Housing Is Moving Towards Disaster

It may seem to lack self-consistency, but foreclosures and pending sales both increased in the third quarter. In the face of this seemingly conflicted data, the Mortgage Bankers Association has come out with an optimistic forecast of significantly higher home sales quantities for 2010. All of these numbers do come together to paint a consistent picture. The only problem is that the picture is one of possible devastation.

Foreclosures

RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report™ for Q3 2009. The third quarter had an increase in foreclosure filings of 5% over the second quarter (and 19% over the third quarter of 2008) to a total of 937,840. According to RealtyTrac, foreclosure filings include default notices, scheduled auctions and bank repossessions. Read the RealtyTrac press release here.

For those who like straws to grasp at, the September foreclosure filings were down 4% from the August number. July and August are the two months with the largest number of foreclosure filings on record.

For those who want to question whether RealtyTrac can count straight, consider this. They report that the September foreclosure number of 343,638 was less than the other two months of the quarter. Multiply 3 x 343,638 and you get a total of 1,030,614. If July and August were both larger than September, then the quarter would have totaled more than 1,030,614 foreclosures, yet they reported almost 100,000 less. We assume that these folks can count better than that and there is a typo somewhere in the press release.

Bank repossessions, or REO actions, increased by 21% from the second quarter to the third quarter. REO is the acronym for Real Estate Owned. There is a big backlog of pending REO actions and the jump in the third quarter may indicate that banks are starting to work into that backlog.

California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62 percent of the nation’s total foreclosure activity in the third quarter, with Nevada having the highest rate, followed by Arizona and California. One in 23 housing units in Nevada received a foreclosure filing in the third quarter.

Only six states had less than one foreclosure filing per thousand housing units. The lowest rate was in Vermont (1 in 5,023), followed by North Dakota (1 in 2,724) and West Virginia (1 in 1,549). The other three states were Montana, Wyoming and Nebraska.

The high numbers of foreclosures may create serious problem for home sales inventories, which have been shrinking for several months. The existing home sales plus the new home sales for the most recent months has been averaging around 525,000. The data just announced shows nearly 350,000 foreclosure actions per month. That leaves only about 175,000 sales left for new and non-foreclosure existing homes. Since foreclosed home sales have been reported to be running in the range of 30-40% of all sales, the implication is that, as many of these foreclosures move into REO status they will be added to inventory and not sold.

Pending Sales

The NAR (National Association of Realtors) has reported the seventh consecutive month of increased pending home sales. This is the longest streak in the eight year history of the index. The index level for September is just below the level recorded in March 2007.

Not all pending sales are actually closing within expected time frames, according to Lawrence Yun, Chief Economist for the NAR. “The rise in pending home sales shows buyers are returning to the market and signing contracts, but deals are not necessarily closing because of long delays related to short sales, and issues regarding complex new appraisal rules,” he said

Plain speak? Issues regarding appraisal rules can be translated into failures to get mortgage financing. If that is the case, many such pending sales will never close. Anecdotally, I have been advised by one real estate speculator that they have signed seven contracts this year and all have been abandoned without closing.

In a previous article (here), it was reported that in 2008, nearly 1/3 of all mortgage applications were denied. It is likely that number would be the same or larger in 2009.

The NAR reveals only a pending sale index, so a direct comparison of the number of pending sales to the number of closings is not possible.

Increased Sales Numbers Predicted for 2010

Jay Brinkman, Chief Economist fro the Mortgage Bankers Association, speaking at the organization's annual meeting, had some bold predictions this week (here). He said that sales of existing homes will increase 11% in number in 2010 over 2009 and new homes will see an increase of 21%.

Hope springs eternal. But even if hope is fulfilled, these increases in numbers of sales over current levels will be between 55,000 and 60,000 units per month. Add this to the current total around 525,000 and you have 585,000 sales per month tops in 2010. Using the current foreclosure rate around 350,000 per month, the foreclosure rate is still well above 50% of the sales rate. These numbers imply (1) a sales rate for homes not being sold out of foreclosure of only 235,000 per month or (2) a some of the foreclosed homes will add to the unsold inventory. This will not make for a recovery in residential real estate in 2010, and home builders in many areas may not survive another year at these levels.

