Explaining Southern California's economy

California 'shadow inventory' of real estate drops through October

Foreclosure

Kevork Djansezian/Getty Images

For sale signs are posted on a foreclosed house in Glendale, California. According to CoreLogic, fewer homes in the state are headed for bank ownership.

There are more signs that the housing market is improving. Real estate analytics firm CoreLogic has just released new data on the so-called “shadow inventory” of homes. Those are properties that have delinquent mortgages, are headed into the foreclosure process, or have been foreclosed and belong to the bank, but haven't yet shown up in real estate listings.

"Don’t be afraid of the shadows," is CoreLogic's message. Why? Because nationally the shadow inventory has declined more than 12 percent since last year. During the three months that ended in October, California saw the second largest drop in the type of mortgage delinquencies that typically lead to foreclosure — almost 10 percent, behind Arizona at just over 13 percent.

California has a housing shortage at the moment. That means there’s demand for these properties. So any home that's on the verge of emerging from the shadows will rapidly find a buyer. In a statement, CoreLogic chief economist Mark Fleming addressed the national shadow inventory situation:

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LA home buyers beware! Investors are inflating the real estate market

Justin Sullivan/Getty Images

A construction worker installs a window in San Mateo, California. He needs to build a lot more homes in Southern California in order to get the market back to normal.

DataQuick released data on October Southern California home sales Tuesday, and while the news looks superficially good — sales are up, prices are rising, foreclosures are down — the market remains distorted.

There are three factors that should make prospective homebuyers wary:

  • There's a shortage of housing supply in Southern California, creating a bubble, with demand outstripping existing inventory and pushing up prices.  Few new houses have been built in the region the past four years.
  • Money is cheap. Mortgage interest rates are at historic lows. Combined with prices that were depressed by the bursting of the big housing bubble four years ago, this is drawing buyers into the market and convincing sellers that now is the right time to put homes on the market.
  • Investors are major players in the market.

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Could Apple actually pay shareholders?

Apple's New iPhone 4s Goes On Sale

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Apple Store customers look at the new Apple iPhone 4Gs on October 14, 2011 in San Francisco, United States. The new iPhone 4Gs features a faster dual-core A5 chip, an 8MP camera that shoots 1080p HD video, and a voice assistant program.

The bigger Apple gets, the more pressure it comes under to share some of the wealth. With a cash pile now approaching $100 billion, the idea of a one-time dividend is being floated. This is from Therese Poletti at MarketWatch:

“Instituting a regular dividend would be a signal of a new maturity in the way the company views itself,” [said management professor James] Post.... “That would be a much bigger statement of change for the company. I think there is probably a debate going on.” And the ghosts of CEOs past are clearly in the room.

Post said a special dividend could be an interim solution for the company. “If they want to they can always come back in a year or two or three, they can do it again, but they are not committing themselves to a regular dividend,” he said. “It would be seen as a pretty big departure from the Jobs era.” It’s a tactic used by Microsoft in 2004, when it announced a one-time dividend of $3 a share, to use return some cash to investors.

A one-time dividend is obviously not very popular among most investors.

“I think that Apple’s stock is and should be like Apple’s sales and products, insanely great,” said individual shareholder King Lear, who spoke up at the company’s annual meeting last year. “Defined quarterly dividends would increase the value of the stock in addition to its incredible capital growth.”

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The Fed's solution to the housing crisis: Rent!

Real Estate Brokers Lead Bus Tour Of Foreclosed Homes In Vegas Area

Ethan Miller/Getty Images

Well, this is interesting. The Federal Reserve has produced a white paper that tackles the Very Big Problem of the ongoing housing crisis and submitted it to Congress. It's a veritable treasure trove of clear-eyed analysis about why the housing market is still in such rotten shape. But beyond that, it offers a suite of equally clear-eyed ways to fix the problem.

One of these is particularly intriguing: taking foreclosed properties and, instead of trying to sell them to new homeowners — which requires mortgage financing which isn't now widely available to any but the most creditworthy borrowers — turning them into rentals. And who will do the renting? Real estate investors are the secret sauce (just a bit of translation: "REO" means "real estate owned," i.e. foreclosures):

To date, REO holders have avoided selling properties in bulk to third-party investors because the recoveries that REO holders receive on such sales are generally lower than the corresponding recoveries on sales to owner occupants. Investors considering such bulk-sale transactions tend to demand a higher risk premium than owner occupants and thus will purchase only at lower prices. Investors in such transactions also might have more difficulty obtaining debt financing than owner occupants.  Although mortgage products are available for individual one- to four-family houses and for multifamily properties (albeit currently at tight terms), no mortgage products currently exist for a portfolio of single-family homes. [My emphasis] In addition, REO holders must absorb the costs of assembling inventory for bulk sale — that is, holding properties off the market until enough properties have been assembled to cover the fixed costs of a rental program. Until the inventory is assembled, the REO holder receives no revenue from the property but incurs direct financing costs; carrying costs such as taxes, utilities, and maintenance expenses; and the continued depreciation of the property.

An REO-to-rental program that relies on sales to third-party investors will be more viable if this cost-pricing differential can be narrowed. REO holders will likely get better pricing on these sales if the program is designed to be attractive to a wide variety of investors. Selling to third-party investors via competitive auction processes may also improve the loss recoveries.

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