Financial Armageddon

A Post on the Housing Market...and the End of an Era at Financial Armageddon...

After almost six years, 2,200 posts, and eight million page views, I am moving on from posting regular updates at Financial Armageddon so I can devote my energies to an exciting new members-only website called Panzner Insights, where I'll be focusing on markets, economics, and geopolitics.

While I will be keeping Financial Armageddon up and running for the time being and may occasionally post new material at the site, it won't be a priority for me. Needless to say, that doesn't mean I believe the nightmare is over—far from it. I just think it's time to look at things a little differently, to try and handicap the bigger picture going forward, and to offer some suggestions drawn from my experience on Wall Street that might enable members to capitalize on current developments.

Hopefully, those of you who have found my posts, books, columns, and other work interesting or helpful will visit Panzner Insights and check out what is on offer.

And now for today's post...

 

Housing: Plenty of Reasons to Be Pessimistic

There’s plenty of debate about—and money riding on—the question of whether we are in the midst of a sustainable recovery in the housing market. Nobody knows for sure, of course, but there are plenty of reasons to be pessimistic.

For one thing, the supply of homes, in terms of what is currently on the market and what is potentially for sale whether or not prices rebound further—the so-called shadow inventory—remains significant relative to demand, even though data from the National Association of Realtors (NAR) shows that inventories of existing homes are back to where they were eight years ago.

Aside from the question of whether developments that have occurred since then—including the fact that their are more ways to sell property than by going through a broker—have distorted the inventory calculation, the composition of sales has changed from what it was. Nowadays, a much greater share of transactions are in the “distressed” category than before the bubble burst. Given that more than 20 percent of sales are foreclosures and short sales makes the current ratio look healthier than it is in comparable terms.

Needless to say, shadow inventory is far greater than it was during the go-go years, when people were happy to remain long despite a booming market. With prices having fallen sharply since then, we now have a situation akin to those seen in other post-collapse markets: Holders can turn seller on a heartbeat as prices move closer to what they paid or owe on their mortgages. Given that more than 20 percent of mortgagees are underwater, that represents a sizable overhang.

The tide of past, present, and future foreclosures—actual and de facto—has also left lenders with substantial holdings of “real estate owned” (REO) properties that will undoubtedly be offered for sale at some point. These are not voluntary investments being held for the long-term; they are unwanted assets that are costing money by the day to finance and maintain. According to HousingWire, nearly half of mortgage giant Fannie Mae’s REO holdings are unable to reach the market at present.

It’s not just about supply, however. Demand is significantly less than it used to be for a variety of reasons, most notably because it is much harder to get financing now than it was when the property market was booming. Despite some recent loosening of credit conditions and ultra-low mortgage rates, anecdotal and other reports make it clear that lenders are generally unwilling to grant loans except on stringent terms to the highest quality borrowers.

But even if you discount the fact that traditional home buyers are having a difficult time borrowing the money they need to buy a home, it’s apparent that other factors, including societal shifts, are undermining demand—and will likely continue doing so for the foreseeable future.

Number one among them are economic conditions in the post-crisis era, which are having an adverse affect on prospective homeowners’ willingness and ability to take the plunge. A structurally weak employment market, where temporary and low-paid services jobs comprise the lion’s share of the jobs being created and where the odds of finding another, better paying, and more secure opportunity are low, is not the catalyst for people to step up and make what could be the biggest investment of their lives.

Demographic factors are also playing a role. The upheavals of the past decade or so have reaffirmed the truism that growing older means trading down and taking less risk. And while ultra-low interest rates have pushed some of those who survive on their savings to invest in something other than a bank CD, real estate is definitely not the investment of choice. At the same time, broader societal changes, including more people living alone and more single-parent households, is undercutting demand for what has traditionally been a nuclear family-oriented investment.

Perspectives about what really matters are evolving as well, especially among the younger generation. Whereas in the past the milestones of getting married, buying a car, and acquiring a home represented the natural progression of things when children reached adulthood, priorities have changed. A recent Bloomberg report noted that 4G wireless telephones trumped V-8 cars for the 80 million U.S. consumers born from 1981 to 2001. Meanwhile, the still-ailing post-crisis economy has convinced a growing number of young people to embrace “the age of frugality.”