Summary

This discussion hasn't even addressed the possibility that the foreclosure rate may increase as we go forward. It is possible that foreclosure rates could keep climbing for another year, as some have predicted, or even longer. What happens if the foreclosure rate approaches the sales rate? What happens if foreclosures outnumber sales? I'm glad I don't plan to move soon.

What could happen to avoid this disaster? Here is a list:

1. Employment picks up significantly over the next 6-9 months, starting now.
2. The estimates for 2010 sales increases are way too conservative (like by a factor of 3 or 4).
3. The numbers of foreclosures start declining significantly starting with the current quarter (fourth quarter).

Actually, the list is cumulative. All of these things would have to happen or the housing market will be dismal.

Comments

[j-dub:]

So, despite the 473 articles declaring the bottom of housing that an SA reader has the opportunity to glance at.......................
a different opinion emerges which throws reality into the equation.

How rogue!!!!

Oct 16 07:23 AM

[Leftfield:]

CRE and alt A defaults have been well advertised and are set to commence. I believe prime mortgages are now 58% of foreclosures, not well advertised.
Our policymakers seem to have been convinced by argument and sweet deals that blowing our wad on Wall St. would restart the bubble economy. Part of this must be hope that stock market manipulation would prime the pump. Or, just give insiders a chance to cash out in record numbers in a huge taxpayer-financed pump and dump.
Juxtaposed with canceling COLA for the political "third rail," SS tells me policymakers and Wall St. feel safely above the law and voter ire. Policies appear unlikely to work but extend and pretend gives more time; perhaps that's the idea.

Oct 16 07:32 AM

[Moon Kil Woong:]

We can look at the options. If Obama approves an extension to the buyers tax deduction we stay in the samer miserable condition but make the US even more broke threatening inflation and further declines in the dollar and higher mortgage rates. If he also approves using TARP to give people free holidays for not paying there will be a great incentive for even more defaults and the government will go even more broke but forclosures may be delayed for yet another year which is prolonging the pain and making us even more open to a W recession.

If he does nothing the housing market collapses as John points out and we get to face the grim realities. However, after the bottom we can look forward to eventually digging ourselfves out of this mess which is much better than digging an even deeper grave. If we dig too deep we won't be able to claw our way back out unless we becomes economic zombies too like the too big to fail banks. Except there will be no bailouts for us.

Oct 16 08:25 AM

[Michael Clark:]

Let's face reality, Moon. Let's be courageous and face reality, and start facing the task of rebuilding our empire from the inside out. These fancy lies only make us more top-heavy, and raise the danger of a calamitous collapse.

Oct 16 08:58 AM

[Zmartmoney:]

Pending sales is a very misleading number - record numbers of pendings fall out due to financing issues. Lots of deals don't go to closing. One big problem is largely unnoticed - the whole appraisal reform has grossly damaged something that actually did work. It's funny how if, in Washington, you use the word "comprehensive" or "reform" that whatever you do must be a great thing for everyone. Almost without fail the opposite is true.

Oct 16 08:59 AM

[Bill S. Friend:]

The housing affordability factor is still high. Applicants must have 20% down, and a 34%+/- debt to income ratio. This includes taxes and insurance. Floridas insurance industry just got a 10% hike per year for the next three years on homeowners insurance namely wind damage coverage. Many areas of Florida require flood insurance,and FEMA has been ratcheting up requirements. The plight of Florida is relevant to the rest of the country in that there are so many second homes. The finances of these owners have been damaged by the 50%+ fall in re prices, who hail from all parts of the country, as well as recent transplants who are packing up and leaving. The infection of foreclosures in FL alone could spread. Many homeowners are like deer in the headlights awaiting the recvery not wanting to move, knowing they are ruined unless the bubble reinflates. These reinflation tactics (instituted by our government) run contrary to long held advocates of increased rates of homeownership.

