RealtyTrac

Read 'Em and Weep

If there is any market that demonstrates the complete and total misallocation of capital that results from Banana Ben Bernanke’s money printing and artificially low interest rate policy, it the latest phony American housing bubble. With a record numbers of citizens on the food stamp electronic breadline, with unemployment stubbornly high no matter what data you use, billionaire financial oligarchs are running around bidding up “homes for rent” and pricing out the random average person that actually has the capacity or desire to bid. What follows below demonstrates the degree of insanity that has now been unleashed upon the streets of Las Vegas - in their QE-forever induced delirium, homebuilders have gone Chinese and in Las Vegas "permits for new home construction are up 50 percent, twice the national average."

Tuesday's Case Shiller update index showed something very troubling: as a whole, the US housing market in its broadest sense, has barely budged in the past four years (chart). And yet, what is unmistakable, and what has given many the impression that there is a "recovery" (despite clear recent signals to the contrary) are media attempts to spark a buying frenzy in several of the key markets that were responsible for the prior housing bubble, such as Florida, California, Nevada and Arizona. And how do we know they are succeeding, if only until the Bernanke liquidity bubble pops again? Courtesy of articles such as this: "25 markets where flipping homes is most profitable." Nuff said.

We all know that double digit inflation in HPA is not a good thing for the long term recovery of the housing market. 

With the mainstream media becoming increasingly worked up about the pending real-estate 'parabolic' surge and 'now is the time to buy', the reality of 'zombie foreclosures' and 'foreclosure stuffing' that we discussed six months ago continues to grow. While most prefer to ignore inventory as an issue (apart from Bob Shiller and Karl Case who have adamantly refused to 'bless' this 'exuberant' housing recovery), knowing full well that at some point these huge volumes of vacated but still 'owned' homes must come to market (once the foreclosure process picks up). The reality is that with Nevada, Kentucky, Maine, and Indiana having over 50% of homes in vacant foreclosure, there is plenty of supply to come (and with it the accompanying downward pressure on prices)...

As always happens when central planning is involved, when one tries to stop a leak here, two new leaks appear elsewhere. Because while the Homeowners Bill of Rights managed to grind foreclosure activity to a halt in California, what is happening elsewhere is the dreaded Boomerang Foreclosure phenomenon, or, said simply, redefaults. In other words, those homeowners who tried to take advantage of the most recent housing bubble mania created over the past year by the unholy trinity of the Fed (open-ended liquidity, REO-to-Rent programs, and $40 billion in monthly purchases of MBS), foreign buyers (who launder illicit money courtesy of the NAR's anti-money laundering exemption and park it in ultra luxury US real estate, usually sight-unseen) and of course, the banks, who with the aid of the robosigning fiasco and the Homeowner Bill of Rights, have over the past year subsidized the housing market by keeping non-cash flow generating mortgages on their books in exchange for a wholesale subsidizied rise in housing prices, ran out of cash before they could flip the "hot potato" that is the house they just bought, to a greater fool, and since they had no actual cash to pay the mortgage with, and with no fear of retribution, handed it right back to the bank. As the chart below shows, while California foreclosure activity is collapsing, things in other places are starting to indicate that the second housing bubble blown by Bernanke in 5 years, is finally starting to crack:

• Bernanke Wields New Tools to Reduce Unemployment Rate (BBG)
• Home Seizures Rise as Banks Adjust to Foreclosure Flow (BBG)
• EU Backs Release Of Greek Aid (WSJ)
• Democrats Confident They Have 'Cliff' Leverage (WSJ)
• Americans Back Obama Tax-Rate Increase Tied to Entitlement Cuts (BBG)
• Goldman flexes tentacles: Treasury open to Carney radicalism (FT)
• Launch Fuels Asia Security Concerns (WSJ)
• BOJ’s Unlimited Loan Program Seen Open to Use by Hedge Funds (BBG) - there are Japanese hedge funds?
• Abe Set to Face Manufacturing Gloom as Japan Contracts (BBG)
• US and UN condemn N Korea rocket launch (Guardian)
• Eurozone agrees common bank supervisor (FT)
• Berlusconi Adds to Italy Turmoil by Signaling He’d Step Aside (BBG)

Heading into the North American open, equities in Europe are seen higher, supported by financials and basic material stocks. With banks benefiting from improved credit spreads in Europe, while reports from the Chinese industry ministry saying that China’s industrial output may be faster in Q4 than in Q3 underpinned the strength by basic material sector. In terms of EU related commentary, the Spanish treasury chief has said that Spain is almost fully funded until year end and can start funding itself for 2013 adding that the ECB has already been very explicit about details of a potential bond-buying plan for Spain. He added that Spain's central government funding program for 2013 will also cover regions' financial needs. In turn, spreads tightened, with SP/GE below the 400bps level, with cash inflows via looming redemption/coupon payments also weighing on German Bunds. However the focus has been on the latest UK GDP print, which came in much higher than the median estimate and also above the upper est. GBP/USD continued to advance, with EUR/GBP on path to make a test on 0.8000 to the downside. Going forward, the second half of the session sees the release of the latest weekly jobs and durables reports.

The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months, has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. Needless to say, the subsidization of this wholesale purchasing of foreclosures, coupled with the ongoing "foreclosure stuffing" pursued by the big banks (as a reminder days to foreclose in New York just hit a record 1,072 per RealtyTrac as banks simply refuse to clear housing inventory faster knowing full well withheld inventory is an additional clearing price subsidy) is the main reason why the punditry has been confused into believing there is a housing rebound. That this "rebound" is merely a subsidized demand pull phenomenon a la the "cash for clunkers" auto sales program is patently clear to most. Nonetheless what little confusion is left, is finally coming to an end, thanks to none other than one of the first entrants in the REO-To-Rental space, $31 billion hedge fund Och Ziff, which a year after entering the program with hopes of quick riches, is now looking to cash out.