In addition to shifting preferences, many of those who are at the lower end of the demographic scale already have a big financial burden hanging around their necks, which precludes them from taking on other big commitments like a mortgage—that is, student loans. Aside from the fact that, for many graduates, these obligations are far higher than they were, proportionally speaking, even a decade ago, the prospect of being in the hole for as far as the eye can leave a lasting impression on impressionable individuals.

Policy-making in Washington and by the Federal Reserve further underscore doubts about taking big risks that might backfire. While the latter keeps reassuring everyone that it has matters under control and that interest rates will remain low for years to come, given how many promises they and other authorities have broken over the past several decades, it’s not surprising that people are hesitant to count on that on those assertions going forward.

Lastly and perhaps most importantly, demand is being undermined by broader-scale mood swings. People are beginning to accept that it isn’t necessary to own your own home, nor is it necessarily a long-term goal. That might seem like heresy in a country where property ownership has been viewed as a God-given right, but when you consider that in economic powerhouse Germany the share of residential property accounted for by rentals is more than 60 percent in most states and 90 percent in the capital, Berlin, it’s not all that strange.

In sum, while it is easy to focus on the traditional indicators of supply and demand and start believing that the long-awaited recovery in the property market has arrived at last, the fact is that much has changed in the wake of the events of the past decade, a development that is likely to weigh on prices for many years to come.

On Housing, the Answer Remains the Same

Although home-builder stocks tested new highs once again on the heels of this morning's housing data, I can't help but question whether the unrelenting euphoria is justified.

As the chart shows, we saw a similar pattern of data being reported during the period from late-2009 to early 2010, when existing home sales rose sharply amid a more subdued uptick in new home starts and sales.

In the end, the jump in the former proved to be temporary and appeared linked to an increase in foreclosures, short sales, and purchases by investment-oriented cash buyers, rather than to a change of heart by traditional homebuyers.

Moreover, while today's ultra-low borrowing rates undoubtedly aid affordability, there is still plenty of evidence that suggests prospective homeowners are finding it difficult or even impossible to get a mortgage.

