By Mike Whitney
“There are many good reasons to believe that the 5.5 million foreclosures we have seen are barely halfway through their full course. The United States may end up with a total of 8-10 million foreclosures before we are finished.” – Barry Ritholtz, The Big Picture
It all gets down to supply and demand. The banks have been keeping millions of homes off the market until a settlement was reached in the $25 billion robosigning scandal. Now that the 49-state deal has been finalized, the banks are preparing to put more of their of distressed homes up for sale. That will lead to lower prices and the next leg down in the 6-year long housing crisis.
According to Reuters, new foreclosures “begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011.”
So BofA, which unwisely purchased Countryside following the Crash of ’08, is scrambling to get its house in order by removing the deadwood from its balance sheet. Good luck with that.
In order to avoid a sudden plunge in prices–which would be devastating for bank balance sheets–the banks will continue to control the number of homes that are released onto the market. In 2011, existing home inventory shrunk by 20 percent year over year while the shadow backlog of distressed homes continued to grow in leaps and bounds. This shows that the banks are managing inventory to minimize their losses.
But even though “visible” inventory has shrunk by as much as 30 percent in some markets, housing prices have continued their downward trek, dropping roughly 4 percent in 2011. This reflects the truly dismal condition of the underlying economy that is wracked by high unemployment, flat wages, and soaring personal debt. Absent another round of fiscal stimulus, there’s little chance that housing sales will rebound in 2012 despite historic low rates and myriad government loan modification programs.
The biggest problem facing housing now is that ordinary working people can’t make their monthly payments. An article in Reuters summed it up like this: “The subprime stuff is long gone,” said Michael Redman, founder of 4closurefraud.org. “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”
So what we’re seeing now is the knock-on effects from high unemployment, tight credit, shitty wages and deep protracted economic stagnation. This is a policy issue, but policymakers refuse to address it, so housing will bump along the bottom for years to come. Now take a look at this article in the Wall Street Journal:
“Delinquent mortgage borrowers, take note: Banks still aren’t moving very fast to kick you out of your homes. February’s foreclosure settlement between big U.S. banks and state attorneys general should have been bad news for mortgage deadbeats — and for house prices. Having resolved charges that they had filed bogus documents to speed up repossessions, the banks should have felt free to move ahead with millions of foreclosures. They should also have started selling more repossessed houses, an influx of cheap supply that would weigh on the market.
So far, though, that’s not happening. …. as a result, the average number of days since the last mortgage payment had been made on homes in the foreclosure process rose to 667, up from 660 the previous month and 253 in February 2008. In other words, the average delinquent borrower could live rent-free for nearly two years without getting evicted, assuming the borrower chose to stay in the house.” (“The Foreclosure Deal Spares the Housing Market (So Far)”, Bloomberg)
Just to be clear, we do not agree with the author that the people who were victims in this vast criminal mortgage laundering scam– that destroyed the financial system and pushed the global economy into a Depression–can be fairly characterized as “mortgage deadbeats”. Even so, the point he makes is important, because it illustrates how the banks are fiddling with supply to avoid the losses on non performing loans. Screwball accounting regulations allow the banks to keep mortgages on their books at fictitious prices (artificially high) until the house is sold. Only then, are they required to write down the difference. Considering that they still have millions of distressed homes on their books, this is no small matter. An accurate accounting of bank real estate inventory would show that most of the biggest banks in the country are technically insolvent.
So what does this mean for people who are thinking about buying a house in the near future? Should they hang on to their money and wait for another year or so or jump at that $450,000 McMansion with the Gothic parapets and custom Swedish sauna that’s been marked-down to a mere $185,000?
That’s hard to say. It depends on one’s own priorities. But one thing is certain, housing prices won’t be going up for a very long time. Maybe never. Moody’s ratings agency forecasts that we’ll see ”an 8% to 10% decline in housing prices” due to a 25 percent uptick in repossessed properties from 1 million in 2011. Unfortunately, Moody’s calculations are far too optimistic. In fact, “top housing analyst Laurie Goodman estimates the amount of shadow inventory at between 8 and 10 million homes, and Michael Olenick, using a different methodology, comes in at just under 9 million homes.” (“Moody’s Foresees 10% Drop in US Housing Prices“, naked capitalism)
Even if Goodman-Olenick’s predictions are wrong by half–which is unlikely–prices have a long way to go before they hit bottom.