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The Next Leg Of The Housing Crisis In Five Simple Charts
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:
- Short-lived remedies; used by the administration to prevent further price deterioration (tax-credits);
- 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.
- 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
- 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.
- 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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As one involved in the residential housing business allow me to offer some thoughts:
Overall, many issues are local and YMMV, but the cost and availability of financing is national in scope and I do not see how that is getting fixed. Right now, the government is the lender of first and last resort. and that cannot end well.
thanks
Great info.
Don't overlook the shadow inventory that comes from a generation of rich boomers either downsizing or dying. The population may be growing, but a lot of that growth in in socio-economic levels that are not going to let the boomers or their hiers out at levels they might be expecting.
Same goes for a lot of the "wealth" currently tied up in invested pension assets.
The bubble are anything but popped.
Why are those "anonymous" creatures always in the dark?
Those "pension assets" are heavily interlocked with all those private equity CLOs, etc., and are about to go fizzle, unless they make good on all those PIK toggles coming due.
Which, interestingly, corresponds with those graphs above, time-wise.
Punxsutawney Phil today said we are getting six more weeks of winter. He is dead wrong and comes up short in his estimate. We are in for a much looooonger winter.
And don't forget your booties...
Kondratiev himself would 1) be somewhat impressed by how long the US has been able to levitate assets (I bet he would argue since 2000) and 2) be awestruck by the breadth/depth of the winter currently unfolding. IMO.
Two thoughts:
A. Just rent. Standard deductions are getting closer (if not already there) to all the bullcrap benefits realtors spin for deducting mortgage interest. Also gives you the benefit of moving if you don't like your neighbors. I've heard the "throwing your money away in rent" for too long and don't buy it anymore.
B. If you want to buy, buy with all cash - save until you've got the full amount. Why give the banks even a penny in interest? No reason to worry anymore how today's interest will be different from 6 months from now. Seems like the best way to uniformally stick it to all of them.
It's simple, Marla. They're going after the houses now.
A huge number of Alt-A's and Option ARMs recast in the next couple of years, and California has a large percentage of those loans.
When I see crappy, old 500 sq ft houses being listed in CA for under $100K instead of $500K I will begin to believe that housing prices have stabilized.
California is toast.
that's part of the problem,
dont look at it through dollars for a second, use gold
500k/1113.50=449oz 100k=89.8oz
houses can deflate while the dollar depreciates, then you could have a house that if liquidated, has lost purchasing power but not nominal value.
Actual report can be found here
http://www.scribd.com/doc/26158724/US-Housing-A-Double-Dip-CIBC-World-Ma...
"...the rest is just Congressional hearings, angry presidential outbursts scripted on the teleprompter, and neverending smoke and mirrors."
I'm watching "Cake Boss", from now on. The hell with it.
"Property Ladder" and "Flip This House" come on every Saturday morning. Fun to watch! Of course these were all recorded circa 2006-2007, but you gotta wonder how many folks out there are watching this thinking they too can be an overnight success story by flipping that foreclosure down the street.
Top of bubble.
UK was red hot
Iceland prices climbing
Southern Spain holiday condos on fire
Finally...
"Condos For Sale In Dalmaica"
Dalmacia...you gotta be kidding me?
It's like the whole globe was one big RE Market...and the
shitty places of the world were just 'diamonds in the rough'
Amazing
Just FYI, Dalmatia is the province in Croatia where many worlds celebrities and wealthy people spend their holidays, From Tom Cruise to Bil Gates & co, they have all been spotted there. Saying that the bubble is popping there (and it is, cause I own an apartment there) will just say that they don't even hope that US and the world will recover soon, so they want to cash in before it implodes. And they don't believe in USD currency anymore, which is going to devalue any time soon. the World is losing faith in the Dollar... US gov has pumped so much fake money into Wall Street past year that the value of it isn't real any more... beware of what is coming next...
Next on HGTV: Torch this House!
Squat This House.
A friend here in NJ, ex-realtor....hasn't paid mortgage or condo fees in 3 years, just got energy assistence...they paid $3200 in electric bills so far..
yo what about good news today ? how come there has not been a post picking it apart as usual. i am lead to believe by the report that sales are picking up which is indicative of a rise off the bottom. dunno if i see it getting much worse certainly not 10% deflation in prices. the fed will do everything thing it can to keep rates down until housing recovers obviously by what they done to date. this means if necessary continuing the purchases of mbs' vis a' vis Qe 2. either way i dont buy the hype that a double dip is a sure thing. it’s a possibility but a remote one.
We were in contract twice on two different distressed properties, only to have the owning banks pull out in the 11th hour. Finally closed on a property owned by a local bank who was more interested in the cash than the loss.
It's a great game for banks - desk the deal to prop up housing sales numbers, but then cancel the deal before you actually have to take the loss.