That begs the question, of course, of whether this time is different. As usual, I believe the answer to that question is "no."

~~~~~

Coming soon: Panzner Insights,
an exclusive members-only website focused on
markets, economics, and geopolitics

If you are interested in learning more, please click here to open a form where you can fill in your name and email address (or alternatively, shoot me a quick email with the details), and I will be in touch...

(Note: your contact information will ONLY be used to let you know when my new site is up and running. I DO NOT sell, trade, exchange, or otherwise transfer any email addresses or other personal data that you provide to me. Privacy is precious. I respect yours.)

Still Shaky

While it is always possible that the housing market has seen its lows, there's still plenty of evidence that suggests otherwise; among other things:

Potential supply is significantly larger than what is currently for sale

"What Housing Recovery? Distressed Sales Still High, Shadow Inventory Massive" (Forbes)

Housing markets seemed to have turned a corner, with Tuesday’s Case-Shiller data adding to the optimism.  Home prices have risen for a second consecutive month for the first time since the summer of 2010, but much of this is a consequence of the falling percentage of distressed sales, while prices are still more than 31% of their peaks and may take years to recover.  With 11.4 million, or 23.7%, of all residential properties with a mortgage under water, and a shadow inventory worth $246 billion, according to CoreLogic, a true housing recovery is far away.

The market is being bolstered by temporary factors

"Michael Olenick: Still Looking for a Housing Bottom" (Naked Capitalism)

Every day a growing crescendo of housing cheerleaders posit the end of the foreclosure crisis. We’re flipping our way out of the mess that we flipped ourselves into, is their usual line of reasoning. I’ve looked at national data, local data, and even data on my own block here in Florida. I tried to make the evidence prove the market has found a genuine, sustainable bottom. There are clearly gimmicks giving a temporary boost, a great PR campaign that may or may not be coordinated, and some foreclosure flippers that may do well, until they don’t. But the evidence is overwhelming: home prices are anything but stable.

For background, a chorus of the same people that created the housing crisis have been predicting a housing bottom every year or so. They’ve always been right for anywhere from a few days to a few months, then the cycle of foreclosures and lowered home values restarts and causes prices to spiral downwards. This time though, especially in certain micro-markets, there does seem to be measured home price appreciation.

Two trends are apparent. One is that banks are delaying foreclosures, or not foreclosing at all despite long-term delinquencies. The other is that private equity firms – flush with cash thanks to Tim Geithner’s religious devotion to trickle-down economics and the resulting cascade of corporate welfare – have been bidding up and holding foreclosed houses off the market. These two factors have artificially limited supply and, combined with cheap mortgages rates, driven up prices. While we can debate whether these strategies represent the best public policy, these policies are obviously not long-term sustainable.

The raw data is less favorable than the headline statistics suggest

"Spot The Housing Bottom: New Homes For Sale Drop To Lowest Ever; Average New Home Price Plunges To 2012 Lows" (Zero Hedge)

Looking at the headline number in the just released New Home Sales data one would be left with the impression that the tepid "recovery" in housing may be chugging along: after all with a seasonally adjusted annualized 372,000 new homes sold in July, this was an improvement to the revised 359K in June (ignoring that the US housing market at best continues to drag along the bottom). This impression, however, promptly changes when one looks at the underlying data. The reality: the actual number of new homes sold in July was 34,000, the same as in June, and the lowest since March. Of this, a massive 3,000 (yes, three thousand) homes were sold in the Northeast in the entire month. Where things get worse is when one looks at the number of new homes for sale. At 142,000 (of which just 38,000 actually completed), this was the lowest number. EVER.

Two key drivers are less-than-supportive

"Is This the End of the Housing Bust? Not So Fast, Says Shiller" (Total Return)

Many indicators are pointing to a bottom forming in the housing market. New-home inventories are at historic lows. Home-builder sentiment has finally turned the corner. And finally, home prices have ticked up for four months in a row on a seasonally-adjusted basis.

All that might make it tempting to call the “all clear” once and for all. But one of the earliest experts to identify the real-estate bubble, Yale University professor Robert Shiller, isn’t convinced we’ve crossed into safe territory just yet.

His reasoning? The home-price rebound, if that’s what it is, doesn’t yet have momentum – which Shiller’s research has found is the most powerful driver of home prices.

Momentum is the tendency for prices to keep moving in the same direction. It exists, but is a relatively weak force, in the stock market. In the housing market, though, it’s proven to be a reliable predictor of where prices will go in the future.

That’s in part because of what Shiller calls “feedback loops.” When someone makes a lot of money off of home-price increases, his friends hear about it and maybe the media takes note. Others who hear those stories decide to take their chances buying a home themselves. That leads to further price increases and more success stories, and the loop continues.

