Thursday, September 16, 2010

Swelling backlog means housing prices will fall

Home ownership has become an albatross. Prices are falling, demand is weak, foreclosures are soaring, and inventory is backed up to the moon. If there's an upside, it's hard to see.

Many of the people who bought homes in the last 6 to 7 years, realize now that they were caught in a massive mortgage laundering scam. The banks lured unqualified applicants into easy-term loans to so they could peddle their "fishwrap" mortgage paper to clueless investors. The con worked so well, that housing prices doubled or--in some cases--tripled in value. But the inflated prices did not reflect supply/demand fundamentals. They reflected fraud-- industrial-scale fraud that created an $8 trillion housing bubble. Now the bubble has burst and prices are returning to trend. That means foreclosures will rise while millions of homeowners will slip deeper into the red.

This is from Bloomberg News:

"The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market. Shadow inventory---the supply of homes in default or foreclosure that may be offered for sale---is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.

“The best thing that could happen is for prices to get to a level that clears the market,” said Joshua Shapiro chief U.S. economist of Maria Fiorini Ramirez Inc, who predicts prices may fall another 10 percent to 15 percent. “Right now, buyers know it hasn’t hit bottom, so they’re sitting on the sidelines.” (U.S. Home Prices Face 3-Year Drop as Inventory Surge Looms, John Gittlesohn and Kathleen Howley, Bloomberg)

The Obama administration has tried everything to boost housing sales--incentives, subsidies, tax breaks, even record-low interest rates--but nothing has worked. Now it looks like they're ready to throw in the towel and let prices fall, but that presents risks, too. Presently, there's a backlog of 4 million homes listed with brokers. (At the current pace, it would take a full year to sell that number of homes.) However, as Bloomberg notes, there's another 12 million properties that have been kept off the market. As those homes gradually come on-line, demand will weaken and prices will fall.

This is from CNBC's Diana Olick

Prices have been recovering since last Fall, largely thanks to the artificial stimulus of the $8000/$6500 home buyer tax credit. But prices were also benefiting from a slight bump in confidence in the housing market, fed by an apparent drop in the foreclosure numbers. In reality, the foreclosure numbers were dropping only because banks and states were delaying the process, as they tried to cram as many borrowers as possible into what we now know is a largely unsuccessful government-backed mortgage modification program....

Now home buyer confidence is back in the dumps, which is clear from another report out today showing that for the 3rd straight month the percentage of home sellers on the market who have slashed their asking prices at least once has gone up....Unless we see a marked, widespread increase in home sales over the next several months, prices will go from flat to down once again. ("Home price double dip begins, Diana Olick, CNBC)

Actually, prices have begun to double dip already. According to CoreLogic: "The majority of states experienced price declines and price declines are spreading across more geographies relative to a few months ago. Home prices fell in 36 states in July, nearly twice the number in May and the highest since last November when national home prices were declining," said Mark Fleming, chief economist for CoreLogic."

Now that the administration's incentives programs have ended, the underlying trend has started to reassert itself. Experts figure that prices could slide another 10 to 20 percent, but no one knows for sure.

As prices continue to tumble, people will want to know why the Fed's $1.25 trillion Quantitative Easing (QE) program didn't stabilize prices as Fed chairman Ben Bernanke said it would.

The fact is, Bernanke's QE program had no effect on prices. Prices are a function of supply and demand. The banks simply withheld supply while the exchange of assets took place ($1.25 trillion reserves for the banks non performing loans and mortgage-backed securities) so the bailout could go forward without inciting too much public rage. (The last thing Bernanke wanted, was another TARP firestorm.) But QE did not increase demand, decrease supply, improve sales or lower interest rates. In fact, interest rates have fallen further since the program ended. Some pundits say that the deal was a "wash", that the Fed merely exchanged illiquid assets for liquid assets. But this is misleading, too. The bottom line is, the banks are now stuffed with a trillion in reserves while while the Fed's balance sheet is loaded with downgraded, toxic assets for which there is no market. It's not hard to figure out who got the better end of the deal.

Now that the banks have beefed up their equity, they don't need to play-along anymore, which is why they've started dumping their housing stockpile on the market. Here's a clip from an article in the Wall Street Journal that helps to fill out the details:

"The Home Affordable Modification Program has fallen short of its goals. So far, fewer than 500,000 loans have been modified, below the target of three million to four million. Yet the program served as a “closet moratorium” on foreclosures that stanched the flow of bank-owned homes to the market, said Ronald Temple, portfolio manager at Lazard Asset Management."

Of course, the HAMP program failed. It was designed to fail. It was a stalling device like the other foreclosure moratoria. All of the subsidies, incentives and tax credits were designed to run-out-the-clock while the banks offloaded their garbage loans onto the Fed's balance sheet. Now that the Fed has successfully transferred the reserves, there's no reason to continue the charade. The great housing inventory purge can resume with gusto. And, it has. Servicers have already picked up the pace of foreclosures while "home seizures reached a record for the third time in five months in August" according to RealtyTrac Inc.

This is from the WSJ:

“We see the perfect storm brewing with rising supply and falling demand,” said Ivy Zelman, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago. She estimated that distressed sales could account for half of the market by year-end if traditional sales didn’t rebound….."

Homeowners have already seen prices drop 30% from their bubble-highs in 2006. Another sharp dip would be disastrous for people facing retirement or living on fixed income. If Obama's got something up his sleeve--like emergency cramdown legislation that will force banks to lower the face-value of the mortgage---he'd better get to it. Things could get ugly fast.

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