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Why Housing Has Another Leg Down
Every day we hear "housing has bottomed" or "experts predict housing will rebound in late 2010". A review of the quarterly bank data reveals some somewhat contradictory numbers:
The data is 1-4 Family First Liens. Nonperforming loans are defined as loans 90+ Days Past Due and loans on Nonaccrual (no longer recognizing interest income).
We have another $55 Billion in Nonperforming loans just in the last year (Q1 '10 v. Q2 '09). This increase alone is more than we had in 2008 Q1 which precipitated the "housing crises". The following is the nonperforming percentage graphed:
Yep, things are definitely looking up.
Needless to say, the big banks are the worst culprits. The Top 4 Banks (BAC, WFC, JPM & C) are running a 17.36% nonperforming rate. A breakdown by all Asset Sizes can be found here.
An alternative way to look at the problem is to track what the banks have as Nonperforming relative to what they are Charging Off. The following table shows that our banks are sitting on $30.45 of Nonperforming loans for every $1 of Charge Offs.
Charge Offs for Q1 were $6.09 Billion v. $7.69 for Q4 2009. Please keep this in mind when you hear that since charge offs are down "we think we've turned the corner." Citigroup at $22.54 is actually doing well compared to BAC, WFC & JPM.
Please note that you should review the section on the site detailing Government Guarantees to determine the financial impact on specific institutions. I'm primarily focused on housing as a whole for this discussion. Whether or not a bank gets money bank from Uncle Sam is not going to impact that house going REO or short sale.
As bad as the 1-4 Family Liens are, Construction & Development loans are worse. Indeed, virtually all housing portfolios are trending poorly - both Multifamily and 1-4 Family Junior Liens have seen an increase in their nonperforming loans. The one bright spot is Home Equity.
Shameless Plug: BankRegData.com is the updated version of the Bank Loan Performance site at wlmlab.com. You can find performance metrics for all U.S. Banks in the following areas: Loan Performance, Asset Quality, Real Estate Owned (OREO) and Income & Expense.
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Many of the abandoned/unsold properties are deteriorating and will be essentially worthless in a year or two. In wet climates like Florida, mold will run rampant in a sealed house with the A/C turned off. Up North, frozen pipes can wreck a place in days, and vermin (two and 4+ legged) will eventually take their toll.
Absent an army of rehab flippers (no loans or buyers), I see the feds simply paying states to condemn and bulldoze these zombie structures. This will reduce available inventory and generate a few jobs for heavy equipment operators and scrappers. Maybe they'll even let the banks mark up the land values so they don't ever take a hit on the now empty properties.
Here's the deal. Fed can't raise the rates as we all know, the economy will be awash in new money and just as inflation starts to set in and the economy appears to be getting better--a new "type" of political sentiment will emerge as in "cut the spending." That "cut spending" crowd will be elected this fall. When that happens, the whole paper house comes crashing down. Oh my, oh my where to run and hide then.
Anyone else see today that Ron Paul of all people introduced a bill to PERMANENTLY extend the first-time home buyer tax credit?
Its positioning and its brilliant. When it dies in committee, and somebody else proposes the same thing 6 months from now, and it begins to advance, he can start calling committee members hypocrites.
Well the Dems were beyond dumb letting it expire in the first place.
Huge number of re-sets on the horizon; shadow-inventories-R-US; Disneyland birth/death fantasies; castrated credit; John Holmes-sized private and public debts; etc, etc.
Just pull the freakin' legals from the newspaper and compare it to the rest of the paper. In the words of Karen Carpenter, "We've only just begun..."
Is there a way to see that data divided by states? My not so scientific perception of things is that FLA, CA, NV and AZ have it distinctly worse than most other places. Here in MA, there was a real estate contraction circa 1991 that wiped out some developers and left others with scars that reminded them. I'm an engineer and one of our clients had a fully permitted condo project as of 8/2005 that he simply chose not to build because he saw that the market would be bad in a year or two. Did that happen anywhere in FLA, CA, NV or AZ?
But will SRS ever see its highs again?
My friends are we now venturing into the real estate Twilite Zone, a new makeup world where the FED and Government now owns or backs over 3/4 of the loan market and increasing more every Friday through FDIC?
How can we predict anything in this new market? Based on what prior data? Well we can't.
