Persistent rumors that “a wave of new properties is headed toward the market, one that is expected to prolong the housing downturn and might even cause prices to dip again” as reported in a lengthy story in the Sonoma County Press Democrat Saturday remain only rumors.

Analysts at RealtyTrac and elsewhere have estimated that there is a “shadow inventory” of 1.7 million to 7 million homes in foreclosure that lenders haven’t yet put up for sale. To put that number in perspective the annualized rate for existing home sales in January was 5.05 million units.  The rumored shadow would equal between 30 and 140 percent of the entire year’s sales.

Nationally, there’s no sign of a shadow inventory coming on market.  ZipRealty’s monthly report on inventories found that the supply of homes available for sale in 27 major metropolitan areas at the end of February was down about 19 percent from a year ago. 

On a national basis, inventories typically rise in February from the January level as owners put their houses on the market in anticipation of the busy spring home-shopping season.  This year was no exception as inventories were up 4.2 percent from January as sellers hope for an earlier and busier than usual spring season with the tax credit extended through April.

Total housing inventory at the end of January fell 0.5 percent to 3.27 million existing homes available for sale, which represents a 7.8-month supply at the current sales pace, up from a 7.2-month supply in December. Raw unsold inventory is 9.6 percent below a year ago, and is at the lowest level since March 2006, according to the National Association of Realtors.

In California, site of most of the shadow sightings, inventories of unsold homes are down 20.5 percent from a year ago.  Through January 10, the months’ supply was a healthy 5.8 months, according to the California Association of Realtors.  Prices in California are up 15 percent over 2009.

As record snows melt away in the Midwest and East, real estate professionals are not seeing the volume of interest or which they had hoped. Despite the expansion and extension of the Federal tax credit, low mortgage rates, robust inventories, and prices as low as they have been in years, expectations are low as the real estate industry enters the 2010 home buyer season.

Like a skunk at a picnic, the January existing sales and pending sales reports from the National Association of Realtors surprised many and drastically lowered expectations for the spring. Existing sales fell after several months of tax credit fervor in the fall. Based on contracts signed in January, pending sales fell 7.6 percent to 90.4 from an upwardly revised 97.8 in December, but remains 12.3 percent higher than January 2009 when it was 80.5.

Reports from across the country are markedly low key as we enter the middle days of March, a time when traditionally the spring sales season is well underway. 

In Las Vegas, contracts on listings are up 845 units over January, not a huge number for that market. New listings are down 213 units and closings are down 987 units. Much of the pending inventory is short sales which require LONGER close times. December's sales were unusually high and January's numbers are still higher than last January. 

In west Georgia, the tax credit boosted sales last year, as in most places, but now fears are growing the market will retrench. 

"It has had a very good effect on the market, but I have a feeling the market may do what the automobile market did after the Cash for Clunkers program went away," said Dwayne Hicks, a broker with United Country West Georgia Realty in Carrollton. "The market does not have enough legs on it yet to stand, and I think the biggest thing right now is nobody has ever seen a jobless recovery and it's a little bit tough to see a rebound taking hold if people can't buy anything, certainly not a home or a car, because they're concerned about their job."
In New York's Hudson Valley, sales and price figures across the region are down dramatically. February was the slowest month for home sales that Orange County has seen in years, and Sullivan County didn't fare much better. The frigid market is a function of the general economic malaise, combined with the biggest blizzard in years.
"The weather just knocked out a ton of closings," said Joseph Rand, managing partner of Better Homes and Gardens Rand Realty.
Rand added that, following last fall's tax-incentive-fueled rally, the real-estate market has been going through a lull for the past two months. "We're expecting that to change in March and April," Rand said.

In her annual housing analysis, Diane Swonk, chief economist of Mesirow Financial, also expects the tax credit to have a greater impact this spring than is evident so far.

"The hope is that the tax credit gets us over the hump and into a more favorable environment on employment. Existing sales are expected to outperform new sales, mostly because of the deals available in the existing market. We should also see some return of luxury sales, as wealthier buyers start looking for deals."

But she doesn't hold high hopes for a year as a whole.

