The U.S. Housing Market's Very Sobering News

The Mortgage Bankers Association came out with their Q1 report Friday and then updated their forecast. [I was going to piece this in, but it really needs to be read in its entirety. Any bold highlights are mine]:

WASHINGTON, D.C. (May 28, 2009) — Foreclosure actions were initiated on 1.37 percent of first mortgages during the first quarter of 2009, according to the Mortgage Bankers Association. This was a 29 basis point increase over the fourth quarter of 2008 and a 36 basis point increase from one year ago. Both the level of foreclosures started and the size of the quarter over quarter increase are record highs.

According the MBA’s National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties was 8.22 percent on a non-seasonally adjusted basis, down 41 basis points from 8.63 percent in the fourth quarter of 2008. Delinquency rates always decline in the first quarter of the year due to a variety of seasonal factors. After accounting for these factors, the seasonally adjusted delinquency rate was 9.12 percent of all loans outstanding as of the end of the first quarter of 2009, up 124 basis points from the fourth quarter of 2008, and up 277 basis points from one year ago.

The seasonally adjusted rate is the highest in the MBA’s records going back to 1972 and the unadjusted rate is the highest recorded in the first quarter of any year back to 1972.

This means now that on every quantifiable level, this housing bust is far worse than the most recent one in the early 1990s. Read more on that and its effect here.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the first quarter was 3.85 percent, an increase of 55 basis points from the fourth quarter of 2008 and up 138 basis points from one year ago. Both the foreclosure inventory percentage and the quarter to quarter increase are record highs.

The combined percentage of loans in foreclosure and at least one payment past due, meaning the percentage of mortgage holders not current on their mortgages, was 12.07 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

“The increase in the foreclosure number is sobering but not unexpected. The rate of foreclosure starts remained essentially flat for the last three quarters of 2008 and we suspected that the numbers were artificially low due to various state and local moratoria, the Fannie Mae and Freddie Mac halt on foreclosures, and various company-level moratoria,” said Jay Brinkmann, MBA’s chief economist. “Now that the guidelines of the administration’s loan modification programs are known, combined with the large number of vacant homes with past due mortgages, the pace of foreclosures has stepped up considerably.”

“In looking at these numbers, it is important to focus on what has changed as well what continue to be the key drivers of foreclosures. What has changed is the shifting of the problem somewhat away from the subprime and option ARM/Alt-A loans to the prime fixed-rate loans. The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures. In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans. More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults.

This means that the housing bust has cycled from a sub-prime to Alt-A to now an employment issue. Since we were already in the midst of the drop when the layoff began, those losing jobs had no way to sell their homes. Now even good borrowers with conforming loans are defaulting at a record rate.

“What has not changed, however, is the oversized impact of California, Florida, Arizona and Nevada in driving up the national numbers. Those states continue to account for about 46 percent of the foreclosure starts in the country, and represented 56 percent of the increase in foreclosure starts, including half of the increase in prime fixed-rate foreclosure starts.

“It is difficult to overstate the severe impact home price declines have had on mortgage performance in those four states. 10.6 percent of the mortgages in Florida are now somewhere in the process of foreclosure. In Nevada it is 7.8 percent, Arizona 5.6 percent and California 5.2 percent.

“In the first three months of this year, foreclosure actions were started on 3.4 percent of the mortgages in Nevada, 2.8 percent of the mortgages in Florida, 2.5 percent of the mortgages in Arizona and 2.2 percent of the loans in California. In comparison, the states with the highest foreclosure rates in the hard hit Midwest were Michigan and Illinois at 1.5 percent and Indiana and Ohio at 1.3 percent.

“While the national foreclosure start rate was 1.37 percent in the first quarter, in California, Florida, Nevada and Arizona it was 2.45 percent. Absent those four states, the national rate would have been 1.01 percent.

“Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve. MBA’s forecast, a view now shared by the Federal Reserve and others, is that the unemployment rate will not hit its peak until mid-2010. Since changes in mortgage performance lag changes in the level of employment, it is unlikely we will see much of an improvement until after that,” said Brinkmann.

Want more bad news? What could be worse? Well, we are actually in a trough for Alt-A and Option Arm resets as the following chart shows:

Simply put? It gets worse from here and here is already really bad...
So aside from the damage already done, rapidly rising mortgage rates and more folks losing their jobs, we have a wave of resets coming that dwarfs the first one that pushed housing off the cliff. Now, there is no way to know what percentage of those in 2010-11 set to reset have either a) already lost their job and will default before then, b) have already defaulted or c) have already converted into conforming loans.

But, we do know this, no matter how large the percentage of those set to reset that fit into a, b or c above, there is another serious body blow to the housing market waiting around the corner.

We also know that government programs designed to help have been abject failures as HOPE for Homeowners, designed to save 400k homes, has saved, ummm, 1 (that is 1...not a misprint). A Fannie Mae program, HomeSaver Advance [HSA] has seen 70% of the people it actually did help re-default. This isn't an issue we can govern our way out of, and to be honest, government meddling is making it worse. How many people held on to homes, wiping out savings in the HOPE a government program was going to bail them out? Only after it was too late did they find the program would not work for them and now not only were they losing their home, their saving was gone also.

It is the unintended consequence of government trying to artificially prop up a market.

The sad truth is this just has to play out and it will be a long and difficult process. Do not let anyone tell you any different...

Comments

[jgbooker:]

Sad, but true.

May 31 06:57 AM

[CautiousInv...:]

Thanks Todd for the sober reality of the housing market.

And as you correctly note, recently the greatest growth in foreclosure activity is in prime mortgages........a result of falling prices, reductions in credit lines and unemployment woes. And this surge could easily be exacerbated by the next wave of resets in Alt-A's and ARMS.

With housing supply standing at ten months and creeping up, most in the industry see no immediate relief and, as John Maudlin reported yesterday, "Fitch ratings estimated that up to 75 percent of the modifications now being done through the administration's Making Home Affordable program will re-default in six months to a year." This is a forecast for the new program, though the default rate is about the same as HOPE for homeowners.

My gut feeling is that the housing market will stabilize sometime in 2011, slightly beyond the horizon of the bank Stress Test, and in the meantime falling home prices and increased foreclosures will only further strain bank balance sheets saturated with legacy (toxic) securities and loans.

With respect to these troubles assets, the administration and Treasury are betting that banks can earn their way out of this mess by generating enough income to retain as capital to buffer future losses. I have a different view and believe legacy (toxic) assets will plague bank balance sheets for the forseeable future until decisive steps are taken. ( In my view, the PPIP's do not qualify as decisive action and are off to a very slow start)

May 31 07:24 AM

[Leftfield:]

I agree it will be a long, difficult process to work through innumerable problems in our economy. What's increasingly evident is that comparisons to this or that recession are falling by the wayside. To the big one, the Depression.
Clearly this is no recession. And the HOPE results of 1, one, ONE home saved (and that's with government statistics) illustrates the competence of our leaders. Or their priorities.
Do you feel better now that trillions have gone to saving the banks, courtesy of the remains of our national balance sheet? To DC pork? Vote early and vote often.

May 31 08:00 AM

[schnickelfritz:]

How do we reconcile the information in Mr. Sullivan's article with Jim Cramer's call that the on going housing catastrophe will bottom in just 30 more days?

May 31 09:08 AM

[Can'tSpotAB...:]

"How do we reconcile the information in Mr. Sullivan's article with Jim Cramer's call that the on going housing catastrophe will bottom in just 30 more days? "

You can't.... Cramer is an idiot.

