Think Housing Is in Recovery? Think Again

Includes: DIA, QQQ, SPY
by: Reggie Middleton

Anyone who regularly follows me knows that I have been adamant in disagreeing with any who actually assert that the US has entered a housing recovery. The bubble was blown too wide, supply is too rampant, with demand too soft and credit tight. Today, the Case Shiller numbers have come out, and after a few months of showing price increases, have come around full tilt to reveal the truth – Reggie Middleton style!

From CNBC:

U.S. single-family home prices fell for a fourth straight month in October pressured by a supply glut, home foreclosures and high unemployment, data from a closely watched survey showed Tuesday. AP The Standard & Poor’s/Case-Shiller composite index of 20 metropolitan areas declined 1.0 percent in October from September on a seasonally adjusted basis, a much steeper drop than the 0.6 percent fall expected by economists. The decline built on a revised decrease of 1.0 percent in September and took prices down 0.8 percent from year-ago levels. It was the first year-on-year drop in the index since January. The housing market has been struggling since home buyer tax credits expired earlier this year. To take advantage of the tax credits, buyers had to sign purchase contracts by April 30.

“The (housing) double dip is almost here [there was no double dip, just a result of .GOV bubble blowing] , as six cities set new lows for the period since 2006 peaks. There is no good news in October’s report,” said David Blitzer, chairman of the index committee at S&P.

Eighteen of the 20 cities showed weaker year-on-year readings in October and all 20 cities showed monthly price declines.

Unadjusted for seasonal impact [in other words, closer to the truth], the 20-city index fell 1.3 percent in October after a 0.8 percent decline in September.

To begin with, the Case Shiller index is highly flawed in tracking true price movement in a downturn such as this, since the said downturn is being led mostly by elements that the CS index purposefully omits. This means that those price drops that are being shown by the Case Shiller index are actually highly optimistic and seen through spit shined rose-colored glasses. The reality is a tad bit uglier. See here as well as Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!

I discussed my thoughts on the Case Shiller index (a complex statistical construct that excludes many of the factors currently dragging on the housing market) being quoted in the mainstream media as if it was the S&P 500, its shortcomings, the true state of housing sales value in America and what’s in store for the near future.

Subscribers have access to all of the data and analysis used to create these charts, in addition to a more granular application, by state in the SCAP template and by region in housing price and charge off templates – see

Several times last year I stated that most of the big banks were being much too optimistic in their forecasts and releasing of credit loss provisions – see here. You see, the mortgages currently on the books are worth even less as the collateral continues to depreciate, and it is exacerbated by the robo-signing problems.

…despite a decline in net revenue and increase in non-interest expenses (both of which appear to be part of an obvious trend), profit before taxes was up 22% y/y as provisions for credit losses were slashed by 60%. JPM decreased its provision for credit losses despite no evidence of a substantial, sustainable improvement in credit metrics (please reference my warning that big banks will pay for optimism driven reduction of reserves). Provisions have lagged charge-offs for two consecutive quarters in a row.

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As a result, banks allowances for loan losses have decreased to 4.9% in Q3 from 5.1% in Q2 and 4.7% in previous year. Although under provisioning has helped the bank to mask its dearth in profits it has also materially undermined its ability to absorb losses if economic conditions worsen. The Eyles test, a measure of banks ability to absorb losses, has consequently worsened to 1.9% in Q3 from 3.7% in Q2 and 5.9% in Q3 09.

I used JP Morgan as an example, but they were far from alone. As excerpted from Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side

FACT THREE: The JP Morgan Foreclosure Pipeline is Not Only Packed Tight, It Is Progressively Getting Much Worse As The Time To Foreclosure Extends AND the Delinquency Rate Continues to Climb At The Same Time That Real Economic Housing Sales Value Is At An All Time Low As Well – and Getting Worse! Future Losses Are Mounting at an Incredible Pace Yet JPM is reducing provisions due to improving credit metrics.

JP Morgan’s average delinquency at foreclosure is 448 days (with Florida and New York having a record 678 days and 792 days of delinquency at foreclosure). Average delinquency for the industry is about 478 days and is increasing consistently since the start of the crisis. During 2009 the average days from delinquent to foreclosure process was 223 days while as of August 2010 average days from delinquent to foreclosure process is 478 days. A very important, yet often under appreciated fact is that although serious delinquencies are still climbing, the lengthening of foreclosure process has resulted in these loans still being classified as delinquent. The difference between delinquency rates and foreclosure rates has increased to 5.3% (9.8% delinquency rate vs 4.6% foreclosure rate) in August 2010 from 3.6% in March 2002 (5.1% delinquency rate vs 1.5% foreclosure rate). As the difference between delinquencies and foreclosure rates normalizes, and shadow inventory overhang moves to further depress real estate prices, real estate related write-downs could further balloon. So, you see, the marginal improvements in credit metrics that JP Morgan’s management has used to justify the releasing of provisions (which also just so happened to have padded a weak quarter of accounting earnings) is really kicking the can of reckoning down the road…

Add to this the difficulty in getting rid of the properties once they are foreclosed upon and you will find that the big banks such as JP Morgan (or after looking at these numbers, particularly JPM--although I suspect BAC and certain others are worse off) will become the nations largest distressed residential housing REITs!

For those who didn’t catch it, I espoused my opinions of JP Morgan’s overt optimism on CNBC a couple of months ago, and things are turning out exactly as have stated with bank reserves being shoved into the accounting profit bucket just as the foreclosure pipeline is being backed up by robo-signing scandals which exacerbates the largely under appreciated shadow inventory problem.

For those who haven’t seen it yet, here is my interview on CNBC discussing JP Morgan’s optimistic management and Apple’s margins with Herb Greenberg.

Related links:

  1. Those Who Blindly Follow Housing Prices Without Taking Other Metrics Into Consideration Are Missing the Housing Depression of the New Millennium
  2. Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
  3. Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
  4. Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.