The definition of pretend and extend...
youvebeenhad
the one thing you have behind housing prices is the fed which yes in reality is bankrupt but we live in reality of perception. this is why at the first sign of risk, dollar rallies when in reality who would rationally want to hold a dollar?!? i just think that being bearish the housing market is like saying that the fed has no power which is foolish at this stage in the game. over the course of the last year it has proven time and time again with each auction that it makes the rules of the game we all play in. the person that makes the rules of a game usually wins that game. again! i am not saying this will end well but all i am saying is that a double dip in housing is unlikely given unparalleled clout of the fed.
If you are agonizing about whether to buy real estate now or later, maybe you'd better define "real estate"
It's hard to see the value in buying a "suburban middle class home in CT" right now, or a year or three down the line if/when prices dive again. You may as well rent it and save a lot of money (and headaches) if all you are gonna do is park your car, watch TV and sleep there. Call that "fake estate"
If you want your real property to produce anything of real value, the best time to buy was yesterday, and you could already be at work building the soil, planting fruit trees and garden beds, installing some distributed energy source like solar or wind, and improving the structure. It takes a few years at least to get this sort of thing going, especially if you are doing it after work and on weekends. Invest in infrastructure during this so-called "deflationary period" and take advantage of gov't subsidies and tax breaks for energy efficient appliances, insulation, solar panels, whatever.
If things really are gonna be so grim, you are probably soon going to be at best "underemployed" and maybe even a little hungry...
Here's another idea - rent your house, and buy some cheap agricultural land within an hour's drive or less (go in with your friends and/or family maybe and it'll be even cheaper) and lease it to an organic farmer. That property may actually appreciate quite a bit in the coming years.
Or if you are not cut out to be a farmer, buy a multi-unit that you can fix up, live in and rent out the other units.
The whole point of real estate ownership used to be that it was a factor of production, not a financial abstraction that magically provides some rate of return while you rent it from the bank. If you are not going to improve the property in some way, and realize some income from it, don't bother buying it. If all you are willing to invest in life is fiat currency, you may eventually get lucky and get it back by the wheelbarrow full, with many more zeroes on it.
the mkt keeps floating w americans' own cash; being spent front obama taxes not yet imposed on future generations...
stallnig the inevitable, awful truth: everything is overvalude, the baby book is comnig w little or no resources on their table and a painful blood lettign must happen to wipe the bad debt away to start fresh, and hopefulyl smarter. Once you pay too much...
u can eiother wait till the mkt recovers or write it off, painfully and bloody.
I am already gearing up for NOVEMBER:
I will campaign SOLO on the Streets of Laguna Beach.
I will have only one sign, front and back, and it will read
TAX AND SPEND
TAKE AND GIVE
INFLAT AND ROB
INCENTIVIZE AND CONTROL
SOCIALIZE AND CORRUPT
VOTE EM OUT, OR
TAKE EM OUT
=============
TOTALITARIAN
ENSLAVEMENT BY
US GANG OF FOUR
WWs FED BANKSTERS,
IRS TAX THUGS
FDRs RAW DEAL
LBJs CORRUPT SOCIETY
BHOs SOCIALISM
=============
Only those who love freedom's dream world of 19th century America will get it. Do You?
Derrick Michael Reid
Laguna Beach CA
(PS, READ MY STUFF townhall "Totalitarian Democracy", "China Transforms North Korea, for a global comprehensive view)
Those pretending we have seen the bottom of the Real Estate markets, must be on weed and crack.
goldonomic.com
Im buying a house right now for 140K - its build cost would be 250K with land. Not to worried.
We just bought a HUD foreclosure for $9500 and fixed it up.
Prop Txs will be steep this year before it can be called 'homesteaded property', but we own it and can rent it while we pay off current home (5% 15 yr fixed) with SS$.
Problem we face in MI. above and beyond the obvious is that we need to get our local gov hacks to stop inflating the value of homes in an OBVIOUS DEFLATIONARY DECADE (?)Will a prop 13 like in CA help? Don't know, but something has to be done quickly here as the hacks are going to emnpty out this state on property taxes alone.
Anymouse
I am new to zerohedge & respect the site.
In my ignorance I have a question, but I'm sure that many would likewise like an answer to this one.
I was once told, rather simplistically (even misleadingly) that a bank makes its money through the difference between the interest rate paid to savers, and the interest rate charged to borrowers.
Somebody else told me (getting closer to the truth) that banking is easy money, and that a bank would have to be guilty of extraordinary stupidity to go bust.
Here is my accumulated understanding, and I seek clarification.