May 31 10:49 AM

[Mad Hedge F...:]

Sobering indeed. That great sucking sound you hear is the air going out of the housing recovery- punctured by the collapse of the bond market and the spike in interest rates. Interest rates on 30 year fixed rate mortgages gapped up from 5.03% to 5.29% in just one day, up from the 4.50% low two months ago. This underlines what a difficult position the government is now in. While all the stimulus spending is great, the need for epic financing is triggering a collapse of the dollar and the bond market. The resulting soaring interest rates are bound to snuff out any recovery. Obama is truly caught between the Scylla and the Charybdis.

May 31 12:09 PM

[Old Trader:]

I recall hearing the info about the spike in foreclosures among prime borrowers on the radio, and yet the market continues to rally? Talk about a "disconnect"...

May 31 12:11 PM

[pitchingpen...:]

The sunshine pump is operating out there in high gear.

Happy hope......... delusions of the worst kind.

"If we make it through December, everything's gonna be alright, I know..." -Merle Haggard

May 31 04:37 PM

[ART DAVE:]

i think the housing market is in long term decline.
question is when will it reover? i have a rule. never say never. but this is an exception. i do believe the housing market will "NEVER" recover. my reasons are very fundaments abcs of economics:

1. in usa we have proped up housing market for last 40 years. the biggest subsidy (to the tune up 20-50% value) depending which decade you look at through tax breaks. i do not care what kind of comodity you have when you have this type of subsidy over this long period, the comodity will be in over supply. tell me which other assett class have been offer this large of subsidy for this long period of time?
2.not only the price of home was subsidized, but the cost of ownership was subsidized through the government guranttees to lenders who were giving money to buy homes. lenders were given government gurantee that if the borrowers defaulted, their funds were gurnateed irrespective of borrower's ability to pay. so, lenders all over the world considered the risk in these mortgages same as us treasury bill without paying proper attention to risk associated with loans due value and credit worthyness of borrower. in 1980 and 90s due to fall of russia, declining western europe economy, rise of china as a manufacturing giant, there was no other avenue left to invest all the world's wealth but in the world but usa tresaury and offcourse home mortgages (gurnateed by usa). in 2000s, these mortgages were colledraized, and same funds were lent over and over again through isnurance gurantees. homeoners will poor balance sheets, savings, took out money from homes like bank atm and refinancing same mortgages over and over again. again, huge subsidy for american home ownership as assett class.
3.TO FIND OUT WHEN WILL HOUSING MARKET STABALIZE? MY ECONOMICS IS VERY SIMPLE-2nd grade economics. AND I AM SURPRISED THAT NO ONE IS TALKING ABOUT THIS. CAPITAL JUST LIKE LABOR WILL HAVE TO FREELY FLOW TO HOUSING BEFORE HOUSING MARKET WILL RECOVER. IF IN INDIA AND CHINA PEOPLE ARE PAYING 9-11% INTEREST ON LOANS WHERE THE LOAN TO VALUE RATIO (LTV) IS 60%. SO, TWO THINGS HAVE TO OPEN BEFORE CAPITAL WILL MOVE FREELY TO US HOUSING MARKET WITHOUT US GOVT SUBSIDY. INTERST RATE HAVE TO BE 10% AND PEOPLE HAVE TO SAVE 40% (60% LTV) OF DOWN PAYMENT. AT 80% LTV, LOAN SHOULD BE MARKED AT CLOSE TO 18-25% (USING RISK SCENERIO USED SAME FROM MORTAGE INSURANCE INDUSTRY).
CURRENT HOMEOWNER STARAPPED FOR CASH WILL NEVER HAVE 40% DOWN PAYMENT AND ABILITY TO PAY AT 11% IS ALMOST NON EXISITANT AT THIS TIME. ALSO, RISK FACTOR FOR LOANS ARE VERY HIGH IN USA (SUCH OTHER DEBT, EMPLOYMENT MARKET AND DEMOGRAPHICS) COMPARE TO CHINA AND INDIA AND I AM SURE THAT LENDER WILL FIGURE IN HUGE RISK PRIMIUM FOR USA MARKET. I CAN CERTAINLY SAY THAT 10% EASILY CAN BE 14-15% WITH ONLY LOANS AVAILABLE WILL BE AT 60% LTV.
i know our political leaders will not want to admit to this and try to have temporary measures (such as governent buying back mortgages from borrowed or printed money and cash and further tax benifits) but eventually, we have to face up to the fact of all our wong doing for 40 years. these temprary measures only will delay and possibly make pain worse over long time.

these secenerio probabbly will not exist in our life time in usa. thus, answer is "NEVER" for housing recovery.

