Entering text into the input field will update the search result below

U.S. foreclosures/repossessions on track to hit 5 million in '09

Sep. 10, 2009 1:48 PM ET
Jeff Nielson profile picture
Jeff Nielson's Blog
1.95K Followers
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

The U.S. propaganda machine was positively giddy last month when the latest “existing home sales” data showed a “jump” to an annualized rate of 5.2 million units. However, with sales in previous months this year much lower, total sales are unlikely to exceed 5 million units for this year, even if the July pace is sustained until year-end.

Despite this modest bounce in sales, the “experts” were (once again) saying the U.S. housing market had “bottomed”. This mindless euphoria was epitomized in a Bloomberg article with a quote from Ellen Zentner, a senior economist for the Bank of Tokyo, who stated, “We can count on housing no longer being a drag on the U.S. economy.”

Oh really?

Just a few days earlier, it was announced that foreclosures had set another all-time record in July, at over 360,000 units (an annualized pace of over 4.3 million units). An additional 80,000 homes were “repossessed” in July (i.e. the owner chose to “walk away”), which works out to nearly 1 million more units when projected over a year.

August's numbers have just been released, and though there was a small improvement the numbers still represent a continuing catastrophe in this sector. Total foreclosures were still above 350,000, and project to an annual total of 4.2 million units. However, that total could easily be surpassed – given that the numbers are still trending higher and we know there are millions more foreclosures looming on the horizon.

As I have reminded people frequently, the U.S. mortgage market is about to begin a two-year spike in mortgage-resets with its infamous, ARM's (adjustable rate mortgages) - which already have the highest default/delinquency rates among all U.S. mortgages (see “U.S. mortgage-crisis to get much worse in 2010-11”). There is a very good reason for the appalling rates of delinquencies and defaults on these mortgages.

According to a CNN article, 60% of all “option-ARM” mortgage-holders have only been making minimum payments on these mortgages. This number soars to over 80%, with respect to the option-ARM's issued in 2006 and 2007. As a result, the average increase in monthly mortgage payments when these mortgages reset is over $1060/month. Since most of the people who are making minimum payments cannot possibly afford to pay out an extra $1000/month, most of these mortgages will default the moment they reset.

The Obama “mortgage rescue” plan was supposed to solve these problems because U.S. banks would voluntarily choose to modify all these mortgages to an affordable level. The reality is that this program has been a dismal failure, due to the banks themselves sabotaging the process by “losing” paperwork, denying assistance to eligible mortgage-holders, and even when willing to “modify”, the change in terms which they offer is still often unaffordable – and far above the limits of what this program was supposed to offer borrowers.

The reason for this non-compliance by most U.S. banks is that on a practical basis, they will profit more over the long term by foreclosing rather than forgiving. The idea that these stingy, uncooperative banks will suddenly start making massive modifications for all these resetting mortgages is (to be charitable) nothing but wishful thinking.

Thus, the “good news” which the talking-heads in the media have been braying about over the last few weeks is that if U.S. home sales can be sustained at this slightly elevated rate (a big “if” in an economy with falling wages and rapidly rising unemployment), and if the rate of foreclosures doesn't worsen significantly from current levels (an even bigger “if”), then total sales in the U.S. this year might slightly exceed the total number of foreclosures and repossessions.

To suggest that a housing market which is barely able to digest only the total number of foreclosures and repossessions has “bottomed” is obviously utter lunacy. However, there is no need to take my word for this, instead we only need to look at the behavior of U.S. banks.

As I have also frequently observed, U.S. banks are deliberately holding millions of already-foreclosed/repossessed properties off the market (see “Delinquent U.S. mortgages break record AGAIN”). Despite the fact that total U.S. sales are barely sufficient to cover the number of foreclosures and repossessions, the sales of these units have never exceeded 50% of total sales – meaning that every month since this collapse started U.S. banks have been building up their own “shadow inventory” of homes (conveniently ignored by the U.S. media).

This trend has become much more extreme, with numbers from the last two months indicating that U.S. banks are now on track to sell less than 1/3 of their total foreclosures/repossessions this year – which works out to more than an additional two million units being added to their unsold inventory this year, alone.

Part of the reason why U.S. banks are keeping these homes off the market is so that they don't have to write-down these properties to their real value (which must be done the moment the house is sold). By keeping them off the market, they can maintain their fantasy-valuations on these properties which sit on their “stress-tested” balance sheets.

However, the second, equally-obvious reason why U.S. banks are holding these properties off the market is to try to simulate a “bottom” in this market. It is elementary economics that when you increase the supply of something, you reduce the price; and when you decrease the supply of something you increase the price.

Listing all these properties on the market as the banks take possession would mean millions more unsold units simply sitting on the market – which would mean the same double-digit price-declines which have been reported month after month for the last two years. Conversely, by artificially reducing the supply (by at least 50%), these market-manipulators appear to have caused prices to momentarily stabilize. Obviously, that “stabilization” ends (at the latest) when these banks start dumping their shadow inventory onto the market.

Even if the banks don't attempt to sell these properties, either the continuing collapse in the U.S. job market or the upcoming spike in mortgage-resets (and the millions more foreclosures and repossessions which must result) will quickly result in U.S. house prices again plummeting downward.

With over 20 million empty homes in the U.S., and U.S. apartment vacancies recently hitting a 20-year high (see “Apartment vacancies NEW nightmare in U.S. housing collapse”), there is no possibility of this market reaching any sort of equilibrium – which is what the propagandists supposedly mean when they claim that this market has “bottomed”. In fact, with supply continuing to grossly exceed demand, there is no possibility of any equilibrium in this market for several years.

In roughly another ten days we will see the next report on “existing home sales” in the U.S. Regardless of what the actual number is, we can be certain that the propaganda-machine will put its usual positive spin on it. For those seeking to resist this brainwashing, simply subtract 5 million from that total sales number. I guarantee you that will be in no danger of being fooled into believing this market has “bottomed”.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You