S&P Chimes In On Foreclosure Fraud, Expects 6-8% Home Price Decline Through November 2011

Tyler Durden's picture

S&P finally chimes in on fraudclosure, and in combination with other recent weak data out of the home segment, now sees an additional 6-8% decline in prices through November 2011. "U.S. home sales and home prices aren't likely to improve as we move into the seasonally sluggish fall and winter months. Although the latest pending home sales, reported last week, showed a modest increase, generally slowing new and existing home sales in recent months, combined with declining mortgage purchase applications after the government's temporary tax credit for homebuyers expired at the end of April, lead us to expect the housing inventory to grow and home prices to fall in the months ahead. A range of other key factors are also weakening the housing market: An elevated level of short sales and distressed asset sales; a large backlog of shadow inventory that have yet to be brought to market; and a high national unemployment rate. The recent news that several major banks will delay foreclosures due to documentation issues may postpone the arrival of the backlog of distressed inventory to the market anytime soon. The foreclosure delay also supports our expectation that the housing recovery will be a slow one. Additionally, the latest U.S. housing futures suggest that home prices will decline another 6% through November 2011. Standard & Poor's economists expect similar price declines over the same period." And if you read through the end of the post, you will see that broad consensus among various sources is that over the next 12 months, home prices will decline by an addition 5.7-10.8%. So much for that "official housing bottom" in July 2008. Too bad QE2 can't inflate home prices as effectively as it can the price of NFLX, which is as the very heart of the problem.

Before we get into why slowing home sales are not, as Cramer predicts, bullish for prices, here is the summary of July home price data. Alas, it is all downhill from here:

Key highlights of the July 2010 home price data include these findings:

  • U.S. home prices increased in July on a seasonally unadjusted basis as month-over-month home price increases
    were 0.8% and 0.6% for the S&P/Case-Shiller 10- and 20-City Composite indices, respectively.
  • LoanPerformance's seasonally unadjusted price index decreased 0.6% in July when both distressed and market
    sales are considered. Excluding distressed sales, the increase was 0.8%.
  • The FHFA home price index reached its seasonally unadjusted peak in June 2007. In July 2010, the nonseasonally
    adjusted FHFA home price index decreased 0.7%.
  • Home prices in Washington, New York, Detroit, and Chicago increased at least 1% on a seasonally unadjusted
    basis in July in the S&P/Case-Shiller index. Home prices declined in seven out of 20 metro areas and the decline
    was less than 1% on a seasonally unadjusted basis.
  • On a year-over-year basis, the S&P/Case-Shiller 10-City index increased 4.1% in July and the 20-City index
    increased 3.2%. This trend marks a significant improvement from early 2009, when declines were 18% or more.
  • Our analysis of home price tiers suggests that low-price homes have experienced more significant price declines
    since mid-2006 than mid- and higher-priced homes.
  • The values of the S&P/Case-Shiller 10- and 20-City composite indices are currently near their fall 2003 levels.
  • These indices peaked around mid-2006 and have since lost slightly below 30% of their values, which translates to an aggregate decline of roughly $571 billion in the original appraisal values of homes across all regions.

Below is one of the most indicative monthly home price change charts:

S&P on the all important distressed properties, which will now be backlogged for months if not longer:

The volume of distressed residential mortgage properties in the U.S. is another factor reminding the market that the fledgling recovery has yet to have a meaningful impact on the housing market. The growing volume of
yet-to-be-liquidated properties has created a large "shadow inventory" of distressed properties--which we define as outstanding properties whose borrowers are (or recently were) 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are REO. While the flow of distressed properties entering the market has been relatively even to date, home prices could drop further if those properties come to market over the coming several quarters because distressed sales usually involve significant price discounts. In terms of price impact, various reports are indicating that distressed properties are currently selling for an average of 25% to 30% less than non-distressed properties. However, we believe the impact of the shadow inventory coming to market may be moderate because the government has put various programs in place to help keep homeowners in their homes whenever possible.

The market's anticipation that prices will continue to decline into 2011 will likely keep potential buyers on the sidelines until prices appear to stabilize. Consequently, home sales have slowed in recent months. New and  pending home sales in May and existing home sales in July dropped significantly after the homebuyer tax credit expired in April. Given the difference between how new and existing homes sales are calculated, new home sales usually lead existing home sales in the residential market by a month or two; pending home sales also lead existing home sales. While the home sales improved in August to an extent, sales are generally slowing and demand is not there.

The U.S. housing market is likely to play a key role in the recovery of the financial markets, and we are carefully watching the direction and movement of home prices as key economic trends. The latest S&P/Case-Shiller home price indices, published on Sept. 28 (including data through July), the FHFA home price indices, published Sept. 22 (also for July), as well as First American CoreLogic's LoanPerformance home price indices, published Sept. 15 (for July), all provide market participants with insights on the overall health of the housing market and highlight trends that help shape expectations regarding future price movements.

Many readers have asked for a chart form of home prices from the bottom to the peak and now back. Now, courtesy of S&P we have it: much more pain lies ahead.

And here is S&P's unpleasant outlook for Jim Cramer who OFFICIALLY called the housing "bottom" last July.

Housing Futures Point To A 6% Price Decline

The home price indices and the S&P 500 index tend to move in the same direction, but at different paces. U.S. home prices dropped more slowly than U.S. equities, and have also recovered more slowly. Through July 2010, the S&P/Case-Shiller 10- and 20-City indices and LoanPerformance's index (including distressed assets) were slightly under 30% from mid-2006, the value of the FHFA purchase-only index was down 13%, and the value of the S&P 500 was down 14% during the same period. However, the S&P 500 turned negative in August and positive in September 2010. The cumulative decline for the period between mid-2006 and September 2010 stands at 11%.

Homebuilder stocks in the S&P 500 Homebuilding Index have performed poorly since July 2005, when the index reached its peak for the current cycle--almost one year before home prices started to weaken. Because homebuilder stocks tend to be highly sensitive to changes in home prices and associated inventory levels, this index is a leading indicator for the market's sentiment on home price volatility and the potential for recovery in the housing market. Homebuilder stocks responded to the deterioration in the housing market about 11 months ahead of the actual decline in the S&P/Case-Shiller home price indices.

Charts 11 and 12 show the relative performance of the homebuilding sector and the S&P 500, which is a broad-based equity index. Again, using equity market behavior to test this relationship and the market's interpretation of the current data, the homebuilding equity index seems to be showing slow recovery since early 2009.

The S&P/Case-Shiller housing futures contracts traded on the Chicago Mercantile Exchange are pointing to a decline of 6% in home prices through November 2011. Table 4 compares the July 2010 S&P/Case-Shiller Index levels with the settlements of the housing futures contracts and calculates the implied price changes. While the trading volume is light among housing futures contracts, we believe that the trend still provides an additional indication that home prices might be near bottom.

Finally, table 5 summarizes home price forecasts from various sources. Overall, Standard & Poor's and other market participants expect an additional single-digit decline in the S&P/Case-Shiller Composite Indices early 2011. The anticipated decline in the FHFA index tends to be lower because this index includes only conforming loans issued through Fannie Mae or Freddie Mac; in other words, it excludes higher-priced houses and subprime lending, but covers more cities. Typically, the FHFA home price index has only half the volatility of the S&P/Case-Shiller Composite Indices.