My Expectations for the Housing Market

Herewith a pair of charts that illustrate my continued pessimism. The first, from Agora Financial, shows the second wave of mortgage resets (thankfully not quite as big as the first wave) due to hit hard from mid 2010 through 2012. What this chart shows will be disastrous, but what it doesn't show is even worse. The situation on the street is deteriorating right now. As this chart shows, we're in presently a "reset lull" yet, counter to propaganda, foreclosures/serious delinquencies are actually up 55% this fall over last. Why?

No doubt some sub-prime foreclosures are still working their way through the snake, but this year's increase is largely due to two other factors. First is the millions of people who have lost their jobs and/or businesses and are now losing their homes. Second is that many option ARM borrowers are paying a minimum payment that won't even cover current interest. (That this is even an allowable practice says plenty...). The unpaid interest is then added to the principal balance each month, and the loans automatically reset to a much higher payment when the loan to "value" ratio reaches 125%(!). Hence, many of the option ARM's in the chart are resetting early - a major red flag. Many option ARM's were written for good credit borrowers on larger homes, so the dollar value represented is higher than one might think...

With that, here's the chart:

The second chart comes from the Glenn Beck show a few months back and shows inflation adjusted housing price history for the last 120 years. Various versions of this chart have been floating around on the web, all based on the highly credible Shiller data. The peaks and valleys in the market are fairly well explained and it's easy to see what's likely to occur in the near future. Here 'tis:

(Yes, Beck's kind of a clown, but you should play this video a second time and pay close attention to the triple bottom of the Great Depression/WWII era. I think the likelihood of that recurring is high as well. The real estate bottoms were mirrored by the stock market, and a lot of folks were destroyed during the depression on the second and third leg down. Don't let history repeat using your portfolio as the fodder.)

Home values must drop back in line with historical norms, and as this happens the number of people upside down in their loans will skyrocket (as though this number weren't high enough already!) Making matters worse, a Realtor friend tells me that most of the folks now buying homes with the government tax credit are immediately upside down upon closing.

He's pessimistic that a high percentage of these previously foreclosed homes will soon reappear on the market. I agree. These sales won't stick. The housing stimulus program has produced nothing more than a fresh crop of subprime paper. These people are just "secured renters" who actually have no equity to fight for. As the song says, "freedom's just another word for nothing left to lose"...

Despite happy talk about the market bottoming and a recovery being underway, I believe a monstrous shadow inventory of unsold properties will depress the market for years. This inventory consists of 1) bank owned homes not yet on the market (a growing number), 2) homes in the delinquency/foreclosure pipeline (another growing number), 3) high rise condos and lofts that don't show up in any tally because they've never been listed, and 4) homeowners waiting for a better market in which to sell. This last may be the largest number of all, and it will be a long wait.

How bad is this shadow inventory? In the largely agricultural county where I live, well over 10% of the ag parcels are already in foreclosure. New foreclosure notices are published weekly in our little local paper, and dividing these into the total number of ag parcels shows that another 1% of the total parcels in the county join the foreclosure inventory every 6-8 weeks. With a few years to go in this crisis, we could end up with 1/3 of the parcels in foreclosure even if trends don't significantly worsen along the way. God knows where we'll end up!

So little is selling that it's difficult if not impossible to even pull comps. I drive past several vacant properties every day and no attempt is being made to sell any of them. Listings cost money, after all, and what Realtor wants to go broke listing stuff that isn't selling? And, who would lend in this environment? Who would buy??? Clearly, only a fool. When the viability of a market depends on fools, you have a house of cards.

Similar trouble is brewing in the commercial real estate market - trouble bad enough to reach beyond the banks and threaten the solvency of a number of insurers - but that is a bedtime story for another night.

Sleep well...

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