The Next Leg Of The Housing Crisis In Five Simple Charts

Tyler Durden's picture

Everything that the government has done so far, with a few minor detours, has been almost exclusively focused on maintaining home prices high, by tweaking either the supply or the demand side of the housing equation. As the bulk of consumer net wealth is concentrated in the housing sector, and a wealthy and confident consumer, much more so than the banking system, is critical to the recovery of America's economy, the Administration will do everything in its power to achieve its goal of artificially manipulating the housing market, thereby not causing an incremental loss of wealth to those still stuck with overpriced houses, while the real intersection of actual supply and demand curves would indicate a materially lower equilibrium price. This is ironic, as proper price discovery is critical for a true recovery, since Americans realize all too well that buying a house at prevailing levels in advance of the second down-leg in housing is senseless, the continued pursuit of such flawed policies by the Fed and President Obama merely pulls the market ever further away from its equilibrium, thereby making the anticipated second dip so much more likely and not that far off in the distant future. Below are 5 simple charts the highlight just how precarious the housing situation in the U.S. is, and how likely the second, and probably much more fierce, leg down in the markets is going to be.

A bearish report by CIBC 1captures precisely the highly unstable system that U.S. housing has become, and deconstructs it along the five key axes of weakness which while individually may be controllable to a degree, combined represent a recipe for disaster. CIBC's main sources of concern arise from:

  1. Short-lived remedies; used by the administration to prevent further price deterioration (tax-credits);
  2. Shadow Inventory; in reality when accounting for the surging shadow inventory which very few dare talk about, the total number of available unit sdouble to over 8 million, representing a record high 16 months of supply.
  3. Strategic defaults; the amount of households with negative equity is roughly 10 million or about 20%, in 2009 25% of all foreclosures were strategic; as populist anger against banks accelerates look for strategic defaulits to keep rising
  4. Quantitative Easing expiring; This needs no introduction: the sole reason why mortgage rates have been as los as they have, has been due to the Fed's constant manpulation of the MBS market via the $1.4 trillion MBS/Agency QE purchase program. With this program set to expire in 2 months, rates are set to explode.
  5. House Prices are already entering a double dip; Previously we discussed the Case Shiller NSA home price index number which indicated that a double dip in prices has already commenced. A positive feedback loop will only lead to further deterioration here

Analyzing CIBC's factors one by one:

Short-lived remedies

During the past year in which the program has been in effect, sales of existing homes have climbed by 15%, while new home sales have actually dropped by 5%. In fact, the usually stable sales ratio between the two has more than tripled, recently hitting a record high 18 (Chart 1). But after being extended once by the Obama Administration, this tax credit will expire at the end of April—putting downward pressure on demand for existing home sales. That prospect will make it more difficult to clear out the next wave of foreclosures, prompting another down leg in US house prices.

Shadow Inventory

the risk of a double dip in US home prices is not simply the result of properties being sold at “fire-sale” valuations, but also due to a deluge of shadow inventory coming onto the market. Although conventional inventories are trending lower, shadow inventories, capturing seriously delinquent and bank-owned properties, are just as large.

There are close to two million mortgages that are more than 90 days delinquent, and nearly all of these will end up in foreclosure, given that over the past three years the “cure rate” of this category fell from 40% to less than one percent. Add to that the 2.3 million properties that are in foreclosure or already seized by banks, and total inventories (conventional and shadow) are now running at over 8 million units (Chart 2). At current sales rates, that adds up to a record high 16 months of supply. True, this “shadow” stock will not hit the market all at the same time as banks manage their supply of seized properties, but this constant flow is likely to keep markets depressed for a while.

Strategic Defaults

A big part of the problem is a still weak labour market, which has left a record 15 million Americans unemployed and another 9 million underemployed for economic reasons. However, just as significant is the roughly 10 million households in a negative home equity position of worse than -20%, for whom strategic default - failing to pay when one could - is a very real option. While negative equity is a necessary but not sufficient condition for default, it’s a clear risk; out of the 2 million or so foreclosures in 2009, roughly 25% were strategic (Chart 3).

