Housing bust to resume

There are a number of reasons to worry about the current housing market. The housing affordability rate actually got worse last year despite collapsing home prices. Home mortgage obligations are still historically high.

However, the biggest concern is the massive overhang of 7 million houses of shadow inventory.

(Bloomberg) -- The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group LP analysts said.
The “huge shadow inventory,” reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005, the analysts led by Laurie Goodman wrote today in a report. Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales, they said.

It isn't just Amherts saying this. Insiders on both coasts are expecting it.

"There's going to be a flood [of bank-owned homes] listed for sale at some point," says John Burns, a real-estate consultant based in Irvine, Calif.
...
"We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running" for a loan modification or other alternatives, says a Bank of America Corp. spokeswoman. Foreclosure sales had dropped to "abnormally low" levels in response to government efforts to stem foreclosures, she adds.

We aren't talking about people in danger of falling behind on their mortgages and the banks waiting to pounce on them like vultures. We are talking about people who are at least three months behind on their mortgages and the banks haven't even started the foreclosure proceedings.
In some cases we are talking about people living in houses for a full year without paying their mortgages and the banks still haven't moved to foreclose on them.

As of July, mortgage companies hadn’t begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn’t yet acquired the property. The figures don’t include home-equity loans and other second mortgages.
Moreover, there were 217,000 loans in July where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier.”

The cure rate for mortgages like these are next to zero. These people will be foreclosed on. It's only a matter of time.

Adding to this foreclosure wave is the coming end to massive federal subsidies for the real estate market, and an intensifying credit crunch.
It's hard to see how the modest seasonal bump in housing will have any sustainable follow-through.

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Calculated Risk

who generally of all of the financial sites out there really has their analysis "on" the entire real estate market, had a post on housing sales, before this info on the shadow inventory, where they implied it was a major problem.

When this summer everyone had proclaimed "home prices have bottomed" CR was one of the few who said, hmmmm, I don't quite think so" and said it would resume falling in the fall.

Here we are.

CR has now put up a flurry a posts going into further analysis on this shadow inventory, crash and burn news.

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I especially like

the monthly, seasonal existing home sales chart that CR uses. While home sales have gone up for the last 6 months, it has really done little more than match traditional seasonal trends (with a slight bump higher from tax credits).

That's why it is amusing to read the headlines today about how home sales "unexpectedly dropped" last month. Seasonal trends dictated it. They will continue to drop for the rest of the year.

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But our financial system is relying heavily on re-inflating

this bubble. We will have to do what we should have done sooner 'nationalize', debt foregiveness, write downs and hair cuts.

Obama/Geithner's strategy depends on the bubble.

RebelCapitalist.com - Financial Information for the Rest of Us.

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won't hear me argue on this one

it's been an entire year, a year and they haven't done anything to restructure it.

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Housing prices as I see it.

I live in a pleasant side-by-side duplex on a treed street about three miles from the ocean in the Los Angeles area. This duplex was built for entry level renters or buyers in 1949. A young fellow who landed a job selling insurance and whose young wife had just become pregnant could easily get a mortgage and buy the duplex in the early nineteen fifties. His wife would not have to work and could spend her time raising their children. They would have a paid two week vacation a year and even health care would not be a tremendous burden. In fact that is the kind of person who first purchased the two bedroom one bathroom home where I now live. My neighbors tend to be professionals in the their mid thirties to fifties who rely on two incomes to just scrape by. For many of them a health catastrophe would bankrupt them. Many of them don't take vacations and, although I do, I have never had a paid vacation in my life. A healthcare catastrophe for my wife has just put us $50,000 in debt and now, I too, might be facing bankruptcy - and we have health care insurance.

My central point is that, whatever the direct causes of the housing market collapse, the underlying cause is that in real terms Americans are getting poorer. The discrepancy between what people earn and what it costs to put a roof over your head has been growing exponentially and now two people need to work often more than full time just to keep things going. The gap between real incomes and actual buying power and the cost of housing was bridged through granting unreasonable amounts of credit to people who just didn't make, and would never make, enough money to sustain their mortgages. And if there was a mortgage bubble it pales beside the credit card bubble that is about to burst.

This above most thinking people now probably understand. What is not so widely understood, however, is that the granting of credit shell game, was how the economy in general, and the housing market in particular, gave America's cowboy capitalism system its glowing reputation. That illusion of robustness has been shattered. But now the illusion projecting apparatus has has been transfered to the hands of apologists and spin-doctors who are creating a new myth. It is that the present economic disaster is the result of errors of oversight and uncontrolled greed. This is a kind of conspiracy theory that blames a certain type of CEO for the problem, rather than fundamental contradictions in capitalism.

Real incomes, however, fall for the vast majority of working people because those incomes are viewed as costs to the owners of businesses and capital. If means can be found to reduce the cost of labor and increase profits, whether it is by outsourcing to cheaper labor pools or just replacing backs and brains with technology, then that is what happens. It is what is happening. The contradiction that the owners of capital and businesses are colliding with is that someone has to have money to buy stuff and services, from bubblegum, to I-Pods, to homes - but you are lowering the real incomes of those someones.

In other words, as you become leaner and meaner in business you destroy your markets. This has largely already happened and the 'solution' had been to have workers borrow at a high cost their lost incomes so that they could buy those goods and services. And so bubbles are created. And bubbles burst. And bubbles become ever more subject to bursting as time wears on. But the bubbles mean that markets can be created to buy houses at absurdly elevated prices. Then the houses are turned into equity by the buyers, a form of credit, so that they can buy more stuff such as college educations and not just Beemers. As houses become one of very few means of manufacturing wealth, or the illusion there of, they become increasingly more desirable items. Thus they go up in price creating more equity. Until it all collapses.

It has to collapse doesn't it? It is collapsing here and it will in China and India. Now can someone please supply a solution to this problem?

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Welcome to EP!

Your personal story kind of sums up the demise of the U.S. middle class.

I personally don't believe it will suddenly collapse, although others do, I suspect looking at all of the indicators, we will just continue down this slide to 3rd world status.

But you're in the right place, this site focuses heavily on U.S. workers, U.S. middle class, income, economics for us in the peanut gallery, ya know, America.

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Financial Sector

Good post - Nowhere is the problem more evident than in the natural history of banking and credit at the retail level. Somehow, my (grown) severely mentally ill son got "pre-approved" for a $30,000 automobile loan AND a line of credit at a bank (since merged with Bank of America), despite no job, no income, and no assets. Equipped with the loan documents and a letter from his psychiatrist attesting to his illness and lack of competence in financial matters, I met with the bank manager as well as the automobile dealer -- they had no interest in taking back the car or reversing the loan. We attempted to return the car and they refused to take it. Even their regional management had no interest in undoing the deal. Well, my son drove a Camaro convertible for a year or so, and ran up $74,000 in credit card debt, despite never making a payment on any of it. His only solution was bankruptcy and leaving the car at the bank. This was 10 years ago, and I marveled at the inability of these bankers to grasp simple reality. They treated the whole affair as some sort of game. Reminds me of the "structured by cows" remark at a credit rating agency. It has been ingrained in our culture for some time, and we have seen the tragic and continuing results.
Frank T.

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Frank T.