Despite recent news that the rate of delinquencies appears to be slowing and predictions of a surge in existing home sales in the second quarter of 2010, some analysts believe that true recovery in the housing market will not be realized until the issue of bloated distressed inventory levels is resolved. Examining the market from a supply side perspective, it is clear that the number of loans in default is growing faster than lenders can fix. See the following article by Paul Jackson from HousingWire.
Last week, I wrote about REO volumes and showed how bank-owned real estate was back on the upswing after two quarters of limited inventory—and by the end of last week, so too had most of the financial press. Which is flattering.
This week, I’m going to build from last week’s column to take a more in-depth look at delinquency trending to help you get a feel for where the real estate market is headed next. (I can only hope the message is as widely followed by my journalistic colleagues this week, as well.)
Last week, using data from Lender Processing Services (LPS: 41.31 +0.41%), I highlighted the fact that there are some 7.5 million loans in some stage of delinquency, and noted that problem residential mortgage loans are growing—not shrinking. Take a peek at the below chart, which clearly shows that delinquency and foreclosure inventory is currently double the levels seen in the 1995-2005 decade.
While the pace of delinquencies seems to be slowing somewhat as of late—good news, indeed!—we still face a situation where loans are going bad faster than we can offer a “fix.”
Consider that 2.5 million loans, current at the start of 2009, had become 60+ days delinquent or in foreclosure by the end of January 2010, according to LPS. Compare that to the roughly 2 million loan modifications in process or processed in generally the same time frame—116,000 permanent HAMP mods + 830,000 trial HAMP mods + 1.0 million completed non-HAMP mods.
It’s simple math: 2.5 million is greater than 2.0 million.
And keep in mind that many of the loans modified now will inevitably re-default later, as most modifications bring with them substantial re-default rates—roughly 60% or so, according to most of the data I’ve seen (the Treasury does not report on HAMP re-default rates, by the way).
JP Morgan Chase & Co. (JPM: 44.58 +1.92%), for example, recently suggested to investors that it expects re-default rates on completed modifications to run 35 to 50 percent one year out, reaching as high as 65 percent 3 years out.
So let’s assume the redefault rate over time is untenably optimistic and stays at 35 percent (JPM’s lowest bound, just for the first year). Even in such a scenario, we’ve got a “fix” shortfall of 1.2 million loans on new defaults recorded during 2009 alone. Short sales will help cover some of this gap, absolutely—but as I’ve written before, I do not expect them to be the panacea that many are currently predicting.
Regardless, the point here is that there remains significant distressed housing inventory yet to be cleared off the books—and cleared off the books it must be, one way or another. Which means whether REO or short sale, these properties must eventually come on the market and be sold to somebody in order for there to be recovery.
With that as background, take in recent remarks by the National Association of Realtors’ chief economist Lawrence Yun, discussing January’s 7.6 percent monthly drop in pending home sales: “We will see weak near-term sales followed by a likely surge of existing-home sales in April, May and June,” Yun said in a recent press statement.
“The real question is what happens in the second half of the year. If there is sufficient job creation, housing can become self-sustaining with stable to modestly rising home prices because inventory has been trending downward.”
Because inventory has been trending downward. Read Yun’s quote again, and focus on that very last phrase. Given the numbers I threw out earlier in this column, we’d all better think about what millions of distressed sales will do to inventory, and prices too. We’d better start doing something that the NAR is famously horrible at: considering the supply side of the housing economics equation, rather than simply looking at ways to juice housing demand (read: generate commissions for dues paying NAR members).
And speaking of housing demand, I’m not sure how higher mortgage rates tied to the Fed’s exit from mortgage purchases coupled with a pending expiration of the homebuyer tax credit will translate into an expected “surge of existing-home sales in April, May and June,” as Yun asserts. Both changes to the mortgage market’s inner workings are scheduled to hit in April.
More impartial economists than Yun are watching April as a critical month for U.S. housing. Mark Fleming, chief economist at First American CoreLogic has said that “[t]he big unknown for the 2010 spring selling season continues to be the future of the federal homebuyer tax credit.”
I agree insofar as demand for homes goes, but my concern sits more squarely with the supply side of the housing equation—what, exactly, becomes of millions of units of already distressed residential housing?
To understand the depth of the problem here: we’ve already got 4.7 million loans either 90+ days delinquent or in foreclosure, according to LPS data. I could legitimately argue that at least 25% of that figure should already have been listed on the market as inventory to be sold via REO or short sale (after all, the average age of a loan in foreclosure is well over one year).
The NAR estimates that there are 2.8 million single-family existing homes available for sale, representing a 7.6 month supply at the annualized, seasonally-adjusted sales rate recorded in January 2010; add the 25% figure I describe to that, and we might in reality be closer to an single-family inventory figure of 4.0 million and 11 months supply.
Here’s the bottom line: any so-called recovery in housing right now is a faux recovery until we work through bloated distressed inventory levels. The sooner we get to work on this, the sooner we get ourselves a long-term and sustainable recovery in U.S. housing.
This article has been republished from HousingWire. You can also view this article at HousingWire, a mortgage and real estate news site.
It would be a good idea to research Caribbean real estate investment to offset the losses in other areas around the globe.
In my opinion, there needs to be some sort of stop gap relief for people in a distressed situation. These people do Not want to walk out on their mortgages. But they may be forced to do so. Unless the government or the lender can convey some sort of interim relief that reduces or eliminates the mortgage payments for several weeks or months, until these people can find work again. They want the American Dream. We all do. Contact your elected officials in Washington and talk with your lenders to expand the current discussions regarding interim mortgage debt relief, or we could be looking at a much larger financial tsunami for our country. Banks do not want to be in the real estate business. Let's use that position to help them understand that if they can just be a little more forgiving in the short term, that this could help avoid catastrophic losses later. http://www.HomeArchitects.com
What exactly counts as a "housing recovery"? Nationwide the average home is worth 30% less than it was in early 2007. Despite a small bump in demand driven entirely by government tax credits, we continue to have historically high inventories and low demand. If values were to stabilize, meaning prices stop falling and return to historic appreciation percentages which basically match the rate of inflation, it will take decades to recover the value lost. But, as you point out, the bleeding is far from over. With a new wave of foreclosures added to current inventories and with dismal employment opportunities it's unlikely we've hit bottom.
Making matters worse is the fact that the huge loss of equity for the middle class will have far reaching consequences for the economy in the longer term. They will have a harder time financing their kids college education, making business investments and planning for retirement. The "perfect storm" of bubble and bust in real estate markets that crashed the economy will have ongoing effects for at least a generation.
Government is on a path to solve these problems through inflation of the currency which may lead to an increase in home prices but the "recovery" will be a hollow one indeed.
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