Feedback loops can help home prices – as they did during the housing boom – or hurt them, as they have with all the bad real-estate news over the last few years.

With several successive months of price increases, you’d think that momentum would finally be in the real-estate market’s favor. But Shiller says he stills sees reason to be skeptical.

“It could be [a bottom]. It’s a real possibility. I just don’t know,” he says.

Among the reasons to be wary, according to Shiller: a large overhang of homes that are either in foreclosure or near it. If those homes flooded the market, it could push prices down even further.

And though momentum is the No. 1 driver of home prices, the No. 2 driver, the unemployment rate, is still well over 8%.

Unusual seasonal influences paint an overly positive picture of current conditions

"Home Prices Rise Slightly, But Not in the Philadelphia Area" (Philly.com)

Michael Feder, CEO of RadarLogic, a New York firm that provides data analysis for real estate, said that although the data exhibited more strength to date in 2012 than they have over the same period in the preceding three years, "this does not necessarily indicate that home prices have hit a bottom."

Feder and other experts said the mild winter weather temporarily boosted demand.

"Assuming that these buyers would have entered the market later in the buying season under more typical circumstances, the early uptick in housing demand will have come at the expense of weakness in demand later on," Feder said.

Home prices are not likely to appreciate on a sustained and meaningful basis, Feder said.

"Rather, short-term appreciation will paradoxically short-circuit long-term appreciation and perhaps trigger further declines," he said.

Activity is being distorted by credit-related factors

"Jonathan Miller: Don't Buy The Hype About A Housing Recovery" (Business Insider)

Much of the housing recovery you've been hearing about is still just hype, says Jonathan Miller of Manhattan-based real estate appraisal company Miller-Samuel.

"We keep throwing the 'recovery' word around, but the big numbers are coming from sources being created from the tight market," he told Business Insider. "Tight credit is causing rents to rise; falling mortgage rates are pushing people to buy.

"There's this sense that no one really has a sense of where we are in the housing market. Recovery is this very generic, undefined term. Maybe that's a good thing, not one extreme or the other."

Ultimately, it depends where you are.

"When you say 'recovery' you're implying that things are going to go up," Samuel continued. "In certain markets you might see that, but in some you won't."

So what does the seasoned appraiser think consumers will see in the market over the next five years?

"A sideways orientation," he said. "For now, it may make lenders more comfortable and help turn prices around, but I guess I take offense to it because I think when people hear it, deep down they don't trust the message either. All it does is create more confusion."

A Bottom in Housing?

Despite the fact that home prices are more affordable than ever --

the percentage of people looking to buy a new one remains near multi-decade lows --

Doesn't quite sound like "recovery" to me (but then again, what do I know?)

(Charts: "US Housing Outlook: Housing Recovery Stalling?" Torsten Stock, Chief International Economist, Deutsche Bank)

Housing: Still A Broken Market

Aside from everything else -- including a still-massive overhang of properties for sale -- the fact that ultra-cheap financing is not enough to induce a suffcient number of buyers to step up and take the plunge makes it apparent that we are nowhere near a bottom in the housing market.

And yet, Wall Street keeps piling into homebuilding stocks (I guess fundamentals don't matter when you're the "smart money" -- right?).

Fantasy vs. Reality

The fantasy they want you to believe:

"Sales of New Homes Dip, but Reports Suggest a Recovery Is Under Way" (Reuters)

New single-family home sales fell in January, but an upward revision to December’s data and a drop in the supply of properties on the market added to growing signs of a budding recovery in the housing sector.

The reality I want you to see:

"The Housing Recovery In One Index" (Streettalk)

The Total Housing Activity Index shown here is a composite of the sales of new and existing homes, new construction permits for single family homes and new single family home starts.  As you can see we are still near the same lows that we were in 2009 at the end of the recession.  Furthermore, and what is really worse, is that the "recovery" was built on the bank of a whole slew of tax payer funded bailouts, tax credits and incentives from HAMP to HARP to the Home Buyer Tax Credit.  Not quite the recovery the government was hoping for.

"AP's Kravitz Plays 'Let's Pretend the New-Home Market Is Recovering' Again" (NewsBusters)

In his Friday report on new-home sales, [Associated Press journalist Derek] Kravitz noted a seasonally adjusted January drop, but trumpeted a minuscule upward adjustment to fourth-quarter sales which was barely more than a rounding error:

New-home sales dip after 4 straight monthly gains
 
Sales of new homes dipped in January but the final quarter of 2011 was stronger than first estimated.
 
The Commerce Department said Friday that new-home sales fell 0.9 percent last month to a seasonally adjusted annual rate of 321,000 homes. That followed four straight months of gains in which home sales rose 10 percent.
 
