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Will the Housing Market Continue to Decline?

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The quick answer seems to be yes; prices will continue their slide for at least another year in the softer markets.

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Editor's Note: This article was originally published at The Daily Capitalist.

The quick answer to the headline of this article seems to be yes. The volume of housing that is in mortgage trouble is rising as prices drop in vulnerable markets around the country. There isn't a sufficient floor of buyers in those markets to stop further declines and foreclosure sales that appear to be on the horizon. It depends on the market. For example, the recent Case-Shiller 20 cities report shows that coastal California has had a positive trend: Los Angeles +4.4%; San Diego +5.0%, and San Francisco +5.5%. Another area of strong growth is Washington DC (+4.5%) which is an island of government transfer payments in a sea of trouble.

The bad news is that estimates of homes underwater and likely to default have gone up, depending on who you wish to listen to. The most recent and scariest number floating around is from Laurie Goodman at Amherst Securities:

I estimate the housing overhang to be more than 7 million units -- these loans are likely to be liquidated and are creating a huge shadow inventory. Adding borrowers with substantial negative equity but who have not yet become delinquent, I place the total size of the problem at 11 million to 12 million units; in other words, at the current trajectory, more than one in every five borrowers could face foreclosure if stronger policy measures are not taken. Clearly, the biggest problem for these borrowers is negative equity.


Lender Processing Services (LPS) tracks performance on 40 million mortgage loans in the country. Its October report says that delinquencies remain about 2.7 times historical average, foreclosure inventories are 7.4 times and rising. Delinquencies have flattened a bit as more homes are moved to foreclosure. More loans are starting to move into foreclosure in the six- and 12-month delinquency:

  • Foreclosure inventories continue to grow, the rise in delinquencies remains subdued as a result.

  • Accelerated foreclosure activity has led to a rapid decline in agency delinquencies. Foreclosure inventories have risen dramatically as a result.

  • Most western states have experienced a decline in the total 30-day and foreclosure inventory over the last six months.

  • The issue of current loans going delinquent remains, however more and more 60-day defaults are repeats.

  • Modification dominated seriously delinquent cures have declined over the last several months but still remain elevated.

  • More six and 12 month delinquent loans are moving to foreclosure, but the extremely delinquent category continues to grow.



The trend seems to be up:



Based on Ms. Goodman's research, Nouriel Roubini sees losses to lenders reaching $1 trillion, assuming lenders recover 50 cents on the dollar on an average $200,000 per home. These are thumbnail estimates but previous estimates were that there were perhaps 3.5 million homes of shadow inventory.

CoreLogic reports on negative equity in homes:

In the third quarter, 10.8 million, or 22.5%, of residential mortgages were "underwater" nationally, meaning homeowners owed more on their mortgages than the homes were worth. This was down from 11 million, or 23%, in the previous quarter, according to housing-data provider CoreLogic.


RealtyTrac reported:

A total of 188,748 homes in some stage of the foreclosure process sold in the third quarter, down 31% from a year ago and 25% from the previous quarter, according to RealtyTrac, an online foreclosure marketplace. ...

The average sales price for homes in the foreclosure process was $169,523 in the third quarter, down 0.44% from a year ago and down 2.46% from the previous quarter. Properties that were not in foreclosure sold on average for $249,721, up 4.36% from a year ago and 6.42% from the second quarter.


The interesting thing is that low interest rates do not seem to provide the stimulus for the housing market:

Meanwhile, applications for mortgages have hovered near their lowest levels in more than a decade since May, even though mortgage rates have tumbled to their lowest levels in 60 years, with average 30-year, fixed-rate loans bottoming at 4.21% in October.


That suggests that neither rising rates nor tighter lending standards will have a major impact on housing as long as people perceive that prices are still falling.

It goes without saying that housing starts are still at historical lows.

Home sales are still off. RE/MAX reported that home sales in November fell nearly 5% from the prior month and are about 26% lower than a year earlier.

The September S&P Case-Shiller home-price indexes reported that home prices declined:

US home prices dropped in September from a month earlier and the rate of decline showed signs of accelerating, according to the S&P Case-Shiller home-price indexes. Third-quarter prices were also down.

The Case-Shiller index of 10 major metropolitan areas dipped 0.5% from August, while the 20-city index decreased 0.7%. Adjusted for seasonal factors, the declines were 0.7% and 0.8%, respectively.

For the third quarter, the S&P Case-Shiller US National Home Price Index posted a 1.5% decrease from a year earlier. It declined 2% sequentially.


I agree with many analysts that the Cash for Houses tax-credit program just delayed the inevitable and caused a momentary spike in sales; then after this summer when the credits expired, the market reasserted itself. Another cruel, unintended consequence is that many buyers who bought because of the credits now are finding that their homes are declining in value.

Here is something on the positive side: Net worth is increasing because of deleveraging. The Fed's Flow of Funds report said:

American household net worth increased by $1.2 trillion in the third quarter as a result of debt deleveraging. According to the funds flow report, the average household net worth was $54.9 trillion, up from $53.7 trillion in the previous quarter. … Household debt decreased at an annualized rate 1.75% during the quarter, compared to a 2.2% decrease in both the second quarter of 2010 and the third quarter of 2009. This is the tenth consecutive quarter decline.

According to the report, household mortgage debt decreased in the third quarter as did the value of household real estate. Mortgage debt dropped 2.5%. The current Fed valuation of household real estate is $16.6 trillion, down 3.8% from the second quarter and down 1% from one year ago. …

Personal savings (without consumer durables) in the third quarter totaled $325.8 billion. Personal saving now represents 2.9% of disposable personal income.


The numbers show that while mortgage debt is being reduced, the value of homes is declining more. It is likely that this trend will continue.

But 11 million more foreclosures?

The trouble with historical analysis is that it doesn't predict the future. Goodman's analysis is thorough, but it is based on assumptions that are yesterday's news. It is difficult to refute her forecast, it all depends on her assumptions, but I'm not sure I buy in to it. There are too many things that can prevent 11 million foreclosures.

One thing is an increase in money supply and resulting price inflation. Because I don't see unemployment improving dramatically in 2011, it is my belief that the Fed will continue its quantitative easing program past the June 2011 period it has set for itself to buy $600 billion of US Treasurys. It is conceivable that the Fed's balance sheet will expand beyond $1.7 trillion to much more than $2 trillion. I believe that will cause price inflation. Price inflation will appear to cause a rise in housing prices or at least flatten prices out. This in turn will (i) bail out borrowers as their homes increase in value and push toward positive equity, (ii) allow home owners to refinance their mortgages, and (iii) attract buyers to the market putting upward pressure on home prices.

It is clear that housing prices will continue their slide for at least another year in the softer markets. Bottom-fishers should be ready.


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