Housing bottom premature. The clue? Foreclosure pipeline full

A case could be made that the housing market has bottomed. As my colleague Joseph Lazzaro recently explained in Could the end be in sight? Housing guru Shiller senses home price rebound, there have been three recent improvements:

1. Home prices edged up.

2. Sales of new homes increased.

3. Inventories of new homes declined.

Ready for the buzzkill? Though certainly more positive than the recent trend of declining sales and valuations, these reports fail to take into consideration what's in the housing-market pipeline: more delinquencies and foreclosures, which will increase inventories and depress prices.
Rising foreclosures are "old news," but the dire consequences of the delinquency pipeline have been sloughed off in the "good news" blitz. Moody's Economy.com estimates that lenders will foreclose on 1.89 million homes in 2009; some 4.3 percent of all mortgages are in foreclosure.

The combined percentage of loans in delinquency (8.86 percent) and foreclosure was 13.16 percent, the highest ever recorded in the Mortgage Bankers Association survey. In the good old days circa 2005, about half of those who fell behind in their mortgages caught up and became current -- what those in the mortgage industry call the "cure rate." If the cure rate had remained at 50 percent, then only half the 4 million delinquent mortgages would enter foreclosure or be sold in "short sales" where the sale price is less than the mortgage balance.

Unfortunately for housing market bulls, the cure rate has collapsed from 45 percent for prime loans, all the way down to 6.6 percent. For Alt-A loans, the rate plummeted to 4.3 percent, even lower than the subprime cure rate of 5.3 percent. Fewer people are catching up on lapsed mortgages, according to The Wall Street Journal.

This means that virtually 95 percent of all the 4 million homes with delinquent mortgages will end up being dumped on the market or languishing on lender balance sheets. Given the 4 million delinquent mortgages in the pipeline and the low cure rate, the market should expect 3.8 million more foreclosures in the near future.

The news that July's new home sales rose to a seasonally adjusted annual rate of 433,000 homes, 32 percent above the trough in January, is also not quite as rosy as boosters are implying. The seasonal adjustment is questionable, as the sample size reported is small and summer is the peak home-buying season.

Another flaw in the sales data is that the sales reported are signed contracts, not properties that have closed escrow. The dropout rates have been quite high in the past few years, and up to 30 percent of these new home contract sales fail to close escrow.

Thus the actual number of new homes sold in 2009 could be quite a bit lower than the 433,000 headline number. (If so, don't expect to hear much about it.)

While rousing numbers like "32 percent above the trough in January" make the headlines, buried deep in the data is a more troubling statistic: the estimated 400,000 new home sales in 2009 is but a shadow of the 1.3 million new homes which were sold each year during the housing boom.

In other words, take a number that's been beat down to the ground, and it's remarkably easy to tout the inevitable lift above the zero line as being more significant than it might be when taken in a "big picture" context.

If the 4 million homes already in the foreclosure pipeline were the end of the market's troubles, then that would be something that the market could discount. But there are powerful reasons to suspect the pipeline will continue filling with even more delinquencies and thus more foreclosures.

Negative equity (owing more than the house is worth) is a strong driver of foreclosures. And with almost one-third of home loans under water, that then suggests some percentage of the owners of the 15.2 million homes estimated to be under water will become discouraged when job losses, medical emergencies or other financial crises make paying the mortgage a sacrifice or an impossibility.

If even 10 percent of those homeowners fall into delinquency, that would add almost 1.5 million more foreclosures to the 4 million already in the pipeline. Another 3 to 4 million delinquencies are certainly in the realm of possibility.

As for those blips up in home prices: they may not be a sustainable trend, as foreclosures depress house prices in three ways:

1. They increase the supply of homes on the market (or waiting to be put on the market).

2. The lenders' heavy discounting of foreclosed properties via auctions and short sales set lower benchmarks of comparable prices.

3. The presence of foreclosed (and often abandoned) homes in a neighborhood depresses valuations.

With all this supply in the pipeline, it's no surprise that though house prices clicked up 1.4 percent in July, they're still down 31 percent from their July 2006 peak. And that 's the national average; in previously white-hot markets such as Las Vegas and Southern California, prices are off 50 percent or more.

While demand for heavily discounted homes has been strong -- up to 70 percent of all home sales in Las Vegas and California are foreclosure-related -- the pipeline full of millions of foreclosures will weigh on prices for some time to come.

Charles Hugh Smith writes the Of Two Minds blog and is the author of numerous books, most recently Survival+: Structuring Prosperity for Yourself and the Nation.

Increase your money and finance knowledge from home

What is Inflation?

Why do prices go up?

View Course »

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

Add a Comment

*0 / 3000 Character Maximum

1 Comment

Filter by:
jhon.morinho

Reverse mortgages are currently one of the best ways for seniors to get the equity out of their homes without having to move or worry about foreclosures.

http://www.reversemortgagelendersdirect.com/questions-answered/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-loan/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-rates/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-calculator/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-information/
http://www.reversemortgagelendersdirect.com/reverse-mortgages-pros-and-cons/
http://www.reversemortgagelendersdirect.com/is-a-reverse-mortgage-a-good-idea/
http://www.reversemortgagelendersdirect.com/how-does-a-reverse-mortgage-work/

August 19 2013 at 3:28 PM Report abuse rate up rate down Reply