The gains came after the government upwardly revised October, November and December's figures. December's annual sales pace of 324,000 was the highest in a year.
 
Even with more sales, just 304,000 new homes were sold in 2011 - the fewest on records dating back to 1963. And new homes are selling well below the 700,000-per-year rate that economists equate with healthy markets.
 
Still, the pickup in sales at the end of last year coincides with other improvements in the housing market and should bolster the view that the depressed sector is starting to revive.

[Below] is the raw data which forms the basis for Kravitz's first-paragraph placement of the fourth-quarter revision and its characterization as "stronger than first estimated."

You've got to be kidding me, Derek.
 
A whopping 2,000 more homes were sold in December (because of rounding, it could be anywhere from about 1,000 to about 3,000 more).
 
This is supposed to indicate that the industry is "starting to revive"? If Kravitz thinks that 23,000 is "stronger," he must want us to believe that original 21,000 was "strong."

"Measuring Housing’s Drag on the Economy" (Economix)

[A new paper presented Friday at a monetary policy conference in New York] says, “more than half the underperformance in this recovery is associated with housing-related sectors.”

Yes, that's right. Housing is more than half of our problem.

The details by now are probably familiar: The crash in housing prices erased a vast amount of wealth and, perhaps even more importantly, it severely restricted borrowing power. Many people are unable to refinance and unable to tap the value of their homes to finance consumption or investments.

In other words, the housing crash not only caused the crisis, it is impeding the recovery – it is interfering with the Federal Reserve’s easy-money aid campaign, which aims to promote growth by encouraging new borrowing.
 
“Housing problems have both offset the stimulative impact of easy monetary policy and have impaired the link between policy and the economy,” says the paper by Michael E. Feroli, a J.P. Morgan economist, and three collaborators.

The paper offers a striking way of thinking about the depth of this housing problem. It calculates that at the end of 2010, the total value of American homes exceeded demand by about 9 percent, or about $1.5 trillion.

"Warren Buffett: Housing Remains In a Depression" (Deal Journal)

Warren Buffett says the economy is improving from the devastation of the financial collapse, but that the housing world remains “in the emergency room.”

Buffett’s annual letter to shareholders Saturday spends a good deal of time self-deprecating his previous calls, as he is wont to do. He now says his statement last year that a “housing recovery will probably begin within a year or so,” was in fact “dead wrong.”

The businesses his Berkshire Hathaway empire owns that are tied to housing–including a brick maker, a pre-fabricated home builder and a building products company–reported similar pre-tax profits to last year, but less than a third of what they reported in 2006.

“This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own,” Buffett writes. “I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.”

Off in the Distance

If history is any guide, then the following chart from the 2012 Economic Report of the President suggests that any recovery in housing prices, contrary to what Wall Street is saying, is at least 15 to 30 months away [dotted line annotations mine].

Of course, that doesn't even take into account the unprecedented scale of the bubble that preceded the current bust, as well as supply-and-demand fundamentals that remain largely negative (not to mention the fact that when bubbles burst, they tend to overshoot on the downside).

It's Here -- Or Maybe Not

In "Grumpy Old Permabear," I noted that "a growing number of commentators are suggesting that the worst is behind us," and included (among others) a link to a post by Calculated Risk, "The Housing Bottom is Here." While I certainly can't say for sure that Bill McBride is wrong (FWIW, I am a big fan of CR and have been a regular visitor since its earliest days), I did point out that "genuine bottoms have, historically at least, gone unrecognized until well after their arrival."

On the flipside, long, secular downturns -- like those that invariably follow bursting bubbles -- are littered with endless claims of a recovery being at hand. As it happens, Weakonomics has compiled an extensive collection of such pronouncements about the current bear market, stretching back almost six years, in "The Megalist of Calling the Housing Bottom." Here are some examples:

1/31/2012 Homeownership rates fall to 66% as downturn nears a bottom – USA Today
1/10/2012 Has The Housing Market Hit Its Bottom? – Forbes
12/8/2011 Is the Housing Bottom Finally in Sight? – Kiplinger (my favorite!)
9/27/2011 This Has To Be The Housing Bottom – Seeking Alpha
6/21/2011 The Housing Bottom Is Here: Economist Russell Price Explains – Daily Finance

...

2/8/2007 Housing still on down slope Economists say no recovery until midyear; prices face record fall – Market Watch
12/21/2006 Housing ‘close to bottom,’ realtor-group economist says – Market Watch
12/5/2006 Home builders see bottom of housing slump – CNN Money
11/15/2006 Housing slide may deepen; New forecast sees bottom in 2008 – Boston Globe
10/6/2006 Greenspan Says `Worst’ May Be Past in U.S. Housing – Bloomberg

Otherwise, it's been a while since I last highlighted a chart like the one that follows (the unedited original comes via Business Insider), but I thought it might be something worth noting to those who believe the Fed actually knows what it takes to look after or "fix" the economy (or whatever else Bernanke & Co. claim they are responsible for):

