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Goldman On Housing's False Dawn

Tyler Durden's picture




 

Recent housing data have been generally been encouraging. However, the large number of residential properties that are "underwater"—meaning the borrower owes more on the mortgage than the property is worth—casts a long shadow on the sustainability of the housing recovery. Goldman estimates that approximately 10 million properties are currently underwater. Although this number has not changed much during the past three years, there is much divergence across the nation: California, Michigan, and Arizona, for example, experienced significant improvement, while Georgia, Utah, and Missouri saw many more properties falling underwater during this period.

 

 

Even though the number of underwater properties stayed roughly unchanged at the national level over the past three years, different states experienced very different developments over this period of time. Exhibit 2 ranks states by the change in the percent of first-lien mortgages with negative equity from April 2009 to April 2012. Among the 31 states that had at least 0.5 million outstanding first-lien mortgages in April 2009, California, Michigan, and Arizona saw the largest improvement. For example, 42% of residential properties with mortgages in California were underwater in 2009, and that number came down to 29% in 2012. This trend likely resulted from both stabilizing house prices and the relatively fast speed at which foreclosed underwater properties are cleared out of the system. On the other end of the spectrum, Georgia, Utah, and Missouri experienced the largest deterioration in their negative equity problem. For example, 24% of residential properties with mortgages in Georgia were underwater in 2009, but that number increased to 42% in April 2012. This trend is largely caused by house prices falling more in these states than other states during the past three years.

 

 

What are the potential impacts of negative equity on the macro economy? Broadly speaking, negative equity affects the economy in two ways.

First, negative equity weighs on consumption. As shown in Dynan (2012, see full reference below), highly leveraged homeowners had larger declines in spending between 2007 and 2009 relative to other homeowners, and leverage appeared to weigh on consumption above and beyond what would have been predicted by housing wealth effects alone. The large number of underwater properties that we have estimated above suggests that many homeowners are still highly leveraged today. As a result, the deleveraging process they are going through is likely to drag down consumption and aggregate demand during the recovery.

Second, borrowers with negative equity are more likely to default on their mortgages. Both theoretical research, such as Campbell and Cocco (2011), and empirical research, such as Bhutta, Dokko, and Shan (2010), show that mortgage default rates increase significantly when borrowers become deeply underwater.

Given that there are 3 million first-lien mortgages that have LTVs of 125% or above as of April 2012, whether or not a large fraction of these mortgages will default in the near future has important implications for the housing market recovery.

 

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Tue, 06/05/2012 - 14:42 | 2496805 Ahmeexnal
Ahmeexnal's picture

Choom Mansions for all!

Tue, 06/05/2012 - 15:36 | 2496847 Chief KnocAHoma
Chief KnocAHoma's picture

As a Realtor I can tell you the market has never been better. I would also like to add that I am available to wash cars, pick cucumbers and make pointless comments on various blogs.

Thanks for your business,

 

Chief

Tue, 06/05/2012 - 16:23 | 2497265 theTribster
theTribster's picture

Well said. +1

Tue, 06/05/2012 - 17:04 | 2497396 Mitch Comestein
Mitch Comestein's picture

Funniest thing I have heard in weeks!  Thanks  Chief.

Tue, 06/05/2012 - 14:42 | 2496808 SeverinSlade
SeverinSlade's picture

But NPR said this morning that now is the PERFECT time to buy a house!

Tue, 06/05/2012 - 22:02 | 2498146 max2205
max2205's picture

So 10 mil underwater, 40 mil on SSI, 30 mil unemployed., 40 mil working part time, 150 mil working but make less than poverty line .....

Hummm, that's a recovery, 270 mil in the bag, Ahhh, how many people in this country???

Tue, 06/05/2012 - 14:43 | 2496812 CPL
CPL's picture

Market is just about to shit the bed.

 

2:40.  Everyone out of the pool.  Pool is closed.

Tue, 06/05/2012 - 14:45 | 2496823 ArrestBobRubin
ArrestBobRubin's picture

Hey...will my $3,000 D'ohBama Bucks get me a house thingamajig?

Tue, 06/05/2012 - 15:17 | 2496990 NotApplicable
NotApplicable's picture

Maybe one of those Solyndra thingies to put on it.

Tue, 06/05/2012 - 15:37 | 2497067 Unbezahlbar
Unbezahlbar's picture

ArrestBob, sorry, Thingamajigs have soared in price due to high demand after the Barry speech and we are short of them at the moment...you'll have to settle for a couple of Gee Gaws or DooDads.

Sorry.

