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Will The Housing Market Continue To Decline?
This article originally appeared in The Daily Capitalist.
The quick answer to the headline of this article seems to be yes. The volume of housing that is in mortgage trouble is rising as prices drop in vulnerable markets around the country. There isn't a sufficient floor of buyers in those markets to stop further declines and foreclosure sales that appear to be on the horizon. It depends on the market. For example, the recent Case-Shiller 20 cities report shows that coastal California has had a positive trend: Los Angeles +4.4%; San Diego +5.0%, and San Francisco +5.5%. Another area of strong growth is Washington DC (+4.5%) which is an island of government transfer payments in a sea of trouble.
The bad news is that estimates of homes underwater and likely to default have gone up, depending on who you wish to listen to. The most recent and scariest number floating around is from Laurie Goodman at Amherst Securities:
I estimate the housing overhang to be more than 7 million units—these loans are likely to be liquidated and are creating a huge shadow inventory. Adding borrowers with substantial negative equity but who have not yet become delinquent, I place the total size of the problem at 11 million to 12 million units; in other words, at the current trajectory, more than one in every five borrowers could face foreclosure if stronger policy measures are not taken. Clearly, the biggest problem for these borrowers is negative equity.
Lender Processing Services (LPS) tracks performance on 40 million mortgage loans in the country. Their October report says that delinquencies remain about 2.7 times historical average, foreclosure inventories are 7.4 times and rising. Delinquencies have flattened a bit as more homes are moved to foreclosure. More loans are starting to move into foreclosure in the six and 12 month delinquency:
- Foreclosure inventories continue to grow, the rise in delinquencies remains subdued as a result.
- Accelerated foreclosure activity has led to a rapid decline in agency delinquencies. Foreclosure inventories have risen dramatically as a result.
- Most western states have experienced a decline in the total 30 day and foreclosure inventory over the last six months.
- The issue of current loans going delinquent remains, however more and more sixty day defaults are repeats.
- Modification dominated seriously delinquent cures have declined over the last several months but still remain elevated.
- More six and 12 month delinquent loans are moving to foreclosure, but the extremely delinquent category continues to grow.
Based on Ms. Goodman's research, Nouriel Roubini sees losses to lenders reaching $1 trillion, assuming lenders recover 50 cents on the dollar on an average $200,000 per home. These are thumbnail estimates but previous estimates were that there were perhaps 3.5 million homes of shadow inventory.
CoreLogic reports on negative equity in homes:
In the third quarter, 10.8 million, or 22.5%, of residential mortgages were "underwater" nationally, meaning homeowners owed more on their mortgages than the homes were worth. This was down from 11 million, or 23%, in the previous quarter, according to housing-data provider CoreLogic.
A total of 188,748 homes in some stage of the foreclosure process sold in the third quarter, down 31% from a year ago and 25% from the previous quarter, according to RealtyTrac, an online foreclosure marketplace. ...
The average sales price for homes in the foreclosure process was $169,523 in the third quarter, down 0.44% from a year ago and down 2.46% from the previous quarter. Properties that were not in foreclosure sold on average for $249,721, up 4.36% from a year ago and 6.42% from the second quarter.
The interesting thing is that low interest rates do not seem to provide the stimulus for the housing market:
Meanwhile, applications for mortgages have hovered near their lowest levels in more than a decade since May, even though mortgage rates have tumbled to their lowest levels in 60 years, with average 30-year, fixed-rate loans bottoming at 4.21% in October.
That suggests that neither rising rates nor tighter lending standards will have a major impact on housing as long as people perceive that prices are still falling.
It goes without saying that housing starts are still at historical lows.
Home sales are still off. RE/MAX reported that home sales in November fell nearly 5% from the prior month and are about 26% lower than a year earlier.
The September S&P Case-Shiller home-price indexes reported that home prices declined:
U.S. home prices dropped in September from a month earlier and the rate of decline showed signs of accelerating, according to the S&P Case-Shiller home-price indexes. Third-quarter prices were also down.
The Case-Shiller index of 10 major metropolitan areas dipped 0.5% from August, while the 20-city index decreased 0.7%. Adjusted for seasonal factors, the declines were 0.7% and 0.8%, respectively.
For the third quarter, the S&P Case-Shiller U.S. National Home Price Index posted a 1.5% decrease from a year earlier. It declined 2% sequentially.
