The housing sector continues to improve, and big money is poised to benefit from the housing rebound. Still, there are problems in housing finance that help to hold back the strength of the recovery. And the problems impact both the consumer sector and the banking sector.
Right now, about one out of 600 households in the United States is in some stage of foreclosure. Florida has the highest foreclosure rate in the nation, with about one out of every 300 households in some stage of foreclosure.
Realty Trac, Inc. just announced that in November, financial institutions completed the foreclosure on 59,134 homes. That is up 5 percent from a year ago, and up about 11 percent from October. This is the first time since October 2010 that there has been an annual increase.
The number of homes in the United States that are in some stage of foreclosure… about 1 million. Still, about one out of every four homes has a market value that is less than the mortgage on the property.
The good news?
Financial institutions filed foreclosure-related notices on just over 180,000 properties in November. This was down by 19 percent from a year earlier and down 3 percent from October.
Foreclosure starts, that is, the amount of homes entering the foreclosure process of those properties scheduled, for the first time, for auction, was only at 77,494, down 28 percent from a year ago. This number was down by about 13 percent from October.
Homeowners with mortgages who were at least two months behind on their payments dropped in the third quarter to the lowest level experienced in the past three years. Home prices rose for the fourth month in a row. And the hiring of labor seems to be picking up.
However, this environment is damping the enthusiasm of homeowners to do much consumer purchasing. Under-employment remains high, and housing prices have not risen enough to create a very confident environment for people to spend.
Thus, although things are better for homeowners and the housing sector, the consumer sector, like most other sectors of the economy, remains stressed. As such, this is not a good environment for people to extend themselves to take on further debt and to buoy overall consumption spending.
This process is also impacting a lot of financial institutions. Banks and other financial organizations have not had to write down much of the loans they hold relating to mortgages. The reason for this is that these financial institutions expected to hold the mortgages to maturity and, since there was no market for these mortgages, the lenders did not know how to price such a write down.
Now that more and more foreclosures are being completed, and along with the mortgages that are being modified or subject to "short sales" (where banks allow a mortgagor to sale their property where the market value of the property is less than the mortgage and where the banks will take the loss), more and more banks are finally realizing the value of the assets they held on their books.
As this process works out, banks and other financial institutions are finally starting to realize just how bad of a condition that their balance sheets are in.
The banks were not lending before because they did not fully understand how bad off they were. Now, the banks are not lending because they have had to recognize the weaknesses on their balance sheets, and they are not really in any shape to do much lending.
Analysts are looking at the newly released numbers on foreclosures, and are expressing optimism that the housing market is getting stronger. The housing market is getting stronger, but it has a substantial way to go.
This, however, says nothing about the banking industry. Things are being worked out in the banking industry, but we are now going through a period in which the inability of the banks to mark assets to market are really hurting the recovery.
One reason why I like some form of mark-to-market accounting for financial institutions is that, when trouble arises and banks start to have to write down some of their assets, they change their behavior. That is, the start to constrain the lending practices that have resulted in assets that have to be marked down in value.
If they don't have to start to experience any "pain" because of the assets they have put on their books, they have a tendency to continue the very practices that got them into trouble in the first place.
One could say that by marking assets to market, this would constrain the economic expansion that was going on while the banks were engaged in these practices. Well, maybe these financial institutions really needed to slow down and reduce the exuberance at which the economy was expanding.
Others might argue that there is really no way to know what these assets should be valued at because the market, if one exists, in not very liquid and it is hard to know exactly what the "market" price of the asset is.
My reply is that there are ways to determine a "value," and bankers need to have some measure that they have to respond to in order to alter their behavior.
There is also the claim that these assets are going to be held to maturity, and so there is no need to mark them down. I would argue that even though the bank plans to hold the asset to maturity, there is no certainty that this will be the case. Even more important, bankers must experience some "pain" for the problems they have created on their balance sheets, which provides some incentive for them to stop doing what it is that is getting them into further trouble.
Given current practices, bankers can keep up unhealthy behavior long beyond the time that the problems occur. And, because of that, the problems experienced by the bank and by the industry go on for longer and are more "painful" than if they had been dealt with earlier.
The consequence is what we are seeing right now. The excessively easy lending practices turn into a major crisis that lasts a very long time, and tends to prohibit banks from getting back into the market as the economy starts to improve. They don't start lending again because the state of their balance sheets is weak enough to limit the ability of the bank to begin lending again.
The slow recovery will continue. Because of the state of the banking system and American households, the housing recovery and the economic recovery is going to take a long time. I believe that the attempts to "spur" this recovery along at a faster pace are going to be disappointed.