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NAR: INVENTORY SHORTAGE BRINGS DOWN PENDING HOME SALES By Mark Lieberman, Chief Economist for the Five Star Institute The National Association of Realtors' (NAR) Pending Home Sales Index (PHSI) fell 0.4 percent in February, the third month-over-month decline in four months, the trade group reported. Economists had expected a 0.7 percent drop from January's originally reported reading, which was revised downward by 7 basis points. The last time the PHSI dropped in three of four months was at the beginning of 2011, when the index fell in January and February, improved in March, and fell again in April. NAR chief economist Lawrence Yun attributed the latest drop to weak inventory of existing homes for sale. According to the latest existing-home sales report, which tracks closings, there were 1.94 million homes for sale at the end of February, a 4.7-month supply. The number of homes for sale has averaged 2.19 million for the last 12 months, down from an average of 2.8 million in the previous 12 months. Yun said the inventory shortage would be relieved by an uptick in construction of new single-family homes, though single-family home completions regularly exceed new home sales. Government reports indicate builders have shifted from construction of single-family homes to multifamily, suggesting reluctance among younger, first-time homebuyers who witnessed the impact of the housing meltdown. The month-over-month trend in sales correlates inversely with the movement in the median price; that is, when the median price falls, sales improve, as happened four times in the last 12 months. The PHSI is based on a large national sample, representing about 20 percent of transactions for existing-home sales. An index of 100 is equal to 28 the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales; it coincides with a level that is historically healthy. The explanation NAR gave for the drop in the national PHSI in February should be viewed with a jaundiced eye. Though for February, NAR said pending sales declined because of low inventory, that wasn't offered as an explanation one month earlier, when the inventory of homes for sale dropped to its lowest level since December 1999 and the PHSI increased. But when the PHSI fell in February, and the inventory of homes for sale increased, the still-low inventory became a convenient excuse. That home prices have been falling seems to have dropped off NAR's radar as an explanation for the dearth of inventory. Through January, the median price of an existing single-family home—a broader measure than the Case-Shiller Home Price Index—had fallen for five of the previous seven months and in January suffered the steepest monthly decline in both dollar and percentage terms since January 2011. To be sure, the median price of an existing single-family home rose in February, but homeowners interested in selling wouldn't have known that when deciding whether to list their homes. The improvement in median price should swell inventories for March. Not to put analysts or institutional economists out of work, but very often the explanation for market movements is the obvious and doesn't require a lot of digging. "Sometimes," as Freud said, "a cigar is just a cigar." STUDY FINDS LOAN PERFORMANCE IMPROVES AFTER SERVICING TRANSFERS Since the housing crisis, many large banks have sold off servicing portfolios to smaller, emerging companies. According to a recent study, these portfolios often begin to perform better after the transfers. "Acquirers are actively managing their portfolios, resulting in better performance overall," said Bill Hunt, VP at Opera Solutions, which conducted the study. Opera Solutions found faster liquidations and better long-term performance for modified loans after the mortgage servicing rights were sold. According to the study, two servicers stand out for acquiring the "lion's share" of servicing rights—Ocwen and Nationstar. At Ocwen, which added the largest number of loans to its servicing portfolio last year, the study detected higher levels of foreclosures and REO rates immediately following acquisitions. However, after a period of months, Ocwen's portfolios stabilized and improved. Delinquencies of 60 or more days declined steadily from the time Ocwen took over servicing the loans. Loan modifications increased from 0 to about 2 percent of the portfolios after about two months in Ocwen's possession. Similarly, when observing servicing portfolios sold by Bank of America, the researchers found "lags of several months before performance improved." "This is not entirely unexpected; a new servicer may need more time when on-boarding loans to correct data issues before commencing collections," Hunt said. Acquirers tend to address these issues before flushing foreclosures through the pipeline and working to modify loans. The study did find a few servicers who seem to reduce 60+ day delinquencies faster than others. Ocwen, NationStar, and Select Portfolio Servicing "achieved substantial reductions" within six months of acquiring a portfolio, while other servicers tend to take longer. While some servicers tend to perform better than others, Opera Solutions also found performance tends to vary by state as well. Loan modifications in New Jersey and Pennsylvania have the highest success rate, while modifications performed in Georgia have the lowest. KNOW THIS Payments to 4.2 million borrowers covered by the foreclosure agreement between federal regulators and 13 mortgage servicers began on April 12, according to the Office of the Comptroller of the Currency.

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