Tue, 06/05/2012 - 16:27 | 2497280 theTribster
theTribster's picture

Go for the DooDads, they are far superior to the GeeGaws which are losing value as I write this. The DooDads on the other hand have increased in value ever since the Spanish banks decided to give them out as free gifts to anyone opening an account with a deposit over 2 Euros. This has created a reverse bank run, the first in Spanish history - get you DooDads now while you still can!

Tue, 06/05/2012 - 15:45 | 2496851 Village Smithy
Village Smithy's picture

This is the squid applying the coupe de grace to its more mortage laden zombie competition. Jamie must have beaten Lloyd on the golf course this AM.

Tue, 06/05/2012 - 14:50 | 2496859 Snakeeyes
Snakeeyes's picture

I have been writing about this for years. I am going on Bloomberg TV today at 4:30 EST to talk about it.

http://confoundedinterest.wordpress.com/2012/05/30/pending-home-sales-an...

http://confoundedinterest.wordpress.com/2012/05/29/case-shiller-house-pr...

Etc.

But with such lousy GDP growth and a stalled employment recovery, what kind of housing recovery can we have?

 

Tue, 06/05/2012 - 15:18 | 2496994 NotApplicable
NotApplicable's picture

Whatever kind it is, you can bet it'll have a nice, shiny facade.

Tue, 06/05/2012 - 14:51 | 2496867 mrktwtch2
mrktwtch2's picture

bottom line if you bought after 2000 your home is worth less than you paid for it..all houses across the country fell 30 to 35% off the 2006 high..example i paid 227 for my condo in 03 it was valued at 259 at the top and i just sold it for 187..(fortunately i only had 168 left on the mortgage) so i only walked away with about 8k..im just glad i dint have to come up with any cash to get out of it ..plus i lived there for 9 yrs..a home is something you live in and not a  atm folks..

Tue, 06/05/2012 - 15:16 | 2496988 NotApplicable
NotApplicable's picture

For the most part you're right, but your statement is far too general. Two years ago, I bought a steeply-discounted property that not only sat empty for a year, the property itself had been let go for at least ten years. I've had so much to do (grapevines overtaking forest around the yard) that I'm just now getting the yard reseeded.

Even though I'm just now getting into the principal, my property is now worth far more than the note. My biggest fear is that WF (et al.) will try to steal it from me in this non-judicial state in order to pad their losses.

Tue, 06/05/2012 - 15:40 | 2497089 zaphod
zaphod's picture

It's called buy low sell high, this applies to everything in life and you obviously get it.

Its shoking how many people do not want to take that path you described above and instead buy (or have the bank buy I should say) a ready to go house fully updated, and are willing to pay an extra $200K for the privilage.

I recently started to look in the bay area, and most sellers think by simply repainting, have a gardener clean up the yard, maybe redo cabinents, etc. they are entitled to an extra 20%. But for the most part they are right because the buyers appear...

Tue, 06/05/2012 - 14:52 | 2496874 adr
adr's picture

The shadow inventory clouds all the figures. There hasn't been an accurate report filed on the shadow inventory yet. There are millions of vacant homes that arent even in the books. Listing them for sale would drive values south and freak people out when they see 1/4 of thier nieghborhood go up for sale at once.

Any people don't even realize how many neighbors have been living in a home for years without making a payment. Banks are letting people pay $500 a month on a $2000 mortgage just so they don't have to take another forclosure. The owners just keep going further underwater.

I don't even see many homes for sale anymore. The signs are being taken down but the properties aren't being sold. They are just going into the shadow inventory to make the market look better than it really is.

A realtor I know has been saying there aren't enough homes on the market to meet demand. There are tons of speculators ready to buy homes, but they want them cheap and most potential sellers can't sell for what the bidders are asking.

We are now in the hold and pray mode. Everyone is hoping the housing market will recover to save their ass, but it can't recover without wiping everyone out first. Housing is fucked.

Tue, 06/05/2012 - 15:04 | 2496934 BandGap
BandGap's picture

There are houses that no longer exist, that will never be sold.

http://www.youtube.com/watch?v=1hhJ_49leBw&feature=g-vrec

And they are on the bank's books.

Tue, 06/05/2012 - 14:54 | 2496882 The Proletariat
The Proletariat's picture

Fuck LPS and Whorelogic

Tue, 06/05/2012 - 14:56 | 2496888 Hohum
Hohum's picture

If your home is 125% LTV, you SHOULD default because you'll be a homeower for the rest of your life.

Tue, 06/05/2012 - 15:13 | 2496972 CcalSD
CcalSD's picture

"Homeowner" is the ultimate misnomer unless you bought your house all Ca$$h. 

Tue, 06/05/2012 - 15:19 | 2497002 NotApplicable
NotApplicable's picture

I'm stealing mine by paying for it in depreciating fiat.

