Housing: It's Going to Get a Lot Worse
Just in case you've been overcome with optimism lately, let me introduce you to my new favorite gloomy blog, Dr. Housing Bubble. The author(s) are based in Southern California -- which is fitting; this is the home, after all, to one of the most continuous rises in house prices anywhere -- and they're not giving out any good news.
They've been writing a lot about the "Shadow Inventory" of houses. That is, the number of houses at or near foreclosure, but not yet on the market. From the post "Shadow Inventory Armageddon:"
The biggest problem facing the housing market is still the large amount of stubborn shadow inventory. The fact that this figure remains elevated is a sign that the banking system after all these years and trillions of dollars in bailouts has yet to figure out a streamlined way to unload properties. The Federal Reserve is trying to grease the wheels with historically low mortgage rates but that has done very little since this does not address the weak economy. At the latest count there are 6.54 million loans that are either delinquent or in the foreclosure process. This figure hasn’t really moved much for the entire year. Properties have been sold from the REO (bank owned) pile but this is the tiny chunk of properties that is covered by the mainstream news and also that appear in public listing services. As we will show in charts later in this article, only examining this piece of the real estate pool is like seeing the tip of an iceberg and thinking there is nothing underneath it submerged in the water.
Uh oh. Worse:
To break down the figures even further you have 2.48 million loans that are less than 90 days delinquent (3 missed payments), 1.9 million loans that are 90+ days delinquent (more than 3 missed payments), and 2.16 million loans already in the foreclosure process. In total, this adds up to over 6.54 million loans in the distressed pipeline and this is what I would categorize as the shadow inventory. As the chart above highlights, only about 500,000 properties are actually real estate owned and show up for sale in local MLS data (and not all REO show up but a lot do). The cure rates are abysmal on many of the loans and many are underwater to levels that will never cure on these properties. In fact, the latest data shows that the typical foreclosure process timeline is now up to a stunning 599 days!
Okay, I don't know much about real estate, or home finance, but it looks like we're talking about a whole lot of houses that eventually are going to have to be sold. That's bad news for home builders; it's bad news for home sellers; it's bad news, really, for home buyers, because you never know if the bottom is going to drop out of the market.
And what everyone seems to be doing -- from the Fed to the banks to the Treasury -- is stalling for time. The strategy seems to be, let's kick the can a little farther down the road and hope for better news, economic growth, something.
Kicking the can down the road is usually a pretty sound strategy, actually. (It's certainly how I run my life, that's for sure.) But sometimes the right strategy is the most painful one. Sometimes you have to rip the Band-Aid right off.
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Aug '11
Re: Housing: It's Going to Get a Lot Worse
The market -- homebuilders and potential buyers -- is already aware that there is a large overhang of yet-to-be foreclosed houses. It may not get much worse because the overhang likely to be already factored into the prices.
Mar '11
Re: Housing: It's Going to Get a Lot Worse
And when the inevitable spike in interest rates occurs, that shadow inventory's going to hit the books, and then look out. I remember back in the '80's when the oil business was so bad you could buy a condo in Houston on your credit card. This is going to be worse, and nationwide.
Jun '10
Re: Housing: It's Going to Get a Lot Worse
Absolutely! There are manifold reasons buyers are staying out of the market, but the principal reason is that they anticipate a further softening of prices. If the shadow inventory is even close to being right in terms of the absolute numbers, buyers are right to be cautious. In attempting to cushion the slide government is actually impairing recovery by preventing the market from bottoming out.
The added and very real hazard that no one is talking about is inventory quality. Houses that go unoccupied for any length of time deteriorate drastically in terms of their state of repair. The worse of them will be vandalized to the point of total destruction. For banks holding large stocks of mortgages that are in default, the best option may be to let owners remain in homes to prevent this sort of radical deterioration, so the 599 days to process is no surprise, and may even be the mortgagors' best defense.
Jun '10
Re: Housing: It's Going to Get a Lot Worse
Tho point of frozen and inefficient real estate markets (the real estate market is inefficient in comparison to, say, the stock market) is that the overhang is not factored into the price of homes on offer. If it were so accounted for by some discount, houses would be trading. Again, the principle reason houses are not selling is a general anticipation that even the weak prices extant will not hold.
Jun '10
Re: Housing: It's Going to Get a Lot Worse
It is important remember that all real estate markets are local. You refer to a national malaise, Illiniguy, and you are right in that the national economy is in the doldrums, but certain markets will recover sooner than others. Indeed, some markets have not collapsed, and will likely maintain relatively constant prices. As for interest rates, they will not begin to recover until the demand for mortgage loans begins to grow. In other words until the dead cat that is the real estate market shows some bounce. The real fear from a macro perspective is that the market demand for housing changes over the interim, meaning the population ages and begins to demand smaller rather than larger homes. I would bet that this is happening right now.
Jun '11
Re: Housing: It's Going to Get a Lot Worse
Cas Balicki
The real fear from a macro perspective is that the market demand for housing changes over the interim, meaning the population ages and begins to demand smaller rather than larger homes. I would bet that this is happening right now. · Sep 20 at 10:15am
Even apart from the real estate market, how much of this ongoing economic downturn is rooted in the aging of the population? Sure, deficits matter. Sure, socialist administrations are significant but in the great wide scope of things, is this downturn, this massive disruption more directly tied to the demographic shift?
