The US Housing Market Doldrums – OpEd

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The housing market is in terrible shape. Prices have dropped 35 percent from their peak, 1 in 5 mortgage holders is underwater, and another 2 million people will face foreclosure this year. And, as bad as things are now, they’re going to get a whole lot worse if the banks suddenly dump their inventory of distressed properties onto the market in 2012. If that happens, prices will plunge another 15 percent or so, millions of people will see their hard-earned home equity vanish overnight, and the economy will slide back into recession. Even so, there are experts who think “The Big Dump” is coming, and soon, too. Here’s how they summed it up over at CNN:

“The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen — both in terms of new foreclosure activity and new short sale activity.” (“Flood of foreclosures to hit the housing market”, CNN)

While flooding the market with distressed properties might gratify a few “free market” enthusiasts; it would only make matters worse. Purging the market of unwanted inventory quickly is not the cure; it will only kill the patient. What’s needed is government intervention, (Mortgage principle reductions) but that’s not going to happen because the banks are calling the shots and their goal is to minimize their losses as much as possible. So, what will probably happen is the banks will continue to release their backlog of distressed properties in dribs and drabs for another 5 to 6 years, pushing prices down at a rate of 2 percent to 4 percent per year while extending the housing slump for a full decade. This is why there’s never been a worse time to buy a house.

The problem is supply. There are just too many homes and too few buyers. And, even though interest rates are at historic lows, mortgage applicants can still get financing
with just 3.5 percent down via FHA, and prices on many foreclosures are below the cost of the materials; housing is still overpriced.

Did you ever think you’d see the day when you could nab a 15-year fixed-rate mortgage for 3.25 percent?

It’s unbelievable! If you adjust for the rate of inflation (currently over 2 percent); you’re only paying roughly 1 percent interest on hundreds of thousands of dollars. What does that tell you?

It tells you that the banks are desperate. They’re giving away money, but no one is standing in line. No one is borrowing, because the economy is dead, because people don’t trust the system anymore, and because housing has become an albatross. Isn’t that what’s happening?

Sure it is. They’ve screwed everything up and now no wants to play their game anymore. That’s why mortgage applications continue to drift lower 5 years after prices peaked. It’s a matter of trust.

The experts at CoreLogic, a California company that analyzes mortgage data, say shadow inventory is presently 1.6 million homes. but, of course, this vastly underestimates the number of people who are 90-days delinquent or in some stage of foreclosure and who will eventually lose their homes. A recent analysis by Bank of America puts the number at 6.6 million homes. Here’s a clip from the paper:

“The foreclosure inventory pipeline that must be cleared in the next few years is very large. Our mortgage strategists forecast that another 6.6 million homes will need to be liquidated over the next five years.”  (“No Housing Recovery Until 2020 In 5 Simple Charts”, zero hedge)

Others say the housing overhang is much bigger. Laurie Goodman of Amherst Securities, who testified before congress, says there’s between 8.3 million to 10.4 million homes that will eventually have to be resold.

So, who’s right? How much supply is really out there? That’s what buyers want to know so they can make an educated decision about (what will probably be) the biggest asset purchase in their lives. But the banks don’t want people to know about the millions of  homes that are presently in the pipeline, because that just undermines sales. They’d rather you listen to CNBC’s dyed-blond in the plunging neckline who keeps blowing smoke up your trousers every couple hours.   While that may be entertaining, there is a downside, too, which is, that you could get lured into buying a house that’ll probably be worth 10 percent less in 2 years than it is today.  Who wants that?

Now get a load of this from Comstock  Partners:

“The growing optimism on housing is not justified…..Foreclosures have generally declined over the past year as a result of the well-known robo signing scandal that caused banks to voluntarily stop most foreclosures pending some kind of settlement. This has now been accomplished by an overall settlement between the states’ attorney-generals and the major bank mortgage holders. As a result, the significant number of potential foreclosures that were held back by the scandal will now begin to be processed and show up in future inventories. It is highly likely that the vast number of distressed houses coming into the market will depress prices even more in the period ahead.

…..it will be some time before the massive number of actual and shadow inventories are cleared from the system. Until that happens, home prices will remain under continued pressure.” (“The growing optimism on housing is not justified”, Comstock  Partners, credit writedowns)

None of Obama’s wimpish mortgage refi operations (HARP, HAMP etc)  have done anything to revive the housing market. Nor will the administration’s Foreclosures-to-Rental scam. The private equity (PE) boys and other bigtime institutional investors will soon discover that its much easier to make money swapping derivatives and loading up on oil futures, than it is managing property. (Property management requires too much elbowgrease) Oh yeah, they may go hog-wild and buy a million properties or so, (If Obama provides a generous financing package!) but that still leaves 6 or 7 million more to sell. So, no matter how you cut it, there’s a boatload of homes out there that have to be sold in the next few years. And, that’s going to keep prices in the doldrums for some time to come.

Of course, if the recovery gets a head of steam, and incomes grow while more and more people find jobs, than housing prices could do a quick 180 turning a 6-year bust into another real estate boom.

Sure. And pigs can fly.

Mike Whitney

Mike Whitney writes on politics and finances and lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at [email protected]

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