From a practical standpoint the only thing we can say is when this buyer exits, there is no market. It is something other than a market, and I cannot give you its name.
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Towards the end of CY2009, it looked like the classic struggle over price to prevent a deflationary spiral. But, then it was clear that there was no real strategy to prevent deflation on a long term basis due to a myopic strategy to just buy all of the bad debt (fight the market) and not use strategic default as a companion tool.
The continuation of Fannie and Freddie was a mistake into CY2010. A closing up shop would have helped the market work through some of the bad debt. After all there is still FHA.
My point is, I was waiting for the strategy to show itself. Not just a blank check towards bad debt to swamp the real market. There was an opportunity to test the default waters, even though a lot of bankers would be unhappy. The time was right. A Fannie controlled shut down.
But, incredibly the bubble grows unchecked. Now the only way to back out is through massive loss recognition. A Government real estate bubble collapse.
Mark Beck
http://blog.youwalkaway.com/category/strategic-default/
I view this as a lot like tax-striking -- quit giving the drunks a drink!
Mark
Right on point. It is sad but true that Benny and Timmy and the puppeteers have burned through all the dry powder. Writing down the bad debt was the only solution; instead now we can choose hyper inflation, stagflation, or depression.
Nice figures and discussion. Thanks.
I have all my $ in a house, and keep thinking of pulling the plug. Will it hold up its value long term, since it is a hard asset? Would gold do better? Wouldn't I rather be liquid for the great reset?
It is down 30%, and still has another 40% drop from the current price to get back to 2001 levels? Tough decision!
bankregdata.com is pulling the data directly from the FDIC xls files, it's a really valuable website and I'm sure you'll do well with it.
I'm now kicking myself for not having thought of it myself.
Cheers and best of luck with that.
That is not a valid ratio.
That is incorrect, just ask Soros and Michael Dell of Dell computers, and One West Bank
http://www.onewestbankfail.com
nice link. Thanks. I totally agree with the post's findings that the housing mkt is toast for a long while. Bad news: should have sold a couple of properties when I could. Good news: Loaded up on gold, silver, guns, ammo, food...
Can't agree with Leo however. The employment numbers from the gov't cannot be trusted. Is there a lot of hiring in your area? When you have 400 applicants for a just-above minimum wage warehouse job as my bro-in-law recently experienced, that is not exactly a booming employment market.How is your area?
I think most of us want to be hopeful, but the reality is that this was a huge debt crisis and while the wheels of recovery might have started rolling, it is going to take a lot of time for them to get up to speed, especially as they are trying to roll uphill without the motor of momentum.
So we have a crisis of too much debt, and all the governments of the world solve it by borrowing more- trillions of debt for a puny, short term buzz.
This party is looking pretty long in the tooth- there is no traction anywhere and the next crisis is just around the corner.
The cornerstone of every economy is trust and there is no one and no institution that is trustworthy.
Leo- I can never tell when you are on or off your meds.
...market dropping like a rock here prior to the close. Whassup?
Who was it who said, "There's ash in the air, oil in the water, and blood in the streets."
Who was it who said, "There's ash in the air, oil in the water, and blood in the streets."
Someone astute and good with words.
Gulley: Next Prez a republican? It won't matter, he
will act like a guy with a Charlie Chaplin mustache.
Hendrix: Currentseas? Floating a fiat yacht?
Martin Armstrong thinks there is a 27 year cycle
downturn in real estate. It seems plausible. With
a 10 year inventory attitudes will completely change
about RE.
Right now the flippers are still trying to play the
game. By the time they get really burned, only
the hard realists will be left in RE.
How much "inventory" does Fannie & Freddie (& other gov institutions) hold?
Is that reasonable?
Oooops. I forgot we are in the new normal.
I love this place.
What is it's name?
Farcism.
Perhaps once they (FNM and cetera) own all the paper, they'll rent those houses back to us cheap.
Check out loans to indiciduals too, they are sinking like a brick.
http://www.bankregdata.com/allLP.asp?loan=lncon
Thanks for the link. The whole page smells to high heaven. Look at the Top 100 Institutions: Loans to Individuals data. Click on headers to reclassify. Scary as hell.
It's very Short & Informative, thank you. (thumbs up!)
Cash for clunker, credit for house, rebate for appliances and stock rally sucked away last drop of liquidity from market. Now nobody has money, house and stock have to sell at much lower price to raise new liquidity, that is how we got here. I get this prediction even without above loan data.