Oct 16 09:14 AM

[lower98th:]

"How many contracts does it take to get one house closed?" Several, from my experience.

Here appraisers routinely deduct 12% from the comp price (already 50%+ down from peak) to accommodate possible future market losses. And (not just investor) buyers wallpaper multiple offers in order to secure one that will be acknowledged by the bank, pass an inspection, or qualify for financing. The buyers do this because most bank sellers will consecutively reduce the (teaser) price until they get several competing offers before responding to any, then institute some bizarre "multiple offer procedure," and then might or might not take an offer, and might not even contact the chosen potential buyer (a few weeks later, who has now moved on) before taking the contract pending.

Note to Banks: Your Florida inventory will sell-out at the tested price-point of $60ish% off peak. You can add any further tax bailouts to that price, and you might get some offshore the-dollar-is-confetti kickers (is that why you are stalling?), so say 50% off peak. Locally, there is not a lot of price elasticity due to:

1. financing constraints,
2. rent competition
3. the economy (did you see that FL is losing population?)
4. production builders still-standing, building out the (same) stalled developments at just above that discount.

So I kind of doubt the gains from inventory-withholding will be worth the lost time and deterioration factors.

Just let us know when you are ready to get on with it.

Oct 16 09:15 AM

[John Lounsbury:]

I neglected to provide a link in the article to another article earlier this week reviewing the unrealistic expectations of home buyers this summer. A surrvey of home buyers found that more than half expected value gains for their purchases in the summer of 2009 to be greater that the gains seen in the housing bubble. The link is www.thestreet.com/stor...

Oct 16 10:22 AM

[Ming:]

Forclosure process includes 3 steps namely, NOD, NTS and finally REO. Every property has to go thru all these steps SEQUENTIALLY. What RealTrac reported is the summation of all 3 steps. The really monthly rate is bout 130,000.

Oct 16 11:22 AM

[optionsgirl:]

John- If the first time buyer's credit is extended and increased from $8000 to $15000, do you think that will lend some support to the current prices of homes under $200K? ( or whatever level is generally considered the range most first time buyers purchase in.) If that extension/increase in governmental inducements lends some support to the least expensive inventory, how would that impact higher priced inventory?

Oct 16 11:25 AM

[mkttrdr:]

Thanks John.
2010 will be another big year for more of the same...Foreclosures, REO's , short sales and BPO's. That's good for my businesses, but bad news for Americans. No one seems to know the market or its price and when the bottom hits. 2015 is my target; 2 years of current inventory, more coming(banks have been holding back), owners and economy struggling, government intervention and a 17% real unemployment take time to turn around.

Are we, the taxpayers.... buying the garbage loans on the books; where are those bank loses? That too is coming. Plus, the credits to 1st time homeowners who have no idea of the ownership responsibilities, makes me believe that 15% of those will be delinquent. Half of that will be future foreclosures and short sales.

Ah, the Kids are in school now, so most of the buying is in for 2009...and a long winter is around the corner. Hey, we are getting older too; so some of us (myself included )wonder, are the 2nd homes (3rds etc) worth the holding costs? And you thought that having your mortgage paid off was a good idea! Good luck getting the equity line or a cash out refi. Expect more of the same for years to come.

Oct 16 11:37 AM

[tripleblack:]

This fine article triggers all sorts of thoughts...

I would say that the pending financial system reform may be able to pry the drowning man's fingers (banks clinging to the insanely unaffordable deals they sold millions of sub-prime and even prime mortgagees) from the anvil carrying them straight to the bottom of the financial black hole. This is such an awkward thought for me (hoping for logical and effective government reform) that my head may just explode...

Oct 16 11:38 AM

[retfldoc:]

When the Fed stops buying MBS and the FHA finally admits that it is supporting lending to unqualified buyers, the whole charade ends badly. How long can the government prop things up? If it goes on too long the gover

nment collapses under the weight of its own debt; an even worse outcome than letting housing collapse.