Quantitative Easing

It’s not just inventories and tax credits that are looming large over the housing market, but also interest rates. Aggressive central banks’ rate cuts along with large amounts of agency MBS purchases by the Federal Reserve have lowered mortgage rates by over 100 bps since the height of the financial crisis. That spurred a refinancing boom, which, according to First American Corelogic, saved $2.3 billion in mortgage payments—a roughly 10% reduction—in 2009 alone. Although we don’t expect policymakers to raise the fed funds rate until 2011, mortgage rates have already started to head higher, and could keep climbing towards the end of the first quarter when the Fed’s $1.25 trillion agency MBS purchase program is completed. Those purchases made up almost 50% of all MBS issuance last year, and despite the improvements in the securitization market, their absence will likely have a material impact on rates (Chart 4).

Price Double Dip

In the final analysis, the end of unprecedented government tax support for housing, along with the looming overhang of supply and a higher cost of borrowing will keep new home building activity trudging along at historic lows over the next two years and could see prices drop again by 5-10% (Chart 5).

And there you have it: the best that the government can hope for is to extend and pretend, and to avoid presenting the sad but very simple reality to the American public. Because lack of knowledge is half the battle. Alas, as long as the reset button is not pushed, the only beneficiaries are the very same Wall Street kleptocrats who want nothing more than further perpetuating the status quo. At this point nothing absent a complete socio-economic catharsis can help America; the rest is just Congressional hearings, angry presidential outbursts scripted on the teleprompter, and neverending smoke and mirrors.


  • 1. U.S. Housing - A Double Dip; Benjamin Tal and Meny Grauman, January 28

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JimboJammer's picture

These  big  banks  are  not  listing  all  the  vacant  houses  they  have.

A  Realitor  in  Fort Myers  Florida  told me  this.. They  won't  put  a  for 

sale  sign  on  every  house right  now  because it  will  Flood  the  market.

Lower  prices  coming  for  houses...

Rainman's picture

....and sooner than later that nasty old cash flow boogeyman darkens the Bankster doors......sure as night turns to day.

pbmatthews's picture

Of course they can't put signs in front of every home available for sale--otherwise even the dumb public would then realize that an $8,000 tax credit would not offset the losses they will soon realize when home prices fall another 10% to 20% (which they would have done if not for the actions of our fearless leader Barry Soetoro).


Anonymous's picture

incentives serve to shuffle ownership into hands capable of servicing debt--this time more conservatively underwritten. yet another win for the banks

Anonymous's picture

...and a massive loss to the U.S. taxpayer. The number of new FHA loans currently going into default on houses bought via recent government support isn't exactly something to write home to mom and brag about.

But hey, the banks have won big time. Then again, where would the banks be if they had acted intelligently and this downturn never happened in the first place? The country would be a LOT better off, and the bank execs would have earned a lot less in bonuses.

Anonymous's picture

Great, maybe this time the people will revolt.
Of course there will be a second wave of foreclosures. This one will be blamed on ARM mortgages. I suspect rate increases shorty to get this party started. The wall street merchant bankers want you to foreclose because they end up making more money in the process.

Anonymous's picture

Only a complete moron would wish that people will revolt.

I only hope that if people do revolt, the eventually turn up at your doorstep.

OutLookingIn's picture

From Fannie Mae's own numbers -

Conventional single-family serious (90+ days behind) delinquency rates of loans are as follows;


2007 - 0.6%

2008 - 1.0%

2009 - 2.5%

2010 - 5.29%

A four year trend that is not conducive to a healthy housing market.

Anonymous's picture

maybe you should post the 2009 activity because i would thought it bottomed at some point or has it really gotten worse and worse MoM?

Anonymous's picture

Don't confuse foreclosures with delinquencies. Foreclosures dropped, but delinquencies continue to increase. Eventually, these will become foreclosures.

Banks may not be foreclosing as quickly due to asset valuation impact concerns, or simple lack of resources to process the escalating delinquencies. Either way, it doesn't paint a pretty picture.

Anonymous's picture

Banks may also not be foreclosing in an attempt to avoid taking on the risks of being held liable for back taxes. Have you seen the statistics on delinquent property taxes?

