DEAD CAT BOUNCE . . .AND BOUNCE . . .AND BOUNCE – DISTRESSED HOUSE SALES CONTINUE TO DEPRESS MARKET

In a report by Corelogics, the housing market’s statistical arm, year-over-year declines in housing prices are continuing. At heart to this decline is the ongoing depression of the housing market based on the discounting of homes sold as REO or otherwise from distress (short sales). This ties to the analysis by the National Association of Realtors (NAR) stating that up to 40 percent of existing-home sales in  March were REO and short sale properties. This is up from 39 percent in February and 35 percent in March 2010. This increase in the share of sales in the market is causing the median home price to continue to drop. NAR tags the discount of a distress home at about 20 percent.

This follows NAR’s chief economist, Lawrence Yun’s statement in April that “existing-home sales have risen in six of the past eight months, so we’re clearly on a recovery path." "With rising jobs and excellent affordability conditions, we project moderate improvements into 2012, but not every month will show a gain – primarily because some buyers are finding it too difficult to obtain a mortgage.

An interesting note is NAR’s finding that investors accounted for 21 percent of first quarter transactions, up from 18 percent a year ago. When balanced with the fact that first time home buyer percentage slipped 10 percent to 32 percent, the economics of the price slide take over. In its press release on April 20, the NAR also stated that the share of all-cash purchases rose to 35 percent in March, having grown from 33 percent in February and 27 percent in March 2010. So, it looks like investors are starting to get back in deeper as prices continue to slide.

What does that mean to the securitizations. Well, less money is still less money. So, securitization investors will continue to take the hair cuts on cashflow as sale prices for these properties continue to slide. Add to this the costs that servicers will now pass through as foreclosure practices are changed following the Consent Orders and soon to be decided Attorneys General actions, and the “flow” will start looking like a trickle.

On the upside, at least for servicers if investor appetite continues to grow, is the speed at which trusts can sell the REO property or get the short sale done. This should help the servicers recover their advances and costs faster. Given that carry costs on funds expended usually cannot be charged to the securitization trust, any increase in the speed for the return of capital helps the servicer. Whether or not this “velocity to sale” balances the expected slow-down in the foreclosure process due to the implementation of new policies and procedures, however, is yet to be seen.

Another benefit to servicers is through the continued depression of sale prices for these distressed sales. As sale prices continue to slide, servicers will then have more statistical ammunition when it comes to the determination of “non-recoverability”. Or stated another way, less money on the sale means less money being advanced prior to foreclosure.  

So, like those reality TV shows about people buying abandoned storage units, keen eyed (or just plain lucky) buyers can find gems. The storage company gets a least some of it money back. We just try not to think about the family that lost its stuff. That doesn’t make good TV.