I warned thoroughly of this occurrence throughout last year and this – see The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium
Monday, February 7th, 2011. The .gov bubble blowing accomplished the
mission of taking observers eyes off of the fundamentals and macro
environment and back into optimism central. To Bloomberg TV’s credit,
they gave me the opportunity to call it like it is. I will be discussing much of the same on Max Keiser tomorrow.
Part of
the problem is that the foreclosure pipeline has been artificially
clogged, causing a severe backlog that is not registering in the
official numbers. Again, an issue that I went into depth in last year.
Foreclosure activity decreased in April for the seventh straight month,
bringing total foreclosure activity to a 40-month low, according to a
new report from RealtyTrac. But the numbers are deceptive. When adjusted
for reality, these numbers and this turn of events corroborate what I
have dug up regarding the shadow inventory available to subscribers, (see the latest Shadow Inventory Analysis Spreadsheet online)
in that although shadow inventory looks bleak, there is a massive wave
of unseen inventory waiting in the banking rafters. This is online tool
is a very, very under appreciated asset that I would expect to get much
wider use in the near to medium term.
Bloomberg also reports Banks Said to Offer $5 Billion to Resolve State, U.S. Foreclosures Probe.
This amount is a mere pittance, and even if they do push this through
for their nth bailout, I don’t think it will permanently squelch the
various avenues for private litigation, then again I’m no lawyer. Even
as a layman though, the litigious threat was quite obvious, reference :
- “As
JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It
Was Not Obvious Years Ago That This Industry May Become The “New”
Tobacco Companies” - Less
Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking
Industry, The Massachusetts Supreme Court Drops THE BOMB! Monday, January 10th, 2011
Bloomberg reports that Foreclosures Prompt Four U.S. Cities to Sue Banks for Mowing, Home Repairs. I discussed this in detail both on Boombustblog and on the Max Keiser show: Reggie Middleton On Max Keiser Discussing Tradable Fraud, Goldman’s Facebook Deal & Phantom Bank Earnings
For more detail, reference I Warned That Banks Will Soon Be Forced To Walk Away From Homes… Guess What! Monday, January 17th, 2011.
You would be shocked at the amount of so-called professionals and
experts who told me this could never happen! I pushed further, with
articles that expanded on the topic last year as well:
-
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!Wednesday, November 10th, 2010 -
Banks,
Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street
Hustlers! Its a Sucker’s Bet, Who’s Going to Fall for it in QE2?Tuesday, November 9th, 2010
Now, in May, my proclamations from last year and the first quarter
look prophetic. They are not, they are the result of objective analysis.
Either way, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse.
In There’s Stinky Gas Inside Of This Mini-Housing Bubble, You Don’t Want To Be Around When It Pops!
I illustrated the poor macro and fundamental conditions that made it
impossible for a housing recovery to occur in the near term.
Nobody wants to admit it, but the 2008 never finished – The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.
Why so glum? Well, because mortgage lending is still the biggest
lending component in this country and the biggest lenders have YET to
come clean on their trash. After calling the fall of Bear Stearns,
Lehman Brothers, General Growth Properties, Countrywide, WaMu, Merrill
Lynch, and a whole host of other “trash as collateral” financial
institutions (see Who is Reggie Middleton!!!),
one would think that I would get more airplay. If one truly believes
housing is still falling (in other words, if one can count), then here’s
proof of more “hide the sausage” games being played: There’s Something Fishy at the House of Morgan Wednesday, April 27th, 2011
I've been renting since 2006, and I'm sure glad I didn't listen to everyone around me, my wife and parents included back then, when they told me I was such an idiot for renting...throwing all that money away on rent. I was told by one of my buddies that I would "never be secure without owning your own home".
I told him that you don't own what you haven't paid for, and that he's renting the money that he used to buy his house, so what's the difference. I'll just rent the house, and avoid all the strings, and that nasty business of Depreciation!
..Not many people are giving me a hard time anymore, since they've all lost their houses, and their so called "American Dream"...meanwhile I keep renting the smallest house I can convince my wife to live in, and saving what I can for P.M. investments.