I AM SORRY TO HAVE THIS VIEW. NOT WHAT MOST PEOPLE OR I LIKE TO HEAR AND SPECIALLY FROM A REAL ESTATE DEVELPORE WHO MADE MONEY ALL LIFE IN REAL ESTATE DEVELOPMENT AND FINANCE.

May 31 08:06 PM

[billp37:]

The Second Crash – On the Way and Unstoppable

news.goldseek.com/Gold...

May 31 09:15 PM

[igggy:]

As I understand, Alt-A resets are not a huge danger at this point because they are likely to reset at a lower rate - unless they have been refinanced already. It's the Option ARMs that are the real issue since under those borrowers might have been paying very little towards their mortgage and will suddenly have to pay much more.

May 31 11:32 PM

[watmough:]

Outside of select markets, most US housing really only has utility value, and little potential for appreciation (contrasted with the UK where there is very little supply of decent/affordable new housing). With gas pricing normalizing back to $3+, and higher energy costs, large houses in distant suburbs in the US will continue to be a liability.

Potentially rising rates may also act as a deterrent for people considering floating rate mortgages.

Jun 01 02:57 AM

[OptimizedPrime:]

@ART DAVE -- Great analysis. I never looked at the issue from a cost-of-capital standpoint and never applied the rule of "subsidies create oversupply". Excellent use of solid economics.

I appreciate this coming from a real estate professional as well. I hear sooooo much bullshit from virtually all of the real estate people I hear from these days. Things like "great properties never go down", or "in the long run, real estate is always a great investment". This was always absolute bullshit even if it made perfect sense in the bubble years ("stocks always go up" made a lot of sense in 1997-1999 too).

The decades-long run-up in real estate prices has created thousands of misconceptions and outright lies in some cases. Everything was "ok" when nobody got hurt. Enron's lies were fine until people starting losing money.

These lies created an entire culture around the "infinite free money" that US real estate was supposed to provide.

We all have a duty to undo this culture as fast as we can so America can start a new chapter based on reality and not bullshit.


OP

Jun 01 02:57 AM

[Brent Forsland:]

I'm bearish on housing as well. However, I noticed this is the second article in which you have used the CS graph of upcoming resets. I urge you to take this graph with a grain of salt. This is a misleading graph. The majority of the Option Arms that will be reseting have already defaulted. These people had no equity in their homes to begin with. When there equity went negative most stopped paying. Bottom line is the wave of resets and presumably defaults that are to come have already happened to a large extent. The risk is already priced into the bonds and the write downs have already been taken. This is old news. Good old fashion supply and demand are the risk we face going forward

Jun 01 03:06 PM

[Radardoc:]

Can you tell me where the data came from to support the statement:

"The majority of the Option Arms that will be reseting have already defaulted."

I'd like to give it a look...


On Jun 01 03:06 PM Brent Forsland wrote:

> I'm bearish on housing as well. However, I noticed this is the second
> article in which you have used the CS graph of upcoming resets. I
> urge you to take this graph with a grain of salt. This is a misleading
> graph. The majority of the Option Arms that will be reseting have
> already defaulted. These people had no equity in their homes to begin
> with. When there equity went negative most stopped paying. Bottom
> line is the wave of resets and presumably defaults that are to come
> have already happened to a large extent. The risk is already priced
> into the bonds and the write downs have already been taken. This
> is old news. Good old fashion supply and demand are the risk we face
> going forward

Jun 01 06:05 PM