find out about the next auction in the LA area?

  16. TaZ commented on May 14

    “Countrywide plans by the third quarter to finish rolling out 50-year subprime loans nationally”

    So much for the home ownership concept in Amerika, once ALL the sheeple that have no real assets run into these loan-shark scams the resulting inflation will push any sane person right out of the market to buy…

    I was thinking of cutting loose a couple of hundred Gs in my portfolio in 2008-2009 to buy a home (once prices deflated within reason), but it now appears that Helo-Ben & the liar-loan boys are only thru with Phase II of the Credit Bubble.

    There ought to be a law…

  17. TaZ commented on May 14

    “I’m in the LA area. Does anyone know where I can go to find out about the next auction in the LA area?”

    Most of these “auctions” are nothing more than another RE game.

    They miss ALL the sheeple lining up at open houses, frothing at the mouth, holding free money from mortgage scammers ready for a bidding war.

    The REAL “auctions” won’t start for another year…that is if the credit bubble isn’t reinflated, which appears to be in the works.

    So in other words, save your money/credit for REAL investments, unless you’re in the modd to gamble at flipping your way through the next RE craze ;-)

  18. muckdog commented on May 14

    In the mid-to-late 90’s as real estate was crashing down across most of the country, the number of foreclosures skyrocketed. I remember multiple houses on my street at the time that were being auctioned off and depressing prices.

    That didn’t last long, though.

    So the real question is, if the foreclosures are dominating the headlines now like they were back in the mid-to-late 90’s, and the headlines are predicting dire outcomes for housing, is now the time the contrarians step in?

    Those who stepped in in the 90’s made a bundle.

  19. John commented on May 14


    We weren’t nearly as economically, uh…fornicated as we are now, either.

    Just something to keep in mind.

  20. seamus commented on May 15

    muckdog, I wouldn’t recommend it. We are way, way early in the cycle. In Los Angeles, real prices started declining in 1990 and didn’t bottom out until 1997. People who bought in ’91 (approximately where we are) didn’t break even in real terms until 2002. San Diego was only a little quicker to get back to even, in 2001.

    Usually the word “contrarian” means “buy something valuable but neglected while it’s low,” not “buy something valuable while it’s still near the top of a bubble.”

  21. Darin commented on May 17

    I live in Orange County and think that you have missed the bigger picture. The housing market–and I going to say this once and for all–is simply TOO BIG TO FAIL. The banks and the FED, Fanny and Fredie too, have all already contrived to apply a floor for the falling prices. The mortgage market, while ailing at the moment, is still under tremendous pressure (ground swell) to unload billions of dollars because of world wide monetary inflation. Prices will correct, but it is not going to be mean reversion. Inflation has been laid in for almost a decade now and there isn’t any way to stop it. With the boomers retiring, why would the FED want anything other than inflation?
    On the other hand, without a demographic hand me out (a lenient immigration policy), there may not be enough people to live in all of these places either.

  22. lou commented on May 21

    did you say let’s pool money and be ready. Here’s my $5k. I will press for dilligence and proof of good deal, but Im easy and Ill go in. Go get this same message from 10 others and you’ve got a $50k down payment ready in a 1 day window.

Read this next.

Posted Under