Oct 16 12:05 PM

[inthemoney:]

> One big problem is largely unnoticed - the whole appraisal reform has grossly damaged something that actually did work.

Are you serious? I am, fo one, very glad of appraisals coming back to reality. I am sick and tired of paying property taxes every year , increase 10% every year (the cap) because of inflated appraisals. I didn't plan for 10% yoy increase when I bought the house.

Extending the tax credit for the poorest segment of borrowers is also a bad idea. These are poeple who are already overextended with prior debts, falling wages, cash for clunckers, and now we are pushing them into home ownership. They probably just foreclosed on a house they bought in boom years. they are not in a position to buy new one, tax credit or not.

Oct 16 12:38 PM

[HaleJoseph:]

Ming:

The foreclosure process does include all 3 steps NOD, NTS and finally REO... but your data point correction is weak, because you fail to consider the current cumulative cure rate of less than 6% of NOD.

Oct 16 02:29 PM

[John Lounsbury:]

OG - - -

Yes. Extending the first time home buyer's tax credit will cushion the low end of the housing market. I don't have a reliable number but I would estimate that the potential for first time home buyers would be some fraction of the annual new household formation rate, which is in the range of 1.2 to 1.4 million. If it is 50%, the potential market is 600,000 to 700,000 per year.

I believe less than half (somebody got the exact number?) of current home sales are first timers. If it is 1/3, then 175,000 (1/3 of 525,000) is less than 30% of the potential market. There is a lot of room to work into that other 70% of potential, even if employment does not recover quickly.

However, if you integrate housing demand over 10 years or more, any gains in housing now through government support will just be selling forward against future demand. The tax credits may cushion the bottom of the housing collapse, but at the expense of weaker markets several years ahead. Unless our population growth changes, the area under the curve will not change that much.

Of course, some lessening demand for housing will come from aging demographics.

The tax credit situation has much less impact on the higher priced homes, especially above the area of $350,000 to $400,000. There are few first time home buyers at half a million. Downward pressure on high priced homes will continue longer than for the low end. This means that median prices may reach a bottom a long time before the average price does. Right now, average prices are much higher than median prices compared to historical differences, but have started to come down.


On Oct 16 11:25 AM optionsgirl wrote:

> John- If the first time buyer's credit is extended and increased
> from $8000 to $15000, do you think that will lend some support to
> the current prices of homes under $200K? ( or whatever level is generally
> considered the range most first time buyers purchase in.) If that
> extension/increase in governmental inducements lends some support
> to the least expensive inventory, how would that impact higher priced
> inventory?

Oct 16 02:56 PM

[notsosmart:]

the only real answer to all this is good jobs with good wages.not going to happen.the bs job creation of the go go years is over.those businesses that will survive the 1st quarter of '10 will remain lean for a long time to come.some laid offs will never work again.this country is declining & those who dont plan on that will be in big trouble.pay off all you can & dont borrow.

Oct 16 05:03 PM

[John Lounsbury:]

Ming - - -

You are correct about the summation creating double counting. However, the effect is not the simple relationship you suggested.

In the the third quarter there were approximately 230,000 repos. Presumably most of these entered the inventory or were included in the approximately 1.5 million homes sold in the quarter. There were nearly 700,000 homes with pre-repo foreclosure filings. As HaleJoseph mentioned, there is about a 6% workout rate for NODs, so that puts something in excess of 600,000 into the shadow inventory awaiting almost certain future repo. These adjustments still puts the foreclosure inventory increase well above 50% of the current sales levels.

Your suggestion of a net effect of 130,000 is simply not correct.

Oct 16 07:33 PM

[Nuwanda:]

The only way to permanently sort out the housing mess is to eliminate the tax deduction for mortgage interest altogether. Amazing that average people don't realize how much this deduction "inflates" the normal price of housing. It was bad enough the Feds gave in to the bankers once for a mortgage interest deduction on a primary residence, but now we're reeling from the fall-out of another Fed giveaway to the bankers when they changed the tax code to permit another mortgage interest deduction for vacation homes.

