An odd little real estate story, even by newspaper standards.
The other day I ran across a tidbit, almost a throw-away item, in the San Jose Mercury News that had even greater "huh?" value than the usual intrepid real estate reporting.
While scanning the Business section of the February 23, 2008 Merc I spotted a small article headlined "Foreclosures exceed sales". The lead-in: "For what one expert thought was the first time, the number of monthly foreclosures exceeded the number of monthly home sales in California in January, according to data compiled by two research companies."
I won't dispute that this might have happened. I will dispute that anyone can be confident it did happen—or be confident in much else in the story.
"...DataQuick reported 19,145 home and condo sales in January." Okay, so far, so good. I've heard of DataQuick. I can't verify the accuracy of its numbers, but at least DataQuick has been around long enough to have name recognition.
DataQuick is what's called a "credible source".
"ForeclosureRadar, a Discovery Bay real estate research firm, said 19,821 California homes went into foreclosure in January." Wait a second! Who the heck is ForeclosureRadar? I've heard of DataQuick, which also tracks foreclosures. I've heard of RealtyTrak, which tracks foreclosures as well. I've never heard of ForeclosureRadar.
And where does ForeclosureRadar get its foreclosure numbers? From "its own proprietary method". Oh okay. It's a big secret. Maybe ForeclosureRadar gets its foreclosure numbers just by tracking the number of Notices of Default filed in each county each month, a matter of public record? One would hope so. So why the mystery? How does tracking NODs require a "proprietary method"? What embellishments are needed? No one says, at least in the article.
And how long has ForeclosureRadar been tracking foreclosures? No one says, at least in the article.
And why is ForeclosureRadar in Discovery Bay? Isn't that the out-in-the-boondocks retirement community that used to advertise on TV?
And who's the "expert", one Sean O'Toole, who "doubts there has ever been another time when the number of foreclosures exceeded the number of sales in a month"? How long has Sean O'Toole been tracking foreclosures? What's his background? What's his experience?
In other words, what gives Sean O'Toole's utterances credibility? No one says, at least in the article.
Next the Mercury News flexes its journalistic muscles by bringing in the obligatory real estate economist for a quick quote: "What that number says to me is that you have more homes getting dumped on the market in terms of foreclosures than there is demand for homes," explains Christopher Thornberg of Beacon Economics. Thank you, Chris, for that penetrating analysis. Which somehow fits the tenor of the article. Which is starting to look a little like a Marx Brothers routine.
And, by the way, am I the only one who wonders why a story like this was buried in the Business section ("continued on page 5")? Isn't this big news?
I'm going to create a highly speculative scenario that might go a long way toward answering some of my questions about "Foreclosures exceed sales". I'm not saying it happened this way. I'm just guessing.
Sean O'Toole is ForeclosureRadar. Sean O'Toole is way way out there in Discovery Bay and he'd like a little attention. So how does a real estate research firm get itself a little attention? By getting quoted making hair-raising statements about the real estate market (see Christopher Thornberg, above, for the latest example). So Sean O'Toole looks at DataQuick's latest numbers, and he looks at his latest numbers, and a light bulb appears over his head. Press release gets banged out and emailed to various media including the Mercury News, perspicacious Merc reporter sees catchy story already 80 percent written, polishes it off with quick call to economist who happens to be flavor of the month, turns in story, Merc editor likes its thrill-value but wonders who the heck is RadarForeclosure?, decides to run story anyway but not feature it in case something isn't quite right, readers consider themselves either illuminated or mystified as case may be.
Remember, I'm just guessing. But I wouldn't be surprised.
Time passes, as it often does...
...and a March 3 article, "California Foreclosures Outpace Sales", posted on Realty Times by real estate writer Broderick Perkins, clears up some of the confusion. The mighty Merc muffed it (alert the media!) or at least got the gist of ForeclosureRadar's press release wrong: it wasn't foreclosures that exceeded sales in January, according to ForeclosureRadar, it was foreclosure sales at auction that exceeded non-foreclosure sales. In other words, the number of homes sold in January "on the courthouse steps" exceeded the number of public and private sales transactions reported for the month. Credit Broderick Perkins for being able to read a press release correctly, which seems more than one Merc reporter and perhaps one Merc editor could do.
But what I find most interesting about ForeclosureRadar's press release is a claim that neither Perkins or the Merc picked up on: "This month 98 percent of [foreclosure] auction sales went back to the lender after receiving no bids, despite the significant discounts now being offered by lenders at auction (italics mine)." FR (can I call it that?) claims that "of the 19,821 homes that went to auction, 13,950 were discounted, with an average opening bid discount of 16 percent". Of these discounted homes, "4624 had discounts of 30 percent or more".
This claim of steep discounts sounds a lot like the claims made by auctioneers and, not coincidently, by auction buyers interviewed for TV news reports, who undoubtedly got their information from the auctioneers. So how are these folks calculating their whopping discounts?
Apparently here's how: "The majority of these discounts are from the amount owed on an 80 percent first mortgage made in the last 2 or 3 years, meaning that many of these properties are being offered at 50 to 70 percent of their prior value." If ForeclosureRadar can be believed, lenders are starting the bidding on 70 percent (13,950 ÷ 19,821) of their property inventory at an average 16 percent below the balance owed on the defaulted loans. And they're offering almost one in four of their discounted properties (23.3 percent) at 30 percent or more below the loan balance.
Whoa! Can you say "screaming deals"?
Gotcha. Because before you say anything you might regret, consider this. According to the latest California Association of Realtors® numbers, home prices in the Central Valley have fallen about 25 to 28 percent over the past year. And real market value in the Central Valley today may be even lower than these numbers suggest, because hardly anyone is buying even at 25 or 28 percent off January 2007 prices.
Why single out the Central Valley? Because the Central Valley counties where prices are in free fall are also ranked highest by ForeclosureRadar in foreclosure activity. For example, FR says that in January 2008 San Joaquin County had one foreclosure auction sale for each 666 residents, Riverside 694, Stanislaus 824 and Sacramento 851. Why is this significant? It strongly suggests that many of the January 2008 foreclosure auction sales FR reported were in areas where home prices have plummeted to well below the balance of an 80 percent first loan taken out when prices were at their peak. Which eats up a big part of that so-called auction discount right there.
Also consider that at least a part, and perhaps even a significant part, of loans in default were either a) "option ARMs" that allowed loan balances to increase even if borrowers stayed current in their payments, and/or b) refinances based on wildly optimistic appraisals that, at least in my experience, invariably came in well above market value back when lenders we're saying, "take more, there's plenty". Even if prices had held, many of these homes wouldn't be worth their loan balances today. Which may well account for those "discounts of 30 percent or more" off the loan balance.
And very few takers for these homes, which I think speaks volumes about how deep these discounts aren't. When you start from an imaginary number 16 percent (23.2% x .7) of the time, you've got to make huge cuts before you get back within sight of market reality.
Would I buy today in an area where home prices have declined almost 30 percent with no end in sight? Maybe, but before I did, I'd sure take a close look at the market fundamentals: jobs, infrastructure, recreational and cultural amenities, historical performance. Is it an area where houses outnumber jobs, with frantic builders cranking out yet more houses? Is it an area that's always been second or third choice for homebuyers, an area where people live not because they want to but because that's all they can afford? Is it an area where the foreclosure statistics worsen monthly, indicating that a bottom still isn't in sight?
Answered that question, didn't I?