"[T]he level of activity that we see in the market is expected to remain near historic lows and more consistent with a recession (depression?) than recovery. Indeed, nobody in the housing industry is forecasting anything close to what would be considered a 'normal' level of activity until 2012," writes Swonk.

Existing home sales fell 16.7 percent to 5.45 million annualized units in January, while new home sales fell 11 percent to an annualized 309,000 units for the month. The pace of new home sales in January is at the lowest pace on record. As a result, the months’ supply rose to 9.1 for new homes and 7.2 for existing homes.

And according to two leading indicators-mortgage applications and pending home sales, housing activity will get worse before it gets better. Mortgage applications to purchase homes are now at the lowest level, as measured by the purchase index, since 1997. The pending home sales index fell 7.6 percent in January from December, and is now at the lowest level since March of last year.

Both leading indicators suggest the housing correction is far from over. Pending home sales are contracts to purchase existing homes and usually lead existing home sales which are closings by one to two months. Thus, expect a relatively weak pace of existing home sales throughout the first quarter. To make matters worse, the National Association of Realtors noted that abnormal winter weather is likely to have depressed pending home sales further in February. So the actual home sales numbers could end up being worse.

Home values are also sputtering.  Home prices stabilized in early 2009; then edged higher in the second half of the year; and now show signs of weakening. The Case-Shiller Home Price Index for 20 Cities rose by only 0.3 percent in December from a month earlier and is down 3.1 percent compared to a year ago. The Federal Housing Finance Agency’s (FHFA) home price index fell 1.6 percent in December. Despite home values weakening, the level of home prices across the nation appears to be in line with rents and household income, suggesting that home values are now affordable. Indeed, the National Association of Realtors’ affordability index is at an all-time record high. So why are home values weakening again?

The answer is due primarily to excess supply of properties for sale. As long has there are imbalances in the supply of homes across much of this nation, home values are not likely to stabilize. Moreover, rising foreclosures are adding to the inventory of homes, exerting further downward pressure on home values. Economics 101 tells us that home prices will not be in balance until excess supply vanishes.

Surprisingly, the recent retreat in housing activity has occurred against a backdrop of multiple government housing subsidies, designed to spur housing demand. The Federal Reserve’s mortgage security purchase program has kept thirty-year mortgage rates hovering near historic lows. Similarly, two of the largest housing subsidies-Fannie Mae and Freddie Mac (under government conservatorship) continue to feed money into the mortgage market, exerting downward pressure on mortgage rates. And the home buyer tax credit program continues to entice households to purchase homes.

Looking forward, the economy is not helping the housing recovery. Economic growth remains relatively weak and is not strong enough to create jobs. Job losses represent the greatest obstacle to a full housing recovery. The most likely scenario has home sales retreating in the first quarter; but due primarily to the extended and expanded homebuyer tax credit combined with an expected rebound in the job market, home sales are expected to modestly climb during the remaining 3 quarters of the year. As a result, excess inventories should shrink a bit throughout the second half of the year. Softening inventories are expected to ease downward pressure on home values. I expect home prices to stabilize sometime at the end of 2010 or the beginning of 2011.

And if this scenario does not play out, I will have to find another scenario.

The UFA Default Risk Index for the first quarter of 2010 fell to 158 from last quarter’s revised 164, and has now fallen by more than half from the peak level of 330 set in 2007.

Despite the index’s recent steep decline, the risk of default for the current vintage of mortgages remains elevated. The rate of house price depreciation has decelerated, and the hardest-hit areas have begun to return to sustainable levels.  Slower house price depreciation will mitigate risks for mortgage lenders. The Index illustrates the important role that local economic conditions, such as house prices, have played in this credit cycle since loan, borrower and collateral characteristics are held constant over time in the Index.

“Although UFA forecasts that house prices will continue to decline, the rate of decline has decelerated. The hardest-hit areas have begun to return to sustainable levels,” said Dennis Capozza, who is the Dykema Professor of Business Administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA. “Slower house price depreciation will mitigate risk levels for mortgage lenders.”