Oct 16 11:31 PM

[John Lounsbury:]

New news today. McGraw-Hill released a projection that new home construction could increase by 30% next year if mortgage interest rates remain low and the first time home buyers tax credit is extended. Read about it at www.realtor.org/RMODai...
Before you get too excited, based on the average rate so far in 2009, that would be an increase of about 11,000 new homes per month for the entire country.

Oct 16 11:38 PM

[optionsgirl:]

Removing the housing deduction on mortgages would be political suicide for congress. It isn't going to happen so long as we have the present income tax system. Phasing it out as you
get to higher incomes might work though, an opportunity to "stick it to the wealthy" once again.

On Oct 16 11:31 PM Nuwanda wrote:

> The only way to permanently sort out the housing mess is to eliminate
> the tax deduction for mortgage interest altogether. Amazing that
> average people don't realize how much this deduction "inflates" the
> normal price of housing. It was bad enough the Feds gave in to the
> bankers once for a mortgage interest deduction on a primary residence,
> but now we're reeling from the fall-out of another Fed giveaway to
> the bankers when they changed the tax code to permit another mortgage
> interest deduction for vacation homes.

Oct 17 05:41 AM

[rm:]

[We assume that these folks can count better than that and there is a typo somewhere in the press release.]

Don't assume anything. Insiders know that their "information" is often faulty and outdated.

[Employment picks up significantly over the next 6-9 months, starting now.]

Not gonna happen. 80% of big co. CEO's have no plans to hire in the next 6-12 months. And even small business owners in thriving industries are hesitant to add employees due to the unpredictability, insanity and incompetence of this administration, not to mention the preferential treatment given to big biz by this administration.

Oh yeah, I forgot to mention the specter of health insurance "surcharges" and increased costs due to cap and trade.

Oct 17 12:14 PM

[BuyABizInFl...:]

Don't forget the new "factor" Chinese Wall Board. It is considered a "Builder Defect". Poor dumb homeowner or investor forgot the main reason for buying a home and it is not to flip it for quick profit to the next sap. I guess his generation never played musical chairs. Now it seems everyone is left standing. We experienced sick buildings in FL, now we have sick homes. How many '00s or '000s of homes not being foreclosed on yet, will owners walk away from because they are literally toxic? Let us not forget the "insurance" factor here in Florida either. Price of homes transends even traditional ratios, when you factor in these other constraints. You can afford the house (under new FHA criteria) but can you get / afford homeowner's insurance. If you lose your current HO insurance, you are now in default under the terms of you mortgage.


On Oct 16 09:15 AM lower98th wrote:

> there is not a lot of price elasticity due to:
>
> 1. financing constraints,
> 2. rent competition
> 3. the economy (did you see that FL is losing population?)
> 4. production builders still-standing, building out the (same) stalled
> developments at just above that discount.
>
> So I kind of doubt the gains from inventory-withholding will be worth
> the lost time and deterioration factors.
>
> Just let us know when you are ready to get on with it.

Oct 18 12:06 PM

[johnnybigsp...:]

if the .gov has their way, the 'dumb money' (ie. people who we are calling dumb for buying a house in 2009 ) will be rewarded, while those with cash reserves and prudent planning will be penalized... the .gov's policy of bailouts (to relieve the short term pain to some extent) will eventually (relentlessly) lead to inflation... I'm afraid they won't stop until we hit a couple years of double digit inflation.... all that debt magically disappears and TA DA! their taxpayers all all wealthy again! I love this game! (now go and be a good taxpayer and buy a house!)

Oct 19 12:15 AM

[sleepless_o...:]

JL, thanks for a good article and adding to the comment stream discussion. I thought the comments on this article were excellent and brought out a lot of additional details.

Oct 19 12:18 AM