Feast or Famine

It's famine time for most people in this country, but the bankers and financiers who feasted on fraud during the last decade are now feasting on the avalanche of corruption that has hit our system at the highest levels of Government (see MF Global and Solyndra, for example). 

I wanted to do a quick follow-up on yesterday's post with some more data.  First, based on NAR data - which we know is typically bloated with overstatement - the median home price in this country has hit a new 10-year low (median = half of all sales are above that level and half are below)  LINK  I have a feeling that the data is skewed by some of the very high end sales that have occurred in NYC and I would bet that the mean, or average, sales price is lower than the median since there has been a preponderance of distressed sales at levels which occur well below the median but are "poo poo'd" by the industry as "distressed one-time events" lol.

It's mainly been the low-end that has "pulled down" market values since the financial crisis hit in 2008.  But now, for several reasons, I believe that there will be a literal flood of mid to high-end foreclosure properties that will hit the market over the next 12-24 months which will literally crush home values to even lower levels.

To begin with, banks and Fannie Mae/Freddie Mac primarily foreclosed on the large base of lower end homes over the past 4 years, as it was easier to move the REO inventory into distressed buyer hands because typically financing is not required and those homes are more easily "flipped" or rented.    Moreover, we've seen big banks like Bank of America unload large blocs of distressed property onto the balance sheets of FNM/FRE.  And we know FNM/FRE are overloaded with REO inventory because now the Fed and Obama Admin are in the process of converting a large portion of that inventory into rental units.   That move in and of itself will place downward pressure on market values because the new flood of rental space will once again skew the economics of renting vs. buying toward renting, thereby forcing home prices lower - the 'ole "income and substitution" effect we learned in Intro to Economics.

But there's another phenomenon that's witheld a lot of high end foreclosures from happening.  Banks have been allowing people who have technically defaulted on jumbo mortgages to remain in their homes without making any mortgage payments for anywhere from 1 to 3 years.  There's a mathematical reason for this.  Most jumbo mortgage paper still sits in one form or another (outright mortgages or in the form of "put backs" written into securitization documents) on bank balance sheets (off-balance sheet when in the form of a "put-back," which requires the bank to back mortgages on properties below a specified loan-to-value ratio or are non-performing).  If a bank forecloses on a $250k home with a $200k mortgage that it can unload for $200k, the bank eats only $50k.  But if a bank has to foreclose on a $2 million mortgage on a home worth maybe $1.2 million (these are real life data points), the bank eats $800k.   That write-down is a direct hit to the banks tier 1 capital ratio, which is the equivalent of cyanide to a bank.  Moreover, it's significantly more difficult for a bank to move a high 6-figure or 7-figure home.   And the number of people who can actually afford to buy a home like that is shrinking.  It's this dynamic that has created a massive "shadow inventory" of high-end homes (remember the McMansion craze?) that do not show up in the inventory numbers yet:

A huge "shadow inventory" is building of elite homes that are in default but have not been put on the market...The backlog reflects the pent-up flood of foreclosed properties of all price ranges that are expected to hit the U.S. market this year, especially after five major banks reached a $25 billion settlement last week with the U.S. over fraudulent foreclosure practices  LINK

I'm sure everyone reading this knows at least one person living in what was originally a 7-figure home and who hasn't made mortgage payments for at least a year and hasn't been contacted by the bank about foreclosure or short-sale requirements.  But this is changing, as there is now pressure on the banks to start monetizing the big base of hopelessly delinquent jumbo mortgages.  Even though banks are reporting impressive GAAP/phony earnings, they are being squeezed for actual cash flow by low interest rates and lack of lending opportunities that make economic sense and terminally delinquent jumbo mortgages are a huge cash drain to the big banks.

What really irritates me about that this whole thing is when I have to listen financial advisers, idiots on CNBC and other various "experts" proclaim at every step-down in housing values that we've hit a bottom.  We've had zero interest rates in this country for quite some time and we keep hitting new record lows in mortgage rates.  And yet, the housing market continues to plummet further into the abyss.  The only purpose served by the intervention of the Fed and the Government in the housing market has been to keep banks from choking to death on bad mortgages and, even worse, to prevent the market from freely reaching a price point which will clear the massive imbalance between true supply and real demand.  By the time we see the housing market finally "clear," - and I don't expect it to happen in my lifetime - the language of choice in our school system will be Mandarin.