Wednesday, July 18, 2012

The Housing Market Black Hole

We have reached a profound point in economic history where the truth is unpalatable to the political class  -  and that truth is that the scale and magnitude of the problem is larger than their ability to respond - and it terrifies them...Bad things are going to happen.  - Hugh Hendry on CNBC
Once again we're going through another wash, rinse, repeat cycle with the housing market fairy tales.  People who bother to pay attention to the news woke up this morning to a report from the Commerce Dept that housing starts rose the highest level since 2008 in June LINK.  I'm not sure why that would be considered good news, since 2008 is when the bottom really fell out of the housing market.  The other anomaly that contradicts this Government-compiled data is that mortgage purchase applications continue to decline on a weekly basis.  Note:  the mortgage application data is compiled and released by a private, free enterprise organization so we can safely assume that the data report is infinitely more reliable than that of the Government's Commerce Department.

The other myth being propagated by the media and the economic wizards is that the housing inventory is declining.  In fact, this housing inventory has largely been converted to rentals.  In particular Fannie Mae and Freddie Mac have been unloading their foreclosed inventory into institutional investors using Taxpayer money to subsidize the transactions.  Interestingly and anecdotally, I was perusing the home rental listings in the Denver area for a friend who may be moving to Denver and I noticed that rents had decreased by about 10% from just 6 months ago, when I was looking for a new rental.  If in fact the total housing inventory, for sale + rentals, was declining then we would expect that rents would be stable or increasing.

So where's the black hole disconnect?  For one, the data is highly suspect, especially since mortgage purchase applications do not correlated with sales and starts.  To be sure, I'm sure home builders are taking advantage of near-zero interest rates and borrowing as much as they can to build.  But, as zerohedge crunched this morning's housing starts numbers, the number of homes actually completed is well below the run-rate of starts:  LINK.  A form of "channel stuffing" for home builders is to start a lot of homes but take a long time to complete them, since the stock market and investors only care about the headline "starts" data.

Even uglier, the "shadow" inventory of housing market is going to start rising rapidly this year.  The "shadow" inventory primarily is composed of homes in which the homeowner is in some form of delinquency or technical default.  These are homes where the lender/bank has opted to sit on the non-paying mortgage rather take on the ownership responsibilities of foreclosing, primarily real estate tax and HOA dues expenses.  If banks thought they could foreclose and sell quickly without incurring a big capital hit, they would.  But instead they let the homeowner live "rent free" but still on the hook for taxes and HOA dues.  This is especially true in the jumbo-mortgage segment (anything over $417k).  In fact, I know of several people who are sitting in high 6-digit and low 7-digit value homes who have not made mortgage payments for at least a year.

These delinquent/default mortgage homes are just part of the shadow inventory.  The other primary part is actual foreclosures.  We had a moratorium in foreclosures while the mortgage fraud litigation was being settled, of course on favorable terms for the banks.  FNM/FRE also delayed their foreclosure process while they unloaded substantial REO on the market.   So what is the data showing us?  From Bloomberg:
The shadow inventory of homes – those in foreclosure plus those 90 days late on mortgage payments – is on the rise again, a further indication that the supply side has not yet healed. According to RealtyTrac, foreclosure starts jumped 6 percent on a year ago basis in the second quarter, the first year-over-year increase since 2009. There are roughly 4.16 million homes that could begin to flow to market.
What's even more troubling is that the Government's FHA filled in the lending void created by the massive financial troubles at FNM/FRE.  In fact, over the past few years, the Government subsidization of the housing market shifted from FNM/FRE to the use of the FHA.  The FHA became the predominant source for mortgages and rolled out several no-down-payment/3.5% down payment programs.  And now, predictably FHA delinquencies are rising quickly, up a frightening 26% from last year:  LINK.   Why is this "frightening?"  One, because it means that the FHA will be forced to foreclose on a huge number of homes, further contributing to the housing market inventory;  and two, because the FHA is going to require a massive taxpayer bailout.

How can the housing market possibly be "stabilizing" and inventories be "returning to a healthy level" given all of this evidence to the contrary?   The housing market is one giant black hole of wasted resources and fraudulent representation of the numbers.  What's worse is that via the FHA, the Government has been using taxpayer money to subsidize a significant portion of the mortgages that have been used to purchase homes since 2008.  And now it's the FHA's turn to blow up.

It will be impossible for the housing market to ever bottom and stabilize until this country recovers economically.  This means real jobs are created which create real income growth and real employment growth.  Furthermore, the totality of the existing REAL inventory has to clear the market.  This requires demographic growth that our system can not possibly support until all the problems we know about are solved and put behind us.  THAT, my friends, will never happen in my lifetime or your's.


