As Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their Downward Price Movement In Search Of Equilibrium Scraping Depression Levels

Reggie Middleton's picture

Anyone who regularly follows me knows that I have been adamant in
disagreeing with any who actually assert that the US has entered a
housing recovery. The bubble was blown too wide, supply is too rampant,
with demand too soft and credit tighter than frog ass. Today, the Case
Shiller numbers have come out, and after a few months of showing price
increases, have come around full tilt to reveal the truth – Reggie
Middleton style!

From CNBC:

U.S. single-family home prices fell
for a fourth straight month in October pressured by a supply glut, home
foreclosures and high unemployment, data from a closely watched survey
showed Tuesday.  AP  The Standard & Poor’s/Case-Shiller composite
index of 20 metropolitan areas declined 1.0 percent in October from
September on a seasonally adjusted basis, a much steeper drop than the
0.6 percent fall expected by economists.  The decline built on a
revised decrease of 1.0 percent in September and took prices down 0.8
percent from year-ago levels. It was the first year-on-year drop in the
index since January.  The housing market has been struggling since
home buyer tax credits expired earlier this year. To take advantage of
the tax credits, buyers had to sign purchase contracts by April 30.

“The (housing) double dip is almost here [there was no double dip, just a result of .GOV bubble blowing]
, as six cities set new lows for the period since 2006 peaks. There is
no good news in October’s report,” said David Blitzer, chairman of the
index committee at S&P.

Eighteen of the 20 cities showed weaker year-on-year readings in October and all 20 cities showed monthly price declines.

Unadjusted for seasonal impact [in other words, closer to the truth], the 20-city index fell 1.3 percent in October after a 0.8 percent decline in September.

To begin with, the Case Shiller index is highly flawed in tracking
true price movement in a downturn such as this since said downturn is
being led mostly by elements that the CS index purposefully omits. This
means that those price drops that are being shown by the Case Shiller
index are actually highly optimistic and seen through spit shined
rose-colored glasses. The reality is a tad bit uglier. See ??The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression as well as Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!

I discussed my thoughts on the Case
Shiller index (a complex statistical construct that excludes many of
the factors currently dragging on the housing market) being quoted in
the mainstream media as if it was the S&P 500, its shortcomings,
the true state of housing sales value in America and what’s in store
for the near future.

Subscribers have access to all of the
data and analysis used to create these charts, in addition to a
more granular application, by state in the SCAP template and by
region in housing price and charge off templates – see

See the following posts for an extensive background on the topics discussed in the video:

Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!

Several times last year I stated that most of the big banks were
being much too optimistic in their forecasts and releasing of credit
loss provisions – see As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves.
You see, the mortgages currently on the books are worth even less as
the collateral continues to depreciate, and it is exacerbated by the
robo-signing problems.

…despite a decline in net
revenue and increase in non-interest expenses (both of which appear to
be part of an obvious trend), profit before taxes was up 22% y/y as
provisions for credit losses were slashed by 60%.
JPM
decreased its provision for credit losses despite no evidence of a
substantial, sustainable improvement in credit metrics (please
reference As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves). Provisions have lagged charge-offs for two consecutive quarters in a row.

Click to enlarge

As a result, banks allowances for loan
losses have decreased to 4.9% in Q3 from 5.1% in Q2 and 4.7% in
previous year.  Although under provisioning has helped the bank to mask
its dearth in profits it has also materially undermined its ability to
absorb losses if economic conditions worsen. The Eyles test, a measure
of banks ability to absorb losses, has consequently worsened to 1.9%
in Q3 from 3.7% in Q2 and 5.9% in Q3 09.

I used JP Morgan as an example, but they were far from alone. As excerpted from

FACT THREE: The
JP Morgan Foreclosure Pipeline is Not Only Packed Tight, It Is
Progressively Getting Much Worse As The Time To Foreclosure Extends AND
the Delinquency Rate Continues to Climb At The Same Time That Real
Economic Housing Sales Value Is At An All Time Low As Well – and
Getting Worse!!!

Future Losses Are Mounting at an Incredible Pace Yet JPM is reducing provisions due to improving credit metrics. See JP
Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder
of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can
Be When They Say XYZ Bank Can Never Go Out of Business!!!
and JP
Morgan’s Analysts Agree with BoomBustBlog Research on the State of
JPM (a Year Too Late) but Contradict CEO Jamie Dimon’s Conference Call
Statements

JP Morgan’s average
delinquency at foreclosure is 448 days (with Florida and New York
having a record 678 days and 792 days of delinquency at foreclosure).
Average delinquency for the industry is about 478 days and is
increasing consistently since the start of the crisis.  During 2009 the
average days from delinquent to foreclosure process was 223 days while
as of August 2010 average days from delinquent to foreclosure process
is 478 days. A very important, yet often under appreciated fact is that
although serious delinquencies are still climbing, the lengthening of
foreclosure process has resulted in these loans still being classified
as delinquent. The difference between delinquency rates and foreclosure
rates has increased to 5.3% (9.8% delinquency rate vs 4.6% foreclosure
rate) in August 2010 from 3.6% in March 2002 (5.1% delinquency rate vs
1.5% foreclosure rate). As the difference between delinquencies and
foreclosure rates normalizes, and shadow inventory overhang moves to
further depress real estate prices, real estate related write-downs
could further balloon. So, you see, the marginal improvements in credit
metrics that JP Morgan’s management has used to justify the releasing
of provisions (which also just so happened to have padded a weak
quarter of accounting earnings) is really kicking the can of reckoning
down the road…

Add to this the
difficulty in getting rid of the properties once they are foreclosed
upon and you will find that the big banks such as JP Morgan (or after
looking at these numbers, particularly JPM (although I suspect BAC and
certain others are worse off) will become the nations largest
distressed residential housing REITs!!!


For those who didn’t catch it, I
espoused my opinions of JP Morgan’s overt optimism on CNBC a couple of
months ago, and things are turning out exactly as  have stated with bank
reserves being shoved into the accounting profit bucket just as the
foreclosure pipeline is being backed up by robo-signing scandals which
exacerbates the largely under appreciated shadow inventory problem (The
3rd Quarter in Review, and More Importantly How the Shadow Inventory
System in the US is Disguising the Equivalent of a Dozen Ambac
Bankruptcies!
), MBS investors are demanding significantly increased put backs (see ) and “Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…”

For those who haven’t seen it yet, here is my interview on CNBC discussing JP Morgan’s optimistic management and Apple’s margins with Herb Greenberg.

Related links:

  1. Those
    Who Blindly Follow Housing Prices Without Taking Other Metrics Into
    Consideration Are Missing the Housing Depression of the New
    Millennium
  2. Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
  3. Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
  4. Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
  5. Because 105% LTV On Depreciating Property Wasn’t Good Enough for the US Taxpayer…
  6. I
    Told You Housing Was Going to Take a Downturn for the Worse. I’ll
    Tell You Something Else, We Are in a Housing Depression! It’ll
    Get Worse Until Market Forces Rule Over Government Bubble Blowing!
  7. As I Made Very Clear In March, US Housing Has a Way to Fall
  8. It’s Official: The US Housing Downturn Has Resumed in Earnest
  9. The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream Media