When someone can open a website encouraging people to send in their "Jingle Mail", I'd say that the Housing leg is broken (compund fracture, with bone poking out -- in several places!)
.gov pays $25 per hour visit.
My view, survey data is crap.
Perhaps they are a lagging indicator, but initial claims have barely changed and continuing claims aren't getting any better.
http://www.workforcesecurity.doleta.gov/press/2009/051409.asp
Also, even stipulating that private employment will rebound, government at all levels is set for massive cutbacks.
I guess after the census is over we could re-hire them to count rocks. That would be useful.
Don't forget the Option ARM recasts beginning later this year and running into 2012. You're nuts to buy a house before then.
It's a demographic problem. Just accept it. Take the pain, do sensible triage of what can be saved and what can't.
Good post, and BankRegData is an impressive site. Thanks.
Man, when I was trading the banks in the 90s, the rule of thumb I was taught was that you'd never look at a bank with more than 1.05% nonperforming.
S&L crisis, I recall California banks in aggregate were averaging about 3%.
I consider the US housing market in the middle of the second of four legs down. Each leg will last roughly a year. Roughly, because if anything happens to the currentseas of the world (FIAT vs. Gold) it could collapse the whole economic system, and a lot of houses would be worth diddley squat.
Thanks for the data!
Mr Lennon Hendrix
There is over a decade of inventory out there. That doesn't include what remains hidden by the banks.
I maintain that everything gets propped up until after the 2012 election. The next guy is hailed as the great white savior. He will get tough and crackdown on everything. Maybe he joins the North American Union, maybe he just shepards us through the great fall with the accompanying riots. He will be a Republican and have two terms.
The rest of the world may crumble to dust but TPTB have an agenda written in stone for the US.
But I have a question. If you invest in real estate, instead of Gold, will places like beach front property hold value better than say a home in Kansas? Beach front is limited. You are investing in the land not the home. Just like buying sixty acres farmland holds more value. If all real estate is taking a hit, things of limited availability should retain a higher value.
Yes lots of inventory. Enough to comfortably house all Americans and Mexican immigrants combined. I think you are informed; your opinion is astute; you have stated their plan (or one of their plans at least). Will they make it to 2012? If they try, hyperinflation is the name of the game. The only way to prop up the housing prices will be to inflate/deflate the dollar (sorry I am not sure what term to use, both are debilitating now as we are in a new paradigm of monie).
If they make it to 2012 or not, I see the outcome the same. The only land worth anything will be arable, and the only housing will be located near a reliable food source. Beach front property could be nice for those that can afford it, but even these fancier homes should not be considered an investment, only a luxury.
Note, peak oil is a large part of the global collapse, as there is not more growth in cheap energy. This translates all the way down to where a home is located.
They couldn't make it past the 2008 elections, but that implies they care one way or another. Given all the hope and change we've seen since then, my guess is, they don't.
"But I have a question. If you invest in real estate, instead of Gold, will places like beach front property hold value better than say a home in Kansas?"
"Location location location" has always been the rule in real estate and it will always be. But all property classes have lost value over the past few years, with probably more to lose at this point. The question of "holding value" depends on how big the bubble blew for that particular property. Some of the most expensive, highly desireable properties, were the most overpriced at the peak. So less flashy properties might actually be holding their value better, or at least not have as far to drop.
I think the price of good farm land is going up. perhaps some land with a nice stream on it for water and power generation would be valuable. Payable in gold ;)
Good stuff, not sure I agree 100% with your call on housing, especially given the momentum in labor markets, but I like the site (shameless plugs are fine).
"given the momentum in labor markets"
Are you fucking joking!!!!???
+1 What he said.
I'll add - you must be stoned dude.
Do your numbers take into account the impact of the GOM spill ?
Hi Leo,
Could you explain a little more about what you mean when you say momentum in the labor markets, and how that influences you to disagree on the housing call?
Thanks.
Yes, quite simply, the household survey is on fire and it leads the payrolls survey. With employment prospects improving, demand for housing will improve, and help alleviate the slack in the housing industry.
How much are those households making?