We get older. We eat one hamburger instead of two. The tuition is already paid. We move to save before we move to spend.
Apr '11
Re: Housing: It's Going to Get a Lot Worse
One factor that I think is important and often missed is rent values. Rents have risen to the point where it is becoming cheaper to own. This happened in the early to mid-90s and helped start the housing boom here in San Diego. People have to live somewhere and when it becomes cheaper to own, they will buy. I'm not saying this is the sign of a boom yet because of all of the houses that are underwater, etc, but it's the sign of a floor in housing prices in general. While they may go a bit lower, I don't see a whole lot of room left on the downside. Investors have already started buying up the distressed properties and renting them out. We'll just have to see how long it takes to clear out the mess. I think it's going to be awhile.
Re: Housing: It's Going to Get a Lot Worse
Kicking the can down the road is what politicians tend to do when they want to get re-elected. It is always economic foolishness, and it is political foolishness when the motivation is transparent. We are in for one helluva ride.
Mar '11
Re: Housing: It's Going to Get a Lot Worse
Cas Balicki
It is important remember that all real estate markets are local. You refer to a national malaise, Illiniguy, and you are right in that the national economy is in the doldrums, but certain markets will recover sooner than others. Indeed, some markets have not collapsed, and will likely maintain relatively constant prices. As for interest rates, they will not begin to recover until the demand for mortgage loans begins to grow. In other words until the dead cat that is the real estate market shows some bounce.
Those areas where the real estate market hasn't collapsed are places where the job market hasn't collapsed (i.e.: Washington DC, Texas). People living in California can't move because they can't sell their houses, thus putting the clamps on labor mobility.
A rebounding interest rate market won't respond because of a rising real estate market, it's going to respond to the increased rate the government is going to have to pay to peddle its debt. The only reason we haven't seen that happen yet is because of the flight of European money from an even lousier environment. That's not going to last.
May '10
Re: Housing: It's Going to Get a Lot Worse
In Houston, in 2007-2008, you could buy a 2000 SqFt home for $160k. Today, you can buy the same house there- for the same price. The places where the shadow overhang is killing the market are those places where housing inflation created the biggest bubbles. Diego is right- the rental market will stabilize the real estate sector, but rentals will probably also soften a bit in bubble cities first.
Right now, this is also tied, behind the scenes, to the European mess and the foreclosure signature lawsuit. There are a bunch of places that turned over in the last 5 years that simply don't have good paper for the titles, which means they can't be sold. And the big banks, who are tied up in Euros and fearing a massive drop in value, are still reluctant to write off any paper accounts receivable- the exact same problem as the 2008 mark-to-market issue- because of the negative effect on the balance sheet reserve stock to back up outstanding debt.
Until banks stop hoping to get another bailout, and have to write off clearly bad debt (painful to do), we will plod along with the current hangover.
Sep '10
Re: Housing: It's Going to Get a Lot Worse
The bailout was based on the idea that the government and Fed in coordination with international institutions could gradually de-lever a staggering amount of debt. Some of this debt was collateralized by US Housing. In late 2006 and early 2007 there was $75T dollar denominated debt in the world, four times more than a decade earlier, and most people were unconcerned. The housing problem if any would be easily contained we were told. The average junk bond rate had fallen to an all-time low of 7.2% and then panic set in. In 2009 the average junk bond rate hit 25.6% and dollar denominated debt was slowly falling. Today total dollar denominated debt has returned to the 75T. level and two weeks ago average junk bond rates hit an all-time low of 7.1%. This time there is an additional 7-10T. of Euro denominated debt that has been added to the mix. Gradual de-leveraging does not appear to be working. Guess what comes next?
Jun '10
Re: Housing: It's Going to Get a Lot Worse
For the most part I agree with the above. Capital is fungible, however, a healthy economy creates a huge demand for all forms of it. The Fed is currently maintaining an artificially low interest rate police which is a large part of the problem, as this low interest rate policy keeps capital out of the private market and pushes it into the government hands.
Edited on Sep 20, 2011 at 3:28pmDec '10
Re: Housing: It's Going to Get a Lot Worse
There is nothing at all wrong with kicking the can down the road, in this instance. We are upside down, due to an equity loan that doubled the house size as kid numbers doubled; appraisal values then plummeted Time should improve that situation as we continue to make a very modest payment, but we cannot put our place on the market.
It looks as if I will have to relocate for a better work opportunity. Perhaps I will have to rent, for awhile. However, as the market in the area I need to be in seems inflated, to me, I don't mind watching prices drop further before we buy. Time is on our side.
We don't mind paying for two places, if need be and the prices are right, if we can offer our existing place to a family member that will do the upkeep and help prepare the place we would be leaving to be more attractive on the market.
Can. Road. Foot. Some assembly required.
Jun '10
Re: Housing: It's Going to Get a Lot Worse
CJ What may be good advice for an individual is not necessarily good advice on a macro level.