  1. If FHA truly mafe no deposit loans of any size, those in charge should be pilloried and professionally ruined. How could anyone commit the very same "hare-brained" mistake committed so spectacularly just a few years before?

  2. Thank you Dave for pointing out why the banks are slow to foreclose on their loans. I believe another reason banks are in no hurry to foreclose is because when the bank reposesses a property and tries to sell, the house would have to sell for a major loss or not get sold for months or years. Showing a loss on one foreclosed property is one thing, showing a loss on the vast majority of bank owned properties would wipe out profits and scare/anger bank shareholders/bondholders. By keeping the property in foreclosure limbo the loans look good on paper while in reality the banks would take a 30% -50% loss if the foreclosure went through. The more games the banks play today the fewer investors or savers there will be tomorrow.

  3. CNBC had an ex goldman trader report the housing market has turned up...but everything depends on rates...


    Retirees hit hard by foreclosures

    SAN FRANCISCO (MarketWatch) — Golden years? Not for an increasing number of older Americans who are losing their homes to foreclosure.

    One of the hardest hit groups: Those aged 75 and older, according to a report by AARP based on mortgage data from 2007 through 2011.

    All told, more than 1.5 million Americans aged 50 and older lost their homes in the five years from 2007 through 2011.

    While the percentage of foreclosures was higher among younger Americans, the rate for homeowners age 50 and older grew faster in recent years.

    And in that over-50 group, the 75+ crowd had the highest foreclosure rate in 2011, according to the AARP report, which cited data from CoreLogic, a provider of mortgage-loan data, and other sources.

    Among homeowners age 75 and older, 3.2% lost their house to foreclosure in 2011, up from the 0.33% in that age group who faced foreclosure in 2007.

    zirp strikes again.....

  4. This isn't about housing.

    Would MFG, PFGbest and the Grain traders defaulting on their obligations have anything in common? CNBC news about grain traders defaulting due to rise in prices!!!!

    So those that hedged themselves by buying before this rise for their businesses - have lost out. So is it beneficial to try.

    This is just the example that a bankcrupt entity cannot honor its trades, if you haven't the physical!!!!

  5. michael schumacherThursday, 19 July, 2012

    your last sentence sums it all up very nicely. To JMR777: All of the bank activity to discourage taking action on a foreclosure has to do with the bank filing an NOD (and not a default notice) it's about putting off the eventual loss which is recognized with the NOD.

    1. Thanks for pointing that out. I learn so much from this site from Dave and followers of his. Thanks.

  6. A Call For An International Real Investors Spring

    This is a call to litigation and high tech communication arms. This is a call for a communication revolution of 2012 with the same commitment that existed in 1775. This is a call for an explosion in litigation against those that destroy for profit using dastardly means.

    The ends do not justify the means in the investment world even though it is the mantra of the devils that hide as financial and corporate personalities. Unless our markets are cleaned up of criminals there can be no sustained economic recovery. As long as the uptick rule is not enforced the Western world economic system is in the control of demons.

    This revolution is not armed but it should be violent in its constant complaint and litigation of every organization, writer, paper, and personality that is stealing from us. Do no let up.

    It is time for a Real Investors Spring.

    Stop bitching and being cowards. I intend to fight via law, communication and any other legal means I can conceive of until I drive anyone who has screwed me and mine nuts.

    Stop bitching and get active wherever you are being screwed in your area of business. We are a legion and you all have computers. Use them.

    The letters you wrote at my request are having PROFOUND impact. The perpetrators are scared because they we very sloppy in their transgressions against us. We are in a financial system in which almost everything is organized crime. All that you need to do to enforce this disease is to do nothing.

    I refuse and will not yield until it is eliminated from my space and the space of my responsibility.

    What are you going to do?

  7. Matt Taibbi: Libor Rate-Fixing Scandal “Biggest Insider Trading You Could Ever Imagine”

    Rolling Stone’s Matt Taibbi: the pattern of systemic corruption by 16 banks accused of rigging a key global interest rate used in contracts worth trillions of dollars. The London Interbank Offered Rate, known as Libor, is the average interest rate at which banks can borrow from each other. “Ordinary people actually suffered when Libor was manipulated downward, mainly because local governments, municipal governments tended to lose money,” Taibbi says. “Even the tiniest manipulation downward, when you’re talking about a thing of this scale, would result in tens of trillions of dollars of losses. … The banks weren’t doing this just to make themselves look healthier, they were also doing this just to make money. They were trading against this information in what essentially was the biggest kind of insider trading you could possibly imagine.” Taibbi is author of the book “Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History.”