...and how much are houses still? Till we see hte 3:1 ratio return, I don't buy it.
yea, just another 6-8yrs now and we'll be back on track
Hey, you can set fire to and demolish a lot of excess inventory in 6 years. So long as the losses on those loans never hit the books it's all good, and all you have to do to prevent that is never call in the loan and never try to contact the loan holder. Then you sell the empty lots to developers some day and someone builds a new house for new buyers, and you can add that loan to the books. Two entire home loans on the books per lot. It's just like printing money.
millions of homes in the foreclosure pipeline and banks haven't taken posession of any meaningful percentage yet.
all these homes will come on the market over the next couple of years.
we are nowhere near close to anything like a recovery.
quit smoking whatever it is you are smoking.
Thanks.
As a leading indicator, consumers believing employment will improve would imply higher (home) prices in the future.
In this case, I believe that is oversimplifying things a bit, and it might be a mistake to ignore some big impacts ... like the end of the gov't paying people to buy houses ... or the large (shadow) inventory being held off-market ... or the increasing number of non-performing loans, and where that is going. Will employment growth overwhelm those other forces? We'll see, I guess.
Leo Kolivakis
Wow, you mean like this?
http://www.economicpolicyjournal.com/2010/05/hire-fire-hire-census-game-...
Wednesday, May 26, 2010The Hire, Fire, Hire Census Game, Or Why the Unemployment Numbers Are Improving
by John Crudele
You know the old saying: "Everyone loves a charade." Well, it seems that the Census Bureau may be playing games.
Last week, one of the millions of workers hired by Census 2010 to parade around the country counting Americans blew the whistle on some statistical tricks.
The worker, Naomi Cohn, told The Post that she was hired and fired a number of times by Census. Each time she was hired back, it seems, Census was able to report the creation of a new job to the Labor Department.
Below, I have a couple more readers who worked for Census 2010 and have tales to tell.
But first, this much we know.
Each month Census gives Labor a figure on the number of workers it has hired. That figure goes into the closely followed monthly employment report Labor provides. For the past two months the hiring by Census has made up a good portion of the new jobs.
Labor doesn't check the Census hiring figure or whether the jobs are actually new or recycled. It considers a new job to have been created if someone is hired to work at least one hour a month.
One hour! A month! So, if a worker is terminated after only one hour and another is hired in her place, then a second new job can apparently be reported to Labor . (I've been unable to get Census to explain this to me.)
Here's a note from a Census worker -- this one from Manhattan:
"John: I am on my fourth rehire with the 2010 Census.
"I have been hired, trained for a week, given a few hours of work, then laid off. So my unemployed self now counts for four new jobs.
"I have been paid more to train all four times than I have been paid to actually produce results. These are my tax dollars and your tax dollars at work.
"A few months ago I was trained for three days and offered five hours of work counting the homeless. Now, I am knocking (on) doors trying to find the people that have not returned their Census forms. I worked the 2000 Census. It was a far more organized venture.
"Have to run and meet my crew leader, even though with this rain I did not work today. So I can put in a pay sheet for the hour or hour and a half this meeting will take. Sincerely, C.M."
And here's another:
"John: I worked for (Census) and I was paid $18.75 (an hour) just like Ms. Naomi Cohn from your article.
"I worked for about six weeks or so and I picked the hours I wanted to work. I was checking the work of others. While I was classifying addresses, another junior supervisor was checking my work.
"In short, we had a "checkers checking checkers" quality control. I was eventually let go and was told all the work was finished when, in fact, other people were being trained for the same assignment(s).
"I was re-hired about eight months later and was informed that I would have to go through one week of additional training.
"On the third day of training, I got sick and visited my doctor. I called my supervisor and asked how I can make up the class. She informed me that I was 'terminated.' She elaborated that she had to terminate three other people for being five minutes late to class.
"I did get two days' pay and I am sure the 'late people' got paid also. I think you would concur that this is an expensive way to attempt to control sickness plus lateness. I am totally convinced that the Census work could be very easily done by the US Postal Service.
"When I was trying to look for an address or had a question about a building, I would ask the postman on the beat. They knew the history of the route and can expand in detail who moved in or out etc.
http://www.nypost.com/p/news/business/two_more_census_workers_blow_the_O...
Two more Census workers blow the whistle"I have been paid more to train all four times than I have been paid to actually produce results. These are my tax dollars and your tax dollars at work."
God bless the USA.
We've advanced from hiring people to dig ditches and then fill them back up to just paying people to sit on their ass.
There's nothing new in that.