Michael David White's  Instablog

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.

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.

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:

Michael David White is a mortgage broker in Chicago.

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.

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.

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:

Michael David White is a mortgage broker in Chicago.