I do hope that home prices continue to fall. I wish it would happen faster than it is now. This is really dragging on. The banks are protecting their collateral, and propping up prices, so as to keep their performing mortgages performing.
It can't last forever. There's no way that a house can continue to be valued at 10 or 15 times an average annual salary.
Reggie,
Whatever happened to the answer to the multifamily guy in a previous post?
Reggie, great work.
Let's price US real estate in Gold, Swiss Francs, oil etc. It is obviously that much worse when you factor in real estate falling apart in usd's and the usd is falling apart against most other commodities and currencies in general.
The government will NEVER give away houses to the poor and down trodden as someone suggested they might have to do. What may happen is that we may see a sudden clearing of inventory through "Natural Disaster", fires, etc. Here in California, we've had some very suspicious fires. Think about the concept, nobody really gets hurt, because insurance pays out the losses. The government will backstop the insurance company if need be...and...Most importantly, it gets rid of that nasty housing inventory overhang that's going to push prices down eventually. I think it actually conforms to the current administrations ideology if "socializing" the losses.
There's no question that the entire rotten financial system is anchored in real estate here in the U.S. When the price of real estate declines, it's very hard for the economy to do anything other than survive throgh one government market manipulation after another.
Currently in California, home prices are still much higher than they were just 15 years ago. More than double. I bought a nice 3 bedroom in 1996 for 235,000 and right now it's worth about 700,000. That's not realistic. Not many people can afford that, and if they can barely make the payment, they will be essentially slaves, with no extra money for anything else. What kind of a life is that?
These homes are nothing more than a bunch of 2 by 4's nailed together, with some chinese made plasterboard, and stucco on the outside. The construction give the look and image of a substantial "home", but it's not solid. These homes are built as cheaply as possible. The new houses are made of such shoddy materials, that they start to fall apart within a few years.
The idea that 5 or 6 rooms under an alsphalt roof, surrounded by several gallons of stucco, constitutes a 750,000 asset is a joke. The houses only provide the image of being solid. It's form without substance.
A 750,000 house in S. California can be built in about 1 month by a crew of six guys. What is it about that house that magically confers 750k of value to what should be a depreciating asset?
What makes it cost that much is the fact that there are banks willing to loan out 90% of 750,000 to anyone who can make the payment. If we used a real form of money, that couldn't be created out of thin air, you can be sure that the price of a home would be grounded in reality, and nowhere near what they are priced at now. Prices go out of control when there's an unlimited supply of money that can be created by the banks.
Nice rant, gooserooster, and all true. Prices in Cali have always been ridiculous. I live in upstate NY - yeah, the weather is not great - where homes like that $750K you're talking about sell for $75-125K.
How much should one have to pay for living space, anyway? Five years' pay? 10? How about two to three? That's roughly what a single-earner household could expect during the great depression. Average income was under $1500. Most homes sold for under $5K, with 50% down and mortgages no longer than ten years at 4-5%, most five years.
The absurdity of today's prices rested, for a long time, on the dual-earner household, which is bullshine, but pushed RE prices ever upward from the 70s through the 2000s. Then, collapse. Many households have 1 1/2 earners, or just one now. Throws the entire economy out of whack, especially with 30-year mortgages, inflated prices, all the rest. Massive bust.
I say we're headed back to the extreme of 2 year's salary equals one house. You make $60K, you should be able to afford a $120,000 home. $40K, $80K and so on. So, with median income around $40K and median home prices around $135,000, more price reduction is necessary before equilibrium. We're looking at another 20-30% haircut in prices, and that's if the economy doesn't get any worse!
Ouch, for anybody who bought in the past two years. Get ready for a Lloyd Bridges, a la Sea Hunt. See ya 50 leagues below.
Dup
Great post, gander. What you just said symbolizes Amerika. Look at our trash cars that nobody buys in other countries. Everything is trash in this country, trash congress,trash president, trash educational system, trash clothes, trash food, trash religion, TRASH EVERYTHING!. We are nothing but glorified dumpster divers, including our "elites" with their trash securities and ponzi schemes, trash banks, and trash Fed. We should be floating with the giant island of TRASH off the coast of Australia. This country is in need of recycling. What a dump. National bird: the seagull.