The UFA Default Risk Index measures the risk of default on newly originated prime and nonprime mortgages. UFA’s analysis is based on a “constant-quality” loan, that is, a loan with the same borrower, loan and collateral characteristics. The Index reflects only the changes in current and expected future economic conditions, which are much less favorable currently than in prior years

 Sales to existing homeowners also have increased from October to January, and last month their market share overtook first-time buyers, 41.2 percent to 39.8 percent.

 With increased supply of distressed properties and decreased demand from first-time homebuyers, average prices declined for damaged REO and even for non-distressed properties in January.

 Both investors and first-time buyers tend to compete at the lower end of local housing markets and the Campbell survey found that first-time buyers are fading even the inventory of distressed properties (REOs, short sales, auction sales) increased from November through January.  Short sales were the fastest growing category of distressed property types in December and January, increasing to 15.9 percent of all sales.  Throughout 2009, they were generally only a tenth of all sales.

The national inventory of existing homes is larger now than it has been since the run-up of sales since thousands of first-time buyers rushed to the closing table last fall to qualify for the $8,000 tax credit, according to the January existing homes sales report released today by the National Association of Realtors.

Some 3,265.000 existing homes are now on the market, a 7.8 months supply.  The national inventory increased 8.3 percent in January.  The months supply has not been as high since September. 

Existing-home sales dropped 7.2 percent to a seasonally adjusted annual rate of 5.05 million units in January from a revised 5.44 million sales in December.

For single family homes, the boost in inventory is more pronounced.  Two point eight million single family homes are listed for sale, a 10.1 percent increase over December.  Single family home inventories are also higher than they have been since September.

The increase in inventory is a concern because the holidays are traditionally a slow time for home sales and many owners wait until January or February before listing their homes.  They are hoping for strong demand early this year in light of the April 30 deadline for the tax credit, which was extended by Congress in November.   Sellers are hoping the credit will give demand a boost and kick off the spring home buying season as buyers rush to get a contract on a home by the deadline.

A surge of December foreclosures also contributed to the rise in inventory.  January REO activity nationwide was down 5 percent from the previous month; and scheduled foreclosure auctions were down 11 percent from the previous month, according to RealtyTrac, but December saw a huge jump in foreclosures coming on market.

“January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity  followed by a 10 percent drop in January,” said James J. Saccacio, chief  executive officer of RealtyTrac.  “If  history repeats itself we will see a surge in the numbers over the next few  months as lenders foreclose on delinquent loans where neither the existing loan  modification programs or the new short sale and deed-in-lieu of foreclosure  alternatives works.”

A local real estate agent Craig Adams has been providing information to the FBI about one of the largest mortgage fraud schemes in Florida history.  One of his longtime associates may become the center of attention as losses enter the millions, according to the Sarasota Herald-Tribune.

Jonathan Glucker was in line to become the next president of the Gulf Coast Mortgage Bankers Association but now he’s expected to step down or be removed from the board of directors after news reports alleged that he participated in at least 10 deals with Adams since 1997.

Adams allegedly participated in dozens of deals in which properties were sold back and forth between associates, inflating values and increasing the loans they could obtain.

One of Adams’ associates, Lisa Rotolo, a Sarasota title agent who closed at least 60 deals for Adams and his associates, has been arrested in the FBI investigation.  But a review of the real estate sales listed by FBI agents in court records shows that one of the deals involved Glucker and his wife, Sarasota real estate appraiser Heather Kabobel.

In that deal, Kabobel bought a house at 7796 N. Holiday Drive in Sarasota in June 2005 for $2.1 million. She and Glucker financed the purchase with a $1.68 million loan from Washington Mutual.

The criminal complaint states that a $1.68 million loan borrowed against the property was obtained fraudulently.

When told that Adams had been providing information about flipping fraud to the FBI for nearly two years, Kabobel began crying. “I feel sick to my stomach,” she said before declining further comment.

Deed and mortgage records show Glucker’s relationship with Adams dates back 12 years.

In September 1997, Adams bought a house at 3922 Longhorn Dr. in Sarasota for $55,400 and sold it to Glucker 45 days later for $75,000. Glucker financed the purchase with a $75,000 loan from CTX Mortgage, where he was employed at the time.

During the next 10 years, Glucker and his wife participated in at least nine more deals with Adams and his associates, including two in which properties were sold back and forth between associates four times.