I agree with many analysts that the Cash For Houses tax credit program just delayed the inevitable, caused a momentary spike in sales, and then after this summer when the credits expired, the market reasserted itself. Another cruel unintended consequence is that many buyers who bought because of the credits now are finding that their homes are declining in value.
Here is something on the positive side: net worth is increasing because of deleveraging. The Fed's Flow of Funds report said:
American household net worth increased by $1.2 trillion in the third quarter as a result of debt deleveraging. According to the funds flow report, the average household net worth was $54.9 trillion, up from $53.7 trillion in the previous quarter. ... Household debt decreased at an annualized rate 1.75% during the quarter, compared to a 2.2% decrease in both the second quarter of 2010 and the third quarter of 2009. This is the tenth consecutive quarter decline.
According to the report, household mortgage debt decreased in the third quarter as did the value of household real estate. Mortgage debt dropped 2.5%. The current Fed valuation of household real estate is $16.6 trillion, down 3.8% from the second quarter and down 1% from one year ago. ...
Personal savings (without consumer durables) in the third quarter totaled $325.8 billion. Personal saving now represents 2.9% of disposable personal income.
The numbers show that while mortgage debt is being reduced, the value of homes is declining more. It is likely that this trend will continue.
But 11 million more foreclosures?
The trouble with historical analysis is that it doesn't predict the future. Goodman's analysis is thorough, but it is based on assumptions that are yesterday's news. It is difficult to refute her forecast, it all depends on her assumptions, but I'm not sure I buy in to it. There are too many things that can prevent 11 million foreclosures.
One thing is an increase in money supply and resulting price inflation. Because I don't see unemployment improving dramatically in 2011, it is my belief that the Fed will continue its quantitative easing program past the June, 2011 period it has set for itself to buy $600 billion of U.S. Treasurys. It is conceivable that the Fed's balance sheet will expand beyond $1.7 trillion to much more than $2 trillion. I believe that will cause price inflation. Price inflation will appear to cause a rise in housing prices or at least flatten prices out. This in turn will (i) bail out borrowers as their homes increase in value and push toward positive equity, (ii) allow home owners to refinance their mortgages, and (iii) attract buyers to the market putting upward pressure on home prices.
It is clear that housing prices will continue their slide for at least another year in the softer markets.
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Unless there is a corresponding increase in American wages, inflation will not push up housing prices, we will all be too busy keeping up with the rising expense of food and fuel. Not to mention the crushing taxes that are coming to all those who own R/E or any other asset that can't be packed up and moved out of the country. Your house will become the chain that holds you down while Uncle Sam beats you up.
Stun Gun
I would really hesitate to buy any of these newer foreclosure houses whose previous mortgages had been bundled, sold, and where also in the MERS system. How could you be sure that you have a clear chain of title?
House of cards is collapsing.
For those who didnt watch 60 minutes regarding state debt
http://www.cbsnews.com/video/watch/?id=7166293n&tag=related;photovideo
Totaly agree with the above comments. The economy will not recover without construction and anyone that denies this fact is tomfoolery.
The CC and HC markets must revert to the mean and if the ponzi allowed this to happen it would open up the way to reconstruction, especially for the foreclosure market.
Example: Repo home original bubble price 250k--now priced at 125k will take 50k to bring it up to speed--loan should be for initial base price at 125k and stipulated within the loan reconstruction(escrow) cost at 50k -bank takes 75k loss instead of the 125k loss--thats how const jobs could be created--pipe dream probably so as fasb lets the banks keep their precious.
Just my .02
Its all smoke and mirrors - your attention has been distracted from the main event. There is an energy crisis looming and that will suppress economic activity. Printing will inflate the price of things you need money to buy making people poorer - they will therefore be less likely to purchase items that you need debt to buy eg Housing - so deflation will continue unabated in asset classes like housing - which of course makes all home owners feel poorer and further suppress their economic activity. We can see this in M3. We can see this is the deeply damaged housing market (and that's without reference to the foreclosure debacle.) We can see this in the banana republic debt monitization policies. This printing is stoking a hyperinflation, we can all see it - and that won't be good for housing. And finally if it is good in the short term for housing and people get suckered in again - then if you're in property do the sensible thing and quietly exit the property market and go get ready for that world war that's just over the horizon. I think you've got about 150 weeks to get in position for that - longer than that and it'll be too late.