The Tide Is Turning for CRE

Bolstered by reckless monetary policies, unwarranted regulatory forebearance, Hollywood-style accounting, and investors' short memories, the commercial real estate market has in recent times been a bastion of tranquility, attracting the interest of yield-chasing institutions and individuals alike. But some developments suggest the tide is turning.

For one thing, as HousingWire details in "November Bank Failures Tied to CRE Exposure, More Closures to Come," the excesses of the past are still coming home to roost, especially in the banking sector.

The five banks that failed in November were victims of exposure to commercial real estate, analytics firm Trepp LLC said Monday.

The November data follow the pattern exhibited throughout 2011, in which bank failures spiked in the month following the end of a quarter and then dropped during the subsequent two months. Eleven banks failed in October — also because of CRE exposure.

Total bank failures this year now stand at 90, putting the annualized pace just under 100 for 2011. Nearly 300 banks were shuttered by regulators in 2009 and 2010 combined.

Meanwhile, market conditions look to be less than supportive, as the Credit Union Times reveals in "Fed: Commercial Real Estate Still Sluggish."

According to the latest Fed’s Beige Book, released Thursday, nearly all of the 12 districts said CRE market activity has not experienced any significant increases.

Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, Va., San Francisco and St. Louis make up the Fed’s districts.

Boston, New York, Chicago, Minneapolis and San Francisco indicated roughly unchanged activity while Philadelphia and Dallas indicated mixed activity. Richmond and St. Louis reported slow activity, although industrial construction had picked up. The Fed said New York and Philadelphia reported generally weak conditions.

Cleveland saw steady to slowly improving commercial construction and Chicago and Minneapolis experienced modest to moderate increases, the Fed reported.

Other reports confirm a deteriorating outlook, including this one from Pensions & Investments, entitled "Risks Rising as Realty Firms Buy From, Sell to Each Other":

Adding to pressures to sell is the fact that some of the properties in managers' portfolios are either becoming distressed or are in need of capital infusions that managers do not have.

“Many fund managers that were able to access capital did so two or three years ago. Due to poor fundamentals, we have seen once-transitional properties that were subsequently stabilized becoming transitional again,” said Jarret Cohen, head of private real estate at Fir Tree Partners Inc., a New York-based hedge fund firm. “Some owners are unable to contribute additional capital for leasing and required maintenance, and thus will likely sell their properties.”

Then there are the unwelcome realities of the CRE refinancing cycle. As the Wall Street Journals' Developments blog notes in "Commercial Delinquencies Down, for Now," the loans granted to finance dodgy deals done at the height of the boom are beginning to come due.

The delinquency rate on U.S. loans tied to commercial mortgage-backed securities ticked down in November, with payments at least 30 days late for 9.51% of all such loans, according to real estate research service Trepp LLC.

While the rate was down from 9.77% in October, it’s hovered in the mid-9% range throughout the year, and there are few signs that it’s likely to change any time soon. About $15.5 billion of loans made in 2007 — back when loans with loose standards were still common — are set to mature next year, according to Trepp. The firm expects more than half of those to head into special servicing, when a distressed loan specialist considers a rework of the mortgage.

The continued pain in the commercial real estate world — a healthy delinquency rate is below 1% — comes as job growth has been anemic and investors are wary about the direction of the economy, particularly given the turmoil across the Atlantic.

“The day of reckoning is here for the class of 2007 originated loans,” Trepp wrote in its monthly delinquency report.

To top it all off, real estate insiders are growing more pessimistic about their industry's prospects.

"Commercial Real Estate Execs Trim Expectations Amid Weak Job Growth, Political Gridlock, Regulatory Uncertainty"

Real Estate Roundtable’s Q4 Sentiment Index Drops to 2009 Levels

Reflecting concerns about the pace of economic recovery, Washington’s ability to address fiscal and tax policy challenges, a host of new regulatory requirements, and the long-term European debt situation, The Real Estate Roundtable’s latest “Sentiment Index” of commercial real estate executives slid for the second quarter in a row — hitting its lowest point since the fall of 2009.

So much for that light at the end of the tunnel.

Less Than Meets the Eye

As we've seen with the jobless rate, where the broadest measure of unemployment is 80% higher than the headline statistic, and with retail sales, where the reported figure is much less than it seems when population growth and inflation are taken into account, you can't believe much of what you see or hear these days.

So, too, with data on the ever-sinking housing market, which continues to stand in the way of any sort of meaningful recovery.

In "Half of US Mortgages Are Effectively Underwater," CNBC's Realty Check (yes, really) cites research from mortgage analyst Mark Hanson suggesting that the equity position of U.S. home "owners" (I use that term loosely) is far worse than the official tallies would have you believe.