Glucker and Kabobel’s names also surfaced in a civil lawsuit that Maryland-based Chevy Chase Bank filed against Rotolo.

In the suit, which was filed in Sarasota County Circuit Court in January, Chevy Chase claims Rotolo failed to follow closing instructions in loans made to Kabobel and Glucker.

At that time, Kabobel and Glucker “were heavily in debt, had been part of a flipping scheme which greatly and falsely exaggerated the values of properties to which they were in title and have since then been defendants in numerous lawsuits,” the Chevy Chase lawsuit claims.

The suit also states that Chevy Chase told Rotolo to use the proceeds from a $1.3 million loan to pay off a $675,000 loan and was prohibited from passing more than $2,000 to Kabobel and Glucker.

But the suit claims she failed to follow those instructions, passing $100,000 of the loan proceeds to Kabobel.

The result was that Chevy Chase was not in first position to collect the collateral when Glucker and Kabobel ultimately defaulted on the loan and is now out $1.3 million.

Glucker began his mortgage career with CTX Mortgage in Sarasota and later became the Sarasota president and bank manager for New Jersey-based Opteum Mortgage.

Opteum was purchased by California-based Prospect Mortgage in May 2007.

A call to Prospect Mortgage’s general counsel, Don Bundy, in Los Angeles on Wednesday was not returned.

Related Links:

• Former Sarasota real estate agent is key link in flipping inquiry

Jonathan Glucker, a prominent Sarasota mortgage banker who participated in at least 10 deals with Adams since 1997, is expected to step down or be removed from the board of directors of the Gulf Coast Mortgage Bankers Association.

Glucker was in line to become the next president of that trade association, which represents the interests of mortgage companies and service providers in the Sarasota, Bradenton and Venice areas.

“We decided it would not be prudent for Glucker to ascend to the presidency at this time,” said Robert Stobaugh, the association’s current president.

But Stobaugh said Glucker has not yet formally resigned from the board. “I intend to have a private conversation about his position on the board going forward,” Stobaugh said.

Glucker did not return calls for comment.

The Herald-Tribune published a six-part series in July about flipping fraud that featured Adams and his large group of associates.

The Sarasota real estate agent and home builder was shown to have participated in dozens of deals in which properties were sold back and forth between associates, inflating values and increasing the loans they could obtain.

A criminal complaint in the U.S. District Court in Tampa connected to the arrest of Lisa Rotolo, a Sarasota title agent who closed at least 60 deals for Adams and his associates, does not accuse Glucker of any wrongdoing. And it is unknown if he is being investigated.

The criminal complaint against Rotolo states that a $1.68 million loan borrowed against a Sarasota property was obtained fraudulently.

Maryland-based Chevy Chase Bank sued Rotolo last month for failing to follow closing instructions in loans made to Glucker and another lender.  At that time, the two brokers “were heavily in debt, had been part of a flipping scheme which greatly and falsely exaggerated the values of properties to which they were in title and have since then been defendants in numerous lawsuits,” the Chevy Chase lawsuit claims.

Adams turned himself in to the FBI two years ago, and his statements to federal agents resulted in Rotolo’s arrest on charges of conspiracy, bank fraud, wire fraud and making false statements in connection with loan applications, court documents filed with the U.S. District Court in Tampa show.

As of January 25, the phase out was 92 percent complete, according to the Atlanta Federal Reserve Bank.  The Fed purchased a net total of $14 billion of agency-backed MBS through the week of January 13 and an additional $12 billion net in MBS in the following week, bringing the total to over $1.15 trillion of the $1.25 trillion the Fed will purchase by the end of the first quarter. 

Yet a month later rates simply weren’t rising as expected.  Zillow’s mortgage average yesterday 30-year fixed mortgages remained stable at 4.84 percent, down 4 basis points last week, at 4.88 percent.   Bankrate’s number for a 30-year fixed is 5.12 percent, down one basis point from last week and three basis points from January 20.  

The Freddie Mac’s weekly survey was released at noon.  Its average 30-year fixed conforming mortgage jumped 12 basis points to 5.05 percent for the week ending today, up from 4.93 the previous week, but about the same place it was 5.04 percent a year ago.   