Reggie, have you ever done an analysis of the sizzling hot Canadian real estate market? (the market that many pundits in the past few years have suggested is due for a huge correction/crash - of course if it were to crash today by 50% it would be back to the levels some of those pundits started wolf crying)
What happens when the rehab costs, of a property that's been vacant for more than 2 years, exceeds the current value of the home?
City/county condemns it and an order is issued to tear the thing down... with demolition costs being paid by the owner... (if the owner is non-compliant, the city demolishes it and then sends a bill... and if not paid, releases the hounds).
The banks will sit on the inventory as long as necessary. They are going to settle the robo-signing thing en masse. It's the only way they get to survive and the Admin will assist them any way it can.
The states have some ability to dictate the issue though... parcels that do not pay property tax get certified to their respective state land commissioners (or the equivalent) to be auctioned... depending on the degree of formality performed, the lienholders may be extinguished of their rights... certainly with the passage of time...
In this sense, the states (many of which need property tax revenue to stay afloat) are diameterically opposed to any plans to extend and pretend... and, for sure, the states will opt to collect a few years' taxes over causing a landslide in prices (that's going to happen anyway).
I foresee some legal battles over taxation of property owned, at least in part, by federal entities...
http://detnews.com/article/20110512/METRO/105120376/41-000-property-tax-appeals-overwhelm-Michigan-court
Reggie
I think you are mistaken. It's not the spreadsheet, it's God. You are blessed with an amazing gift and please be grateful for it so you can continue to have the insight many people lack.
Perhaps any sufficiently advanced spreadsheet is indistinguishable from god.
Perhaps any sufficiently advanced spreadsheet is indistinguishable from god.
I just came across this ;-)
Reggie, I am in complete agreement with you, and, I think things will only get worse. When one looks at the size of the market that our government and the TBTF banks are trying to manipulate, one has to realize it's an impossible task. I would bet everything I own that the percentage of homes currently underwater is much greater than the MSM reports. The pace of foreclosures is picking up and yet the resale of the shadow inventory is not. The Servicers and Investors have a problem: if they sell off inventory and drive homeprices down further resulting in more underwater home and foreclosures they lose, and, if foreclosures continue and they sit on a hug shadow inventory, they lose. Somewhere there is a tipping point. The best thing that could happen right now is that the investors tell the servicers to cut losses and start modifying loans with major principal writedowns. Will this cause more defaults? Yes of course, but it will still be less damaging in the long run than continuing the current course. I would love to see an internal study showing the marginal cost curve vs. the marginal revenue curve for the housing market...I bet the sprread is growing daily! Keep up the good work.
The Servicers and Investors don't know if they have title to the properties! Whether another bank holds title, or if THE NOTE HAS BEEN PAID OFF w/ bailout money then Maiden Lane holds the title. Don't screw with The Fed, the POMO banquet is far more filling than a few thousand from each foreclosure (back taxes, association dues, renovation/repair). Reggie's right when he says banks will just give up, why bother for a small return when it's better to keep the full value on your bank's balance sheet?
Err, but then what happens to the "value" when the property falls into dis-repair or is bulldozed? Oh that's right, "mark to unicorn" accounting, the "paper" world and the physical world are two truly independent things. Right.....
Well..., actually, when the house gets bulldozed (assuming that the debris is hauled off) the vacant lot will be more valuable..if anyone decides to build on it several generations from now, or, more urgently, put up chicken coops and farm furrows.
I give a big tip to Reggie and full credit as he has called this housing thing spot on bullseye..I wanted so bad to jump on a couple of RE plays but held off..Thank goodness I did because this thing still has more room to move down..
Keep it up RM..
So we have channel stuffing at GM and in real estate also.
And all these houses in the foreclosure/realtor channel meanwhile start to rot and decay, until they'll have to be demolished, since they only produce running costs that pile up until it's irreparably damaged while no rent is coming in.
