by Calculated Risk on 3/23/2009 12:08:00 PM

The evidence suggests there has been a surge in rental units in the U.S. - far exceeding the number of new rental units being built (see: The Residential Rental Market Update). I've argued that the key factors in this surge in supply are "REO sales to cash flow investors, and frustrated sellers putting their homes up for lease".

Here is some evidence of investors buying REOs to rent.

From Jim Wasserman at the Sacramento Bee: Novice investors turn repos into rentals

... Preliminary estimates from researcher MDA DataQuick indicate that 28.4 percent of February buyers in Sacramento County were investors aiming to buy, repair and rent out their new acquisitions.

The numbers confirm a huge shift in the Sacramento housing market in recent months, one that has consumed thousands of foreclosure properties and helped prevent a once-feared pileup of for-sale signs.

Alongside an army of first-time buyers, these investors – many doing cash deals with banks – have fueled growth in home sales for nearly a year. ...

Investor market share in Sacramento County last hit 25 percent in mid-2004, the most frenzied sales year of the region's housing boom. Then it declined by half as the housing market cooled in 2006 and 2007, according to DataQuick.
...
Sacramento County couple Oscar Vargas and Gladys Flores ... bought five houses last year priced between $50,000 and $100,000.

"We buy the repos, and the prices are about what it was 15 years ago," Flores said. "We fix what's wrong with them. We spend a little money and put in new carpets and remodel. We do it ourselves and rent them."

The plan is to hold them for several years to see gains, she said. Flores said it's the same drill as the 1990s downturn. Then, the pair bought houses low and sold them high during the boom that followed. They now own and manage 15 rental homes, she said.

In 2004 the "investors" (really speculators) were betting on appreciation. The current breed of investor is buying for cash flow.

by Calculated Risk on 3/23/2009 10:20:00 AM

Here is another way to look at existing homes sales - monthly, Not Seasonally Adjusted (NSA):

This graph shows NSA monthly existing home sales for 2005 through 2009. Sales (NSA) were lower in February 2009 than in February 2008.

Again - a significant percentage of recent sales were foreclosure resales, and although these are real sales, I think existing home sales could fall even further when foreclosure resales start to decline sometime in the future.

The second graph shows inventory by month starting in 2004.

Inventory levels were flat during the bubble, but started increasing at the end of 2005.

Inventory levels increased sharply in 2006 and 2007, but have been below the year ago level for the last seven months. This might indicate that inventory levels are close to the peak for this cycle. Note: there is probably a substantial shadow inventory – homeowners wanting to sell, but waiting for a better market - so existing home inventory levels will probably stay elevated for some time. There is also the possibility of some REOs being held off the market.

It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!

If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (in the 6 to 8 month range), and that might take some time.

A large percentage of existing home sales (40% to 45% according to the NAR) are distressed sales: REO sales (foreclosure resales) or short sales. This has created a gap between new and existing sales as shown in the following graph that I've jokingly labeled the "Distressing" gap.

This graph shows existing home sales (left axis through February) and new home sales (right axis through January).

For a number of years the ratio between new and existing home sales was pretty steady. After activity in the housing market peaked in 2005, the ratio changed. This change was caused by distressed sales - in many areas home builders cannot compete with REO sales, and this has pushed down new home sales while keeping existing home sales activity elevated.

I think the keys to watch for the housing market are declining inventory levels, a bottom in new home sales, and the gap between new and existing home sales closing.

by Calculated Risk on 3/23/2009 10:00:00 AM

The NAR reports: Existing-Home Sales Rise In February

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 5.1 percent to a seasonally adjusted annual rate of 4.72 million units in February from a pace of 4.49 million units in January, but are 4.6 percent below the 4.95 million-unit level in February 2008.
...
Lawrence Yun, NAR chief economist said ... "[D]istressed sales accounted for 40 to 45 percent of transactions in February."
...
Total housing inventory at the end of February rose 5.2 percent to 3.80 million existing homes available for sale, which represents a 9.7-month supply at the current sales pace, unchanged from January.

Click on graph for larger image in new window.

The first graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in February 2009 (4.72 million SAAR) were 5.1% higher than last month, and were 4.6% lower than January 2008 (4.95 million SAAR).

It's important to note that about 45% of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is under 3 million units SAAR.

The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 3.8 million in February. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Usually inventory peaks in mid-Summer, and then declines slowly through November - and then declines sharply in December as families take their homes of the market for the holidays. Typically inventory starts to increase again in the new year.

Usually most REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently there have been stories about a substantial number of unlisted REOs - this is possible, but not confirmed.

The third graph shows the 'months of supply' metric for the last six years.

Months of supply was flat at 9.7 months.

Even though the inventory level increased, sales also increased, so "months of supply" was flat.

I'll have more on existing home sales soon ...

by Calculated Risk on 3/23/2009 08:29:00 AM

From the Treasury: Details on Public Private Partnership Investment Program

And some reading material ...

Public Private Investment Program (PPIP)

Fact Sheet
White Paper

Geithner speaks at 8:45 AM. Here is the CNBC feed.

by Calculated Risk on 3/23/2009 12:14:00 AM

Treasury secretary Timothy Geithner writes in the WSJ: My Plan for Bad Bank Assets

... [T]he financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

The details will be released Monday at 8:45AM ET.