That'll learn 'em.

Tue, 06/05/2012 - 22:05 | 2498151 Race Car Driver
Race Car Driver's picture

Even then, you better have more 'Ca$$h' for the taxman. Else, he'll foreclose on your property and send the Sherrif over to toss your ass off... and assault you if you resist.

We 'own' little to nothing.

"They own you."

- Carlin

Tue, 06/05/2012 - 15:18 | 2496996 q99x2
q99x2's picture

Plenty of firewood for the upcoming winter.

Tue, 06/05/2012 - 15:20 | 2497006 NotApplicable
NotApplicable's picture

I'm finally seeing some of the half-built houses being torn down after sitting for 5+ years.

Tue, 06/05/2012 - 15:28 | 2497034 booboo
booboo's picture

I feel sorry for all those lenders holding sloppy 2nds on these anchors. No I don't.

Tue, 06/05/2012 - 15:39 | 2497081 FieldingMellish
FieldingMellish's picture

Housing has many years to go before it sees a bottom. There will simply be too much supply as boomers kick the bucket in ever increasing numbers.

Tue, 06/05/2012 - 15:46 | 2497123 sessinpo
sessinpo's picture

A coworker of mine is in the market and trying to buy a house. He's put in a loan application but I don't know the results. Anyway, he's a real asshole so I'm encouraging him to take on as much debt as possible because I'm a bigger asshole.

Tue, 06/05/2012 - 16:44 | 2497336 Papasmurf
Papasmurf's picture

Trouble is... you will end up funding his mortgage.

Tue, 06/05/2012 - 15:55 | 2497177 UndergroundPost
UndergroundPost's picture

Cash is fleeing to the "safety" of real property - properties all over Phoenix are getting 5-10 multiple CASH offers pushing prices up with that same "optimism" that made Phoenix a Top 3 Places to Lose 60% of your Money over the last 3 years. When the cash is gone, no more buyers. Banks still aren't lending, unless of course you consider FHA a bank (more like a giant ATM for the US Taxpayer Bank of Blindfolded Trust and No Savings). Get ready for another BIG step down in housing prices once the investor cash is used up, or Europe collapses - i.e. this little housing flurry will last about 16 more minutes.

Tue, 06/05/2012 - 16:35 | 2497239 earleflorida
earleflorida's picture

'Demographic Western Incarceration [DWI]'

Re:    The TBTF's hold mark-to-market mobility hostage on false off-balance charges, via, a null-and-void,... 'writ of habeas corpus'?

Therefore, Homeland Security has [when deemed necessary?] placed 'all' transient job seekers [*in cases of rebellion ie. terrorist] under house arrest, until the 'War on Terror' is hereby ruled unconstitutional. Thus, under "Article III - Bill of Rights"--'Conditions for quarters of soldiers' shall be vacated [judgement] under penalty of imprisonment.

 Also in accordance with Article III, it is imperative that strict adherence under penalty of law - Article I of the Constitution regarding Interstate Commerce Law will henceforth be held in strict and full compliance with[in] the Federal Government Judicial Branch under the full authority [discretion?] of the Attorney General's Office, via the 'United States Socialist [USSA /Party] of America'! 

jmo

Tue, 06/05/2012 - 16:49 | 2497357 Bicycle Repairman
Bicycle Repairman's picture

I don't need GS to advise me on the housing market.

Tue, 06/05/2012 - 17:26 | 2497465 Bohm Squad
Bohm Squad's picture

Seems to me listening to GS is just like playing poker.  First, just figure out what they want you to do...then do the opposite.

Tue, 06/05/2012 - 16:52 | 2497363 Manny
Manny's picture

I am buying a small property in Denver which I am currently renting. Buying wtih cash. I am getting some credit for the rent i paid in the past. Its in a good location as well.

Not sure if i should go forward if Armagaddeon is coming. But for those of us who have done the right things like saving its been a punishment since 2007 and all that rent keeps piling up.

Tue, 06/05/2012 - 19:07 | 2497769 CreativeDestructor
CreativeDestructor's picture

didn't Kyle Bass bet big on housing 2-3 months ago?

Tue, 07/31/2012 - 17:34 | 2666521 lchic
lchic's picture

It's funny how Phoenix is in the 40th percentile for negative equity. I can see why. It's because builders went ahead of themselves and started building super communities and marked up the houses that are made of cheap material. Now people are walking away from their homes because their house isn't worth even half of what they paid for it. Now us tax payers need to pay for those people who walk away from their homes because the banks are only loaning to those with perfect credit or marking up the interest rate to 40%.

http://www.capstone-mortgage.com

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