On US totals, if you figure average house prices use conforming loan balances, then a repeat buyer has to have roughly 10 percent down to buy in addition to the 6 percent Realtor fee to sell. Thus, the effective negative equity target would be 85%. You also have to factor in secondary financing, which most measures leave out.

Based on that, over 50 percent of all mortgaged households in the US are effectively underwater — unable to sell for enough to pay a Realtor and put a down payment on a new purchase without coming out of pocket. Because repeat buyers have always carried the market as the foundation, this is why demand has not come back. It's as if half the potential buyers in America died over a two-year period of time.

Big Changes Afoot

In case you haven't noticed, there are big changes afoot in the housing market.

For a growing number of Americans, it's out with the old...

(From "Scenes from Surrendered Homes," How to Be a Retronaut.)

...and in with the new --

(From "The Tent City of New Jersey: Desperate Victims of the Economic Slump Forced to Live in Makeshift Homes in Forest," The Daily Mail.)

Change you can believe in?

Don't Quite Have this Bull-Shilling Thing Down

I can't beat 'em, so guess I'll join 'em.

Hey look, it's a bull market...

...in the shadow inventory of actual and prospective foreclosure properties sitting on banks books.

Wait, what? Sounds like a heck of a lot of supply that can suddenly hit the market. That's not so good, is it?

Oops, I guess I need to work on my bull-shilling skills.

The truth is, unlike those highly paid "experts" who keep talking about a housing recovery being underway, I still haven't quite figured out how to spin worsening fundamentals into an improving outlook.

(Chart courtesy of Laurie Goodman at Amherst Securities, via The Atlantic)

Changing Times (or Is It Lines?)

What a difference six years makes...

2005

"Condo Fever Turns Buyers Into Early Birds" (New York Times)

 

2011

"Thousands Line Up in Red Bird to Apply for Dallas County Rent-Assistance Vouchers" (Dallas Morning News)

HUD Acknowledges Officials on Drugs

Well, not really. But at least one seems to be on something when he makes a pronouncement like this:

"U.S. Home Prices ‘Unlikely’ to Fall Further" (Bloomberg)

Homes in the U.S. are the most affordable they've been in decades and prices may start to climb as soon as the third quarter, Housing and Urban Development Secretary Shaun Donovan said today.

"It's very unlikely that we will see a significant further decline," Donovan said today on CNN. "The real question is when will we start to see sustainable increases. Some think it will be as early as the end of this summer or this fall."

Home sales have increased in six out of the past nine months and the number of property owners in default is declining, Donovan said on CNN's "State of the Union" program. Housing prices will begin rising as the number of foreclosures declines, he said.

"In the long run, it's a good time to buy," Donovan said. "It's so affordable today compared to where it's been for generations."

Of course, the data-driven realities of the current housing market suggest otherwise. In fact, if the following reports are any guide, now is actually a good time to sell.

"Equifax Study Points to Continued Housing Woes" (Atlanta Business Chronicle)

The economic recovery following the Great Recession has been hampered by a weakened housing market, a new study from Atlanta-based Equifax Inc. shows.

Equifax’s national credit trend research for May found mortgage delinquencies still exceeded pre-recession levels due to ongoing instability the mortgage marketplace. High shadow inventory levels are contributing to the continued rise of severe mortgage delinquencies and write-offs, the company noted.

According to Equifax research, write-off dollars for home finance, which includes first mortgage and home equity installment loans as well as home equity revolving accounts, are still climbing and have yet to show signs of peaking. Home finance write-offs reached $304.6 billion in 2010, compared with a combined total of $126.7 billion for 2006 and 2007.

The study also found first mortgage real estate owned (REO) rates remain high as lenders struggle to divest of properties unsuccessfully sold through a short sale or foreclosure auction. REO rates since March are on the rise and causing continued economic strain, Equifax said.

"Homebuyer Reality Check: It's a Buyer's Market" (Associated Press)

Why are so few people buying houses? One of the key reasons is falling prices.

Although lower prices encourage true bargain hunters to look for deals, they can also scare off homebuyers who fear the bottom has yet to come. And, between the two, anxiety is winning.

This spring, home prices in major cities were back to the same levels reported in the summer of 2003. Although prices in several locations are beginning to rise again, even with the increases, housing remains the weakest part of the U.S. economy. Prices won't fully recover until the glut of foreclosures for sale is reduced, companies start hiring in greater numbers, banks ease lending rules and more people get comfortable again with buying a house.

"Don't be Fooled by Higher May Home Sales: Radar Logic" (HousingWire)

Pending home sales may have grown 8.2% between April and May, but a housing recovery remains a ways off, real estate analytics firm Radar Logic said this week.