Rats in the frontroom, roaches in the back.
Junkies in the alley with a baseball bat.
So don't push me 'cause I'm close to the edge.
I'm trying not to lose my head.
Yummy !
Not all rot and decay. There are a large number like mine, in foreclosure, but living in it. Reggie is 100% correct about the banks walking away and it makes perfect sense in the bizzaro banker world.
They created a monster that has come back to attack them. It is vicious and without end. The bankers knew they could only win the fight by cheating, so they did, and they continue to do so. But, the state AGs have drawn a line in the sand - sadly, too late and not long enough - and now the banks are trapped. A mere $5 billion will be paid over time, to states, to be used as props, to move some of the least desirable inventory. But the banks, in their infinite stupidity, should agree to pay much larger fines, stuff the states with cash and move their inventory. It's a ponzi for the banks, right up their alley, but they're too scared or stunned or stupid, or a combination of all three. They still are, on a GAAP basis, insolvent and they will not take on additional risk. It's end game for them but they are still in can-kicking mode.
RE prices will continue to decline. Banks will delay and delay and delay foreclosures. People will live in houses for free for years. It's better than a buyer's market, it's a wholesale market. Many FC homes are going for cash only deals, but that money, those buyers, are professionals and very choosy. Cash deals will not support a rebound, no way.
The banks will wait and wait. They have nothing to lose because the servicers are not paying the investors on the NPLs. Since the servicers and investors actually overlap, the investors are also precluded from suing, so stalemate until prices stabilize at some lower level - probably about the point at which a two-income, minimum wage couple can afford a simple starter home - about $50K - many homes are already selling for less, but the catch is there aren't enough jobs, even minimum wage jobs, to cover even the dregs of REO inventory. Not enough quality buyers, prices must fall further.
Phony books, bad paper, bad chain of title issues, the bankers have been truly fortunate to have avoided jail time. Meanwhile, rent-free living for the masses, sounds like wealth transfer and the banks are finished one way or another.
Comments, please, if I haven't gotten it all about right.
FNM and FRE are being used to bailout the banks. Deadbeats may be living rent free, but the US taxpayer is making up the difference through mortgage insurance. I looked at a house last week which was a FNM foreclosure sale. Looking at County records, the place was sold for 360K in 2006. In December 2010 Wells Fargo was made whole by FNM (aka the US taxpayer) who is now selling it with an asking price of 180K. So do the math, the banks will be just fine if Uncle Sam and the Bernanke have anything to say about it. Its election time and all the whores in DC are out to get their campaign tins filled by their patrons. I'm sure the big banks will be pitching in a record amount ... again.
I very much appreciate Mr. Middleton taking the time and effective expense to publicize his analysis here. For what it is worth, his information has probably spared several young people I talk to, who were considering buying a home, thousands in lost equity.
At some point the Government is going to give away some free house to poor and downtrodden..
Yes, they have done it before. Anyone else remember the "love canal"?
Only vaguely, as I've been married for some time now. :rimshot:
I seem to recall that the late John Templeton predicted (about 2005) a 90% plunge in stuccoed-sheetrock with plastic plumbing .
Seems like he mighta been right on the money...
Have a nice day.
nice analysis RM; however, I know several people buying up foreclosures outwside the courtroom steps in Ventura county, fixing them up and selling them for $80-100k more than they paid....and the buyers just keep on coming-all thinking that they are getting a decent deal. My question to you: How does this mess play out-will prices continue to drop or are they at the bottom?
The flippers in the small town where I live quit buying houses here a year ago. There's one current listing that sold in 2005 that's now listed for 22% of its 2005 price.
Come on. there is a sucker born every minute and in the absence of job growth or wage inflation, you know exactly how this will turn out. Same thing happened in Japan 30+ years ago.
Bingo. Softball.
It is simply amazing to me that Reggie has simply not been "disappeared" yet. Keep exposing the truth Reggie!
Second that thought. TBTF/Black Ops Division surely has to rub Reggie out in the near future! He's a violent torpedo of truth!
Appreciate ur insights and work Reggie,
Thx.