Anonymous's picture

Property taxes run with the property as do other municipal liens. In many states the Condo fees also run with the unit. So this is not a reason to postpone foreclosure.

Bank have other reasons, like their Ratios...

fxguy's picture

Doesn't the bank also assume the burden of keeping up the home once they foreclose. I mean after all, someone has to pay the property tax, school taxes etc. And if the bank is the owner, they are on the hook no ?

This is a good reason *not* to foreclose too quickly

Anonymous's picture

Doubling every year. The good news; it can only do that for four more years.

Anonymous's picture


perchprism's picture


Chart 2 is current only to March, 2009, but the article says the housing supply is good for 16 months----is that as of March 2009, meaning there's only 7 mo's supply left?

Anonymous's picture

Yes we all know--that's called shadow inventory.

ghostfaceinvestah's picture

Nothing new here, but it is worth repeating to hopefully prevent a few folks from being suckered in to putting their equity in the housing market today.  Can't fault someone for buying with a no-money-down FHA mortgage, but keep your downpayment for another year, you will be glad you did.

Anonymous's picture

FHA has battened the hatches down. Friend's buyer got turned down because he was a prime buyer pretending to be a sub-prime..

Crime of the Century's picture

On the way up, they pretend to be richer than they are

On the way down, they pretend to be poorer than they are

Does this country have too many liars to recover?

junkyard dog's picture

"the only beneficiaries are the very same Wall Street kleptocrats who want nothing more than further perpetuating the status quo."

Bring them down to yard after dark. Throw them over the fence one at a time every 4 minutes.



Rainman's picture

Banksters are waiting for the Spring HomeSale extravaganza for motivated first time buyers flush with ObamaCash. Car guys are thinking the same thing.

Yeah, that oughta' work.

docj's picture

Yeah, that oughta' work.

Well, sadly, it just might - for a little while longer at least (or, they hope, until at least mid-November 2010).  Honestly, I'm simply amazed at how long these clowns have kept all those plates spinning.  Sure, they're eventually going to start to drop - and when they do it's going to be really, really ugly - but that it hasn't happened yet is quite incredible.

ghostfaceinvestah's picture

I don't think they can kick the can much longer.  They made a big change to HAMP starting today where participants are kicked out after 3 months if they haven't submitted the required docs.  So today there are literally tens of thousands of mortgages that will be entering the foreclosure process.  That doesn't mean they will be foreclosed upon immediately, or at all, they may go short sale, but the extend and pretend period is ending.

Why would the government do that?  Because they realized people were gaming the system, using HAMP to extend the time they could get free/cheap housing.  Remember under HAMP the incentive was to understate your income so you could get the lowest possible mortgage.

So people were defaulting, then 9 months later they went into HAMP and claimed they were barely making anything so got 3+ months of lowered payments, and dragged their feet on submitting paperwork to milk it as long as possible.  It was creating a nightmare, so as of today it is at an end.

The next leg down has already started, it should pick up speed in the coming months.

Tethys's picture


I completely defer to your expertise in this matter.  However, if you might permit me a cynical view of current events:

1) Short lived remedies - will be extended indefinitely and increased as necessary.

2) Shadow inventory - will remain in the shadows indefinitely.

3) Strategic defaults - will increase over time, but since banks can mark-to-whatever-they-fricking-want, who cares?

4) Quantitative easing expiring - so they say. Giggle.

5) Housing prices entering another dip - bah, just statistical fluctuations. Turn up knobs 1,2,4 above if it is real.

Seriously, since it is not in the interest of TPTB to do things that will essentially wipe out the banks, they won't be done.  And since it is not in the media's interest (either for political or financial reasons) to make the general public aware of what is going on, the public (with the minor exception of the increasingly astounded readers of select blogs) will remain ignorant and there will be no 'spark' to incite the rabble beyond a few tea parties which will be widely ridiculed if reported on at all.  Regarding the changes to HAMP - as much as the idea makes sense, I guess I will believe it in 3 months if the deadline doesn't get extended (indefinitely) or if it is actually enforced.

It seems to me that those in charge have only one option left - hold things together by any means necessary and pray for a miracle or at least something to blame the crash on.  As they are aided by a compliant media and largely distracted public, I fully expect to be surprised by how long the final resolution will be delayed.