With four more weeks of mortgage surveys to go before the full psychological impact kicks, we’ll know whether Freddie’s rates are a trend or an anomaly.

The truth is that no one really knows what to expect should the Fed program end as scheduled.  Forecasts range from a modest increase of only 20 to 40 basis points (JP Morgan) or more, to 5.6 to 5.8 percent (Lawrence Yun at NAR).  Other observers, however, predict a full percentage point (Guy Cecala, publisher of Inside Mortgage Finance) or even more, to as much as two percentage points, taking rates to 6 or 7 percent (Christopher Thornberg, Beacon Economics).

Bernanke made it clear in testimony before the House Financial Services Committee yesterday and the Senate Banking Committee today that the Fed is carefully monitoring rates and its decision on whether to maintain any level of purchasing activity will be based on what they observe.

“We’re interested to see what the effect (of phase out the program) is going to be on mortgage rates. So far the evidence suggests it’ll be a modest effect, which wouldn’t have a big impact,” Bernanke said. 

The phase out of the program is only one leg of a potential “triple whammy” confronting housing markets.  The other two are the end of a similar MBS purchase program by Fannie Mae and Freddie Mac, which have been controlled by the Treasury Department since September 2009 and the expiration of the homebuyer tax credit April 30.  Some have feared a combination of higher mortgage rates and an end to the tax credit, which has been in effect in one form or another since April 8, 2008, will diminish demand.

An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity.  Together, negative equity and near-negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide, according to the latest report from First American CoreLogic.

Negative equity, or “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.

Negative equity continues to be concentrated in five states: Nevada, which had the highest percentage negative equity with 70 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (48 percent), Michigan (39 percent) and California (35 percent). Among the top five states, the average negative equity share was 42 percent, compared to 15 percent for the remaining 45 states. In numerical terms, California (2.4 million) and Florida (2.2 million) had the largest number of negative equity mortgages accounting for 4.6 million, or 41 percent, of all negative equity loans.

The net increase in the number of negative equity borrowers in Q4 2009 was 620,000, with the largest percentage increases occurring in Nevada, Georgia and Arizona. Among the states with the highest negative equity shares, California had the smallest increase in the negative equity share, which only rose 0.4 percent to 35.1 percent. In numerical terms, Florida had the largest increase in the number of negative equity borrowers rising by more than 141,000, followed by Georgia (65,000) and Illinois (55,000).

The rise in negative equity is closely tied to increases in pre-foreclosure activity and is a major factor in changing homeowners’ default behavior. Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, owners begin to default with the same propensity as investors.

By contrast damaged real estate owned or bank owned properties accounted for only 13.4 percent and move-in ready bank-owned accounted for 13.8 percent of all sales, according to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions.

As recently as November of 2009, short sales accounted for 12.4 percent of the home purchase market, behind move-in ready REO at 12.6 percent and nearly even with damaged REO transactions at 12.3 percent.

Short sales typically result in lower lender losses and houses left in more saleable condition. Moreover, borrowers that agree to a short sale can often buy another house with mortgage financing after only two years. For borrowers going though the foreclosure process, mortgage financing can be unavailable for a period of five to seven years.

 Short sale properties are most often purchased by first-time homebuyers, the January survey results revealed. Currently, mortgage servicer approval on offers for short sale properties can take several months, making these transactions difficult for current homeowners who often need to conduct not one, but two, transactions in quick succession. In contrast, first-time homebuyers more often have flexibility around the timing of short sale closings.

 ”Short sales activity took a temporary dip in November around the expected expiration of the first-time homebuyer tax credit,” reported Thomas Popik, research director for the Campbell/Inside Mortgage Finance survey. “Few first-time homebuyers wanted to take the chance that their short sale transaction wouldn’t be approved by the November 30 deadline. But now that the tax credit has been extended, we see first-time homebuyers once again snapping up attractively priced short sales.”

 Survey results showed that short sales typically sell for only 91 percent of listing price. In contrast, move-in ready REO sells for 99 percent of listing price, on average.

The Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions polls more than 1,500 real estate agents nationwide and provides up-to-date intelligence on home sales and mortgage usage patterns