Delinquent Mortgages Equal to Three Times the Balanced For-Sale Inventory

A Flood Will Humble Thee

Eight million homes with delinquent mortgages represent a staggering 300% of the normal supply of existing homes for sale. With 3.63 million units now on the market, one million above the long-term average, an inundation of foreclosures represents a fatal death blow capable of inflicting brutal damage on the largest financial market in the world.

The inventory of existing homes is now over supplied by one million units – an excess almost identical to two months of sales. The delinquent mortgage accounts represent an additional 17 months of sales.

If all mortgage delinquencies and current units for sale are combined, they represent 24 months of average sales. A rule of thumb says six months of supply is a balanced number of units “for sale”.

The current oversupply represents approximately 35% of the normal inventory. Add in the delinquent mortgages, and the inventory equals more than 400% of the average inventory. That would be a power-crash creator.

Given the huge intrusion which new foreclosures represent, only the most risk-hungry cash-fat and street-smart investors should be considering a purchase at this time.

Get Thee To A Nunnery

Any ordinary person thinking about buying or renting today should choose renting. There is no question about it. The element of risk created by delinquent mortgages and negative equity represents profound risk. Joe and Jane Homebuyer are not meant to buy into a market laced with profound risk.

The hard facts show a total of 3.63 million existing homes are currently “for sale” according to the National Association of Realtors. The long-run inventory average is 2.66 million. With average monthly sales of 482,000 units in the last ten years, the excess supply of 970,000 units is equal to two months of sales. This in itself is not frightening or insurmountable.

Prices of existing homes have stabilized according to major indexes including Case-Shiller. Many hope we have hit bottom in the massive price crash which has destroyed 30 percent of home prices since June 2006. Has a new floor been established and it is safe to go swimming again?

The recent numbers and their good trends cannot anticipate the factor which scares the daylights out of any breathing analyst -- the wild bubble blowing up in delinquent mortgage accounts.

"Can You Tell Me, Where Is the Point of No Return? How Do I Know I Am There?"

Foreclosure is a toxic substance for property values. The Mortgage Bankers Association reports that 14.41% of all mortgage accounts are delinquent. It’s a record. The record delinquencies represent approximately 8 million borrowers -- based upon the assumption of a total pool of homes with mortgages equal to 56 million homes.

Given the cure rate for past-due mortgages has decreased to near zero in the land of milk and negative equity, if you add in the 8 million delinquent accounts to the current existing-homes-for-sale pool of 3.6 million units, you now have a total supply for sale of almost 12 million. The long-run average inventory of “for sale” existing units is 2.6 million.

You take what you want from the comparison of 12 million units “for sale” and 2.6 million as the target inventory. The first is abnormal. The second is normal.

I make no predictions of Armageddon. I don’t mind making basic calculations and letting those numbers define my best guess. If foreclosures appear in the great numbers described as possible here, one would expect prices will fall forever or they will fall quickly to zero. It’s not promising.

Only a berserk fool is buying real estate today. Only a criminal is recommending to someone else that they buy a home.

***

Please check my math and send corrections:

Comments

[Bruce Krasting]

I think you forgot to include the REO owned by either Fannie,Freddie,FHA or FHLB.

2009 Nov 20 08:03 AM

[swissfrank]

Many thanks for the detailed analysis. How many years will it take cleanse big bank balance sheets of this garbage? Working through the inventory and returning to mark to market valuations on the housing loan book seem remote prospects right now. Particularly as Bernanke is doing everything he can to help banks conceal their debt rather than deal with it.

2009 Nov 20 09:25 AM

[Smalltownbanker]

Common sense tells me that a high percentage of those homes listed for sale have delinquent mortgages. There is also consideration that a percentage of mortgages are always delinquent but do not always end in default. There lots of assumptions in that chart and it results in figures that look much worse than reality.

2009 Nov 20 09:39 AM

[Radardoc]

"Only a berserk fool is buying real estate today. Only a criminal is recommending to someone else that they buy a home."

Thanks for the quote Michael. I think I've found my new e-mail signature line. Clear, succinct, and most of all, right on target.

2009 Nov 20 02:44 PM

[District Banker]

Your lead chart is pretty intersting. I would note that your Y axis is titled "millions" but then the actual number is also in millions. My point is, that chart shows that there are 12,000,000 million (12 million million) delinquent mortgages (obviously not the case). It's a small point, but attention to detail when dealing with data is a good thing - otherwise people will question your diligence.

2009 Nov 20 04:35 PM

[Michael David White]

I believe the figures refer to all mortgages and therefore all owners of mortgages including Fannie and Freddie. Real-estate owned by banks (REO) should be in the numbers. Thanks for the note. mdw


On Nov 20 08:03 AM Bruce Krasting wrote:

> I think you forgot to include the REO owned by either Fannie,Freddie,FHA
> or FHLB.

2009 Nov 20 06:00 PM

[Michael David White]

I haven't the slightest idea how long we will have a problem. We should obviously look at credit-bubble failures like Japan. Thanks for the note. mdw


On Nov 20 09:25 AM swissfrank wrote:

> Many thanks for the detailed analysis. How many years will it take
> cleanse big bank balance sheets of this garbage? Working through
> the inventory and returning to mark to market valuations on the housing
> loan book seem remote prospects right now. Particularly as Bernanke
> is doing everything he can to help banks conceal their debt rather
> than deal with it.

2009 Nov 20 06:06 PM

[Michael David White]

There is overlap and exaggeration in the numbers, but the problem is much more serious than many acknowledge. Thanks for the note. mdw


On Nov 20 09:39 AM Smalltownbanker wrote:

> Common sense tells me that a high percentage of those homes listed
> for sale have delinquent mortgages. There is also consideration
> that a percentage of mortgages are always delinquent but do not always
> end in default. There lots of assumptions in that chart and it results
> in figures that look much worse than reality.

2009 Nov 20 06:07 PM

[Michael David White]

sounds interesting. thanks for the note. mdw


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2009 Nov 20 06:08 PM

[Michael David White]

Thanks it has a nice ring. mdw


On Nov 20 02:44 PM Radardoc wrote:

> "Only a berserk fool is buying real estate today. Only a criminal
> is recommending to someone else that they buy a home."
>
> Thanks for the quote Michael. I think I've found my new e-mail signature
> line. Clear, succinct, and most of all, right on target.

2009 Nov 20 06:09 PM

[Michael David White]

Thank you for the note. Dumb error. mdw


On Nov 20 04:35 PM District Banker wrote:

> Your lead chart is pretty intersting. I would note that your Y axis
> is titled "millions" but then the actual number is also in millions.
> My point is, that chart shows that there are 12,000,000 million (12
> million million) delinquent mortgages (obviously not the case).
> It's a small point, but attention to detail when dealing with data
> is a good thing - otherwise people will question your diligence.

2009 Nov 20 06:10 PM