Sorry for the rant, but now I do feel a little better.  


carbonmutant's picture

Good points.

HAMP will help but the Real Estate sector has lots of lobbyists.

Anonymous's picture

its not hte real estate lobby its the banks

Anonymous's picture

Actually, it is ALSO the real estate lobby. They were pushing Congress to extend the $8000 tax credit. It's a circus.

Anonymous's picture

"It seems to me that those in charge have only one option left - hold things together by any means necessary and pray for a miracle or at least something to blame the crash on."

War on Iran for a distraction?

Don't let it happen!
Join and take action.

Crime of the Century's picture

Things that cannot continue indefinitely, won't.

boooyaaaah's picture

Nice skptical response

Your phrase "pray for a miracle or at least something to blame the crash on" made me remeber this ---- the system worked

Joe Davola's picture

Shadow Inventory - just another way of saying tomorrow's section 8 housing.

Commander Cody's picture

More Section 8'ers created every day, therefore, convenient and according to plan.

MarketTruth's picture

Many do not realize that oBOMBa cash is taxed, just wait until April 15th THIS year when all those who took advantage of 'free' cash get the bill.

Dr Horace Manure's picture

Mr. Durden, Sir.  What you are saying is that home prices will certainly be lower in the future.  Only a fool would buy now, the wise among us will wait for the lower prices.

And that, boys and girls, is the deflation mentality that will lead us straight into the Greatest Depression.  Oh, that plus global debts being greater than GDP and so on and so forth, blah, blah, blah.

I'm all cash and hungry to buy stuff cheap.

Tethys's picture

Right you are.  It seems the key for those with cash will be timing.  Need to wait just long enough so that you buy at the bottom, but not so long that (a) currency collapses and your cash is worthless, or (b) deflation/depression hits full scale in which case your cash will be frozen by bank holidays / money market freezes etc.  I'm guessing some luck will be required.


andy55's picture

Well summarized, Tethys.  I've been noticing that your posts are always quality btw.

Tethys's picture

Thanks!  Given the general quality of posts on this blog, I am honored indeed.



faustian bargain's picture

What's the worry? We're all experts at timing the market, right? And surely TPTB wouldn't allow a deflationary spike that strikes unannounced, and collapses the currency without giving anyone time to react...would they?

Hephasteus's picture

It's timing for criming till the bells start chiming.

Ask not for who the bell tolls for it tolls for thee.

MarketTruth's picture

Great post, and why gold is a way to hedge against currency collapse.

Anonymous's picture

The way things are going, you will soon be able to afford a nice house by plunking down a few 1 OZ Gold coins----

More and more, I am long both silver and gold--

This will not end well for our fiat currency!

Crime of the Century's picture

Yes and no - I took it to say that those who are "baited" into purchasing may have regrets. The point is valid. Your presentation of "The Paradox of Thrift" not withstanding, I don't believe that the "duty" to spend is a valid rallying cry anymore. Did it work after 9/11? Did it really?

boooyaaaah's picture

Don't buy too soon

In Cash -- You mean you are not a gold bug?

Most people can contemplate major deflation and major inflation and think that gold will be "up" regardless


jeff montanye's picture

but gold has gone up in deflation and inflation: 1929-1935 and 1965-1980.  it seems to have something to do with stocks and bonds doing poorly and currency debasement.  

Kayman's picture

It was once proposed in the Roman Senate to have all slaves marked, to more easily distinguish them from Roman citizens... it seemed OK until someone realized it might not be such a good idea to let Roman slaves know just how many of them existed.  Better not encourage revolts and riots...

The non-disclosure of the so-called Shadow Housing inventory is but one more piece of the Smoke and Mirrors show, to keep Americans from rioting in the streets.

Our governments and the Banksters have not accepted that continuing to rob our economic future by printing, borrowing, postponing, and outsourcing has burned out the engine of the economy.

This economy is jacked up on wooden blocks and our politicians are making the vrooom,vroooom, sounds, trying to pretend they have a real engine.

It is truly pathetic to watch this gong show.