+100
5% or 10% YoY decline in the real economy from here on out. No technofixes on the horizon until we are down to a smallish fraction of current use.
Q: But... but... but... I thought asset prices were supposed to be going up?!
A: Good news. They are. And in nominal dollars.
Q: What's nominal dollars?
A: Those are the ones I give to you for your gold.
Q: But why don't I just keep gold?
A: Because you can't eat it.
Bloomberg this morning, as the 8:00 AM show comes on: "The GREAT 2010 recovery".. says Betty Liu
Wow.. Just .. Wow
These are the things that bring me to actually wish for the Mad Max scenario so these people will suffer rather than simply report (or not) on the suffering of others.
It all depends on the quality of the houses.
House built out of brick will recover. All the other once not.
The reason that foreclosed houses that are not made out of brick will like we say die. First the humidity will build up fungus and then woold starts to rot. It actually happens pretty fast. Mostly after 1 year depending on the climat.
It will not destroy the houses but they will need a lot of renovation to fix it and that cost will come of the original value.
The fed cannot manufacture housing inflation. They can increase the money supply but cannot control how money is spent. The only thing that can make home prices rise is rising incomes. And businesses competing with foreign wages CANNOT pay higher wages to American workers.
This is why the Fed's real objective is a lower dollar. Only a substantially lower dollar will allow American businesses to remain competitive after paying nominally higher wages. But our competitors have figured our the Fed's real objective and are doing everything they can to competitively devalue their own currencies relative to the dollar.
Until this impasse is resolved, there is no "inflating away" the still excessive housing debt.
I generally agree with yoru statement, all the tricks the FED did to print hosuing dollars are done now, now people have to bring real money, and that means wages. However I disagree with statement "businesses competing with foreign wages CANNOT pay higher wages to American workers". Businesses overpay their CEOs and upper management all the time (boards are made up of cronies, not directors working in best interest of stockowners) and big US businesses are generally making high profits and have record cash reserves. So businesses CAN afford to pay workers high wages, but rather, they simply WON'T because they do not have to (no laws, unions etc to force them) and the WON'T because unlike the waste of over-priced salaries at high-end of coroporate ladders, business are not so stupid and wasteful and low-end and they keep low and middle workers wages as low as they can or they outsource.
But just so you know in real world there is an alternative ( not one you will ever see in US due to our politics and people assumptions like yours) look at Germany. They are an exporting machine. Their companies are very competitive in world market AND their worker wages and benefits are much higher than US. They have higher horuly salaries, their workers get 6 weeks vacation from get go, etc.. Also, they are fairly heavily regulated, their companies are held to high safety standards, high worker fairness standards, and tough environmental standards and also their companies do a lot with expensive alternative energy.
So in my mind there are at least two ways to for a countries companies to be competitve on world market, China or Germany, the only option is NOT China and depressed wages and weak currency.
Again and again, I see smart people assuming we must just do a China to compete, low wages, weak currency, trash the environment, peel back regulations that keep workers safe and keep work place fair. Its like Germany's example does not enter our consciousness. No way we can have a strong social safety net, treat enviroment well, have a strong currency, pay workers well, regulate businesses to ensure fairness and still compete, pay not attention to Germany.
It may not be easy for US to replicate what is working for Germany, primarily simply because most in US media and culture has it so we don't even know it that at least one coutnry is already proven it is possible, but it is crazy not to at least look at what they are doing and see if maybe we could strive for something closer to them. Germany competes and grows and German workers benefit. Germans model is very good for the common wealth, and yet, all we can fixate on is China.
We see same phenomen in business. There are some companies that are very successful and treat their workers much better than average, while other companies see their only way to success is to treat low end workers as badly as possible and to overcompensate upper management. See simply Costco vs. Sam's club.
Stop self-limiting, we can be a globally competitive country and have a solid middle class and have clean air and water, safe workplaces. But we won't if we let crony upper management of US companies decide everything in their interest, because clearly, sh%^ting on workers and over-compensating themselves and their friends, corrupting our government for their purposes is what they will keep doing unless we fight for something better.
Great comment.. It is absurd to think the FED can create inflation that would cause what I can only describe as an intended knee-jerk reaction in housing prices.
The job market will ALWAYS determine the housing market. The job market stinks..
You are absolutely correct, a weaker dollar is needed. The question is, can it be achieved without causing a run and loss of confidence? We shall see over the next 12 months.