A month ago, when RealtyTrac posted their latest US foreclosure numbers for the month of August, we presented what we called was the "Foreclosure Stuffing" thesis, explaining the explicit subsidy by the banks for the housing market, whereby the entire foreclosure process has now ground to a halt, and in doing so removing millions in inventory flow from the distressed end market, forcing limited buyers to chase what supply there is, and in the process boosting prices of existing inventory higher. In other words a traditional inventory removal-based subsidy. It is therefore not surprising that today RealtyTrac reported the latest foreclosure data, and lo and behold, just as we expected, the great foreclosure collapse has taken another leg lower, with the total number of foreclosures for the month of September sliding to 180.4K, a decrease of 7 percent from the previous month and down 16 percent from September 2011, and the lowest in five years!

Back in November 2010, the robosigning scandal hit in which it was made clear that when it comes to keeping track of mortgage titles, nobody really knows what belongs to whom, except maybe for Linda Green. The immediate result of this was a complete collapse in the foreclosure process as banks no longer had leverage to evict those who don't pay their monthly mortgage bills, since the banks couldn't confirm they actually had rights to the underlying mortgage, and the total monthly foreclosure total dropped from a ~330,000 average houses/month to roughly 250,000. Then in February, to much administration fanfare, the banks, and the attorneys general, signed what we dubbed the Robo-settlement: an event which was supposed to be the "resolution" to the robosigning scandal, and which should once again unclog the foreclosure pipeline. This did not happen. Instead, as RealtyTrac has been diligently reporting month after month, the monthly foreclosure total has continued to decline, and in August hit a level of 193,508 total foreclosures. The immediately spin is that this was a 1% improvement from July's 191,925. The reality is that it was a drop of 15.1% from a year earlier. As the chart below shows, ever since the advent of fraudclosure, the average monthly foreclosure total has dropped from a 330K/month average to just 219K. And declining. So why did the robosettlement not undo the robosigning foreclosure crunch? Simple - foreclosure stuffing.

Now that the German high court ruling is out of the way and the Dutch elections results produced no real surprises the European equity markets are essentially flat with position squaring evident ahead of the keenly awaited FOMC rate announcement and accompanying press conference. Bund futures have followed a similar trend having ticked higher through the morning with some modest re-widening of the Spanish and Italian 10yr government bond yield spreads, wider by 9bps and 5bps respectively, also in Euribor will did see a decent bid after comments from ECB member Hansson who said the ECB council must now start debating a negative deposit rate. Today’s supply from Italy and Ireland had little impact on the general sentiment, that’s in spite of the fact that demand for debt issued by the Italian Treasury was less than impressive to say the least. Also of note, Catalan President Mas said that Spain should debate staying in the euro, which unsettled the market somewhat. Overnight it was reported that the US Navy have stepped up their security presence in Libya by ordering two warships to the country's coast, according to US officials. This is after the US ambassador to Libya and three American members of his staff were killed in the attack on the US consulate in the eastern city of Benghazi by protesters earlier in the week. Today, there were more reports of demonstrations in the region, however supplies remain unaffected.

With the US presidential election looming in just two months, there is hardly a state that is as critical to the outcome of who America’s next president will be, as Florida. As Bloomberg vividly summarizes, Florida - and specifically its five swing counties: Hillsborough, Orange, Pinellas, Seminole and Volusia - was the state that determined the president in all of the last 3 elections: set between the Republican-dominated North Florida and the more Democratic southern counties, these suburban communities of middle-class voters are known for their shifting allegiances. In 2008, Obama took four of the five counties to capture Florida. George W. Bush won three of the counties, and the state, in 2004. In 2000, Volusia’s vote count was disputed by Vice President Al Gore. Gore won the county yet lost Florida by 537 votes, giving Bush his first term as president. It is quite fitting then that these five counties are very much indicative of the primary malaise that has plagued the country for the past 4 years: the inability of the housing market to rebound no matter how many trillions in printed dollars are thrown at it. Which brings us to the key number that probably should (but most likely won’t in this age of ultra short-term attention spans and constant redirection and focus shifts): 11% - this is the foreclosure rate in these 5 critical counties, double what it was 4 years ago, and three times higher than the national foreclosure average rate of 3.4%. In other words, if there ever was a time and place when economics, through its sheer failure to restore “household wealth” in this most decisive region, was a key issue, now is the time.

The initial boost given to European equities following weaker than expected overnight data from China, which renewed speculation of more stimulus measures, has faded throughout the morning. The major European bourses are now trading in negative territory at the North American crossover. The DAX is underperforming, weighed down by the likes of Commerzbank and Deutsche Telekom who both failed to impress markets with their earnings reports pre-market. However, thin summer volumes and another light economic calendar have once again been the theme for the morning, with only the UK Trade Balance for June gaining some market attention. Despite the larger than expected deficit, the ONS said that the figure is likely distorted by the extra public holidays.

European markets started off on a quiet note with thin volumes as equities drifted lower and fixed income gradually made gains, however newsflow rapidly picked up as commentary from the ECB President Draghi picked up wide attention. The ECB President was very upbeat on the Eurozone’s future, commenting that the bank will do whatever is needed to preserve the Euro, fuelling the asset classes with risk appetite across the board. European equities as well as the single currency erased all losses and the Bund moved solidly into negative territory. As such, EUR/USD is seen comfortably back above 1.2200, with both the core and peripheral bourses making progress. In the wake of the moves, attention is particularly being paid to Draghi’s comment that if monetary policy transmission is affected by government borrowing, it would come within the bank’s policy mandate. As such, much of the focus now lies firmly on next week’s policy decision from the ECB.