Radar Logic picked apart the latest pending home sales report, saying 8.2% month-over-month sales growth does not equate to a recovery when sales are down 20.4% from last year when consumers rushed to buy to take advantage of federal tax credits. Instead, Radar Logic concluded that May's pending home sales remain "essentially flat."

Furthermore, an influx of distressed properties, including many that are still waiting to come online, remain a constant threat to market confidence and home prices, according to the report.

"Regardless of what may happen to sales contract activity in any given month, the fact remains that the inventory of homes for sale and in the foreclosure pipeline far outstrips current demand," Radar Logic said. "Potential buyers are cognizant of this fact and the negative impact it will have on future home price appreciation, and are therefore choosing to stay out of the market. As long as the supply overhang persists it will weigh on housing demand."

"CoreLogic: 10.9 Million Borrowers are Underwater" (Mortgage News Daily)

Approximately 22.7 percent of all U.S. homeowners were in a negative equity position with their mortgages at the end of the first quarter of 2011, down slightly from 23.1 percent in the fourth quarter of 2010.

In a report released Tuesday, CoreLogic states that some 10.9 million borrowers are "underwater", i.e. owe more on their mortgages than their property is worth and another 2.5 million borrowers (5 percent) were in a near-negative equity position,  which the real estate data and analytics company defines as having less than 5 percent positive equity.

While the drop in housing prices caused much of the negative equity, equity extraction was also a key driver.  Borrowers with second mortgages on their home were twice as likely to suffer negative equity as those with only one lien.  18 percent of borrowers without home equity loans were underwater while 38 percent of borrowers with home equity loans were in a negative position.  A total of 4.5 million negative equity borrowers (40 percent) have home equity or other junior liens.

"Big Banks Easing Terms on Loans Deemed as Risks" (New York Times)

As millions of Americans struggle in foreclosure with little hope of relief, big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked.

Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.

[Editor's (cynical) note: and they are doing this because they see housing bottoming, right?]

"No ‘Definitive Signs of Improvement’ in Housing" (Flathead Beacon)

A recent housing report by the University of Montana Bureau of Business and Economic Research comes to a sobering conclusion: “Three years into its real estate slump, Montana’s housing markets do not yet show definitive signs of improvement.”

The report includes all the familiar words Montanans have learned to accept as reality. Foreclosures. Declining prices. Debt. And the words may have to stay in our everyday vocabulary for a while longer.

“Even as the rest of the state economy swings to growth, the data clearly portray the 2010 as another year of adjustment and correction in Montana’s housing markets,” the report states.

But the report offers a “silver lining,” offering a word most people can appreciate, unless they’re trying to sell their homes: “affordability.” Even struggling markets have their upside.

Half Way There?

If reports like this are any guide [blue italics mine] --

"Sellers Wonder When Housing Market Will Hit Bottom" (News & Observer)

Although Donna Roberts' Cary house is for sale, she was not among the hundreds of Triangle homeowners who participated in a nationwide open house event over the weekend.

Instead, she used the weekend to scope out the competition, touring homes in her Lochmere neighborhood that are priced similarly to her own.

Roberts' house has been on the market since late March. Initially listed for $825,000, the house is now at $779,000 after two price reductions and just four showings.
Click here to find out more!

Fearing further discounts, the neighbors on her cul-de-sac are now upset at her for selling. "It's tough now," Roberts said. "But housing prices could go down even further.

"There's no good time to sell right now, unfortunately."

After years of assuming the housing market couldn't get any worse, a growing number of Triangle homeowners and agents are now resigned to the fact that no one seems to know when it will hit bottom.

Last week, a key national housing indicator, the Standard & Poor's/Case-Shiller index, showed that housing prices are now at the lowest level in nearly a decade. Such news has only heightened anxiety among homeowners everywhere about where the market is headed.

The Triangle isn't among the 20 areas included in the index, and it's generally considered to be one of the healthier markets in the country. But even here, the average price of a single-family home has dropped from $243,900 during the first quarter of 2008 to $229,000 during the same period this year, Triangle Multiple Listing Services data show. So far this year, total home sales in this region are near a decade low.

"It's a great time to buy, but it's a horrible time to sell," said Graham Smith, 39, who was touring homes Sunday in North Raleigh. "You're afraid of losing your shirt on your home."

Smith, along with his wife and two daughters, was looking at homes for his sister, who is relocating to Raleigh from Pennsylvania.

The Smiths, who own a home in North Raleigh, eventually want to move to a house with a larger yard. But they've watched nervously as the house next door has sat on the market since January drawing little interest.

"We'll ride it out for a while," he said. "We're scared." --

then...

...which means there's only five more years of pain to go!

(Of course, I could be wrong.)