Modern banking is fractional banking, which means that for every dollar deposited, the bank can create out of thin air, another eight dollars to lend out, in addition to the real, saver's dollar. Therefore, with a 100k dollars deposited, the bank can lend out 900k dollars. If the respective interest rates are 5% for savers, and 8% for borrowers, then the bank has to pay out 5k pa to the saver, but charges 8% x 900k to the borrower, = 72k. This is a 67k annual margin on a 100k deposit; sweet. Notice that if the rate for savers was 5% as before, but 2% for borrowers, the bank will still earn more interest than it has to pay out (thus highlighting the misleading nature of the first tenet above; under fractional banking, a bank can theoretically even charge a lower rate to borrowers than it awards to savers; but we detract).
Now lets turn to the balance sheet. The bank has a 100k of deposits, and lent 900k to me to buy a McMansion. Now, I default, and I am foreclosed. What is on the balance sheet? The savers cash is spent. The asset which used to be my debt to the bank, is gone, but the 100k liability remains. Title to a McMansion, worth 500k, now sits with the bank. Of course, writing off the debtor ( $900k less the collateral of 500k = $400k) is a loss that in principle appears as a loss on the balance sheet, but the money isn't real. It was conjured out of thin air.
The reality, is a debt to the saver of $100k, offset against title to a house worth $500k. My main concern as a bank is not solvency, but cash flow; it is now torpedoed (and I have my own overheads to pay), because my debt slave wriggled free, and I cannot sell the house (which would resolve said cash flow angst). I cannot lend further amounts on the 100k savings deposit, since I maxed out on the fractional conjuring already. I am in further doo-doo if the saver wants his money back, since I don't have it and will have to borrow it myself from another bank.
Is this a fair assessment of the bank's position, and if incorrect, what needs correcting?
If it is a fair assessment, is there a risk that the banking cabal will extract from government, the right to lend out even higher multiples of savers money, in order to solve their liquidity crisis? (and to hell with the money supply?)
Thanks.
I believe that 900K is borrowed from the FED (central bank) and must be repaid. So member [FED] banks are still on the hook for the money they lend out however the FED is not. The FED really does create the stuff out of nothing... er out of the full faith and credit of the United States... in other words our faith in the value of their dollars aka [promissory] (federal reserve) notes.
I believe that 900K is borrowed from the FED (central bank) and must be repaid. So member [FED] banks are still on the hook for the money they lend out however the FED is not. The FED really does create the stuff out of nothing... er out of the full faith and credit of the United States... in other words our faith in the value of their dollars aka [promissory] (federal reserve) notes.
SOLUTION: BLOW OUT THE FORECLOSURE INVENTORY AT 3.5%!!! The banks can complain that's too low - guess what, it is better than the 0% you are getting now!!! And the property taxes will get paid again so we can have a fire department, schools, teachers, hospitals, decent freeways, etc. That should be done for a short "fire" sale. Do it fixed for the first year for 30 years to get things moving. The 2nd year at 3.5% graduated to 5% for the 2nd year. Third year 4% graduated to 5% & so on. Let's get people out of "deer in the headlights" syndrome & get things moving!!! And let's stop the joke of the Modifications that take forever & blow peoples credit to the twilight zone & give people a choice of the new plan or gone! We are in an urgent situation - create URGENCY!!! The economy would start moving, businesses would stop having to layoff & sell, the tax base would be replenished, so more government jobs could be saved & created, etc.
We need to get rid of the minimum wage too, the government is only thinking of how much tax they will loose - well it would be better than the millions on taxes you are loosing now!!! And it would keep our jobs here in America!!! We wouldn't have to give so many jobs to India or China just to get a better price if an American wants the job!!! That would reverse the government created depression we now have!
Just because the sheeple are revolting doesn´t mean they will EVER revolt
I have given up hope--too stupid, too brainwashed, and oo dependant on a broken system
Eventually they will line up nice and docil--to go into the Fema camps
Just because the sheeple are revolting doesn´t mean they will EVER revolt
I have given up hope--too stupid, too brainwashed, and oo dependant on a broken system
Eventually they will line up nice and docil--to go into the Fema camps
Banksters, politicians and their attorneys should get their passports in order. They're going to need them -- soon.
This site has a cool interactive chart that shows median house price / median household income for the 20 Case-Shiller cities. Judging by the chart, some cities have reached record affordability and others are still wildly overpriced.
Choose: Case Shiller Absolute House Price vs Median Household Income (U.S. Census version)
http://housingcorrection.com/
"over the next two years and could see prices drop again by 5-10%"
Try a supercharged 30% when including other asymmetrical factors such as massive increases in unemployment and the withdrawal of consumer credit and finance from the pending bond market collapse.
Prices will eventually collapse to 75 - 90% of their highs, depending on market area. There will be an approximate 30 million unit continuous oversupply of housing for the next half century.
2010 was kinda a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.
http://www.firsttimehomebuyercredittips.com/
Just because the sheeple are revolting doesn´t mean they will EVER revolt
I have given up hope--too stupid, too brainwashed, and oo dependant on a broken system
Eventually they will line up nice and docil--to go into the Fema camps.
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Just because the sheeple are revolting doesn´t mean they will EVER revolt
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