Friday, September 11, 2009

US treasury Sees Millions More Foreclosures

According to this Reuters article, U.S. Treasury sees millions more foreclosures, even with the ever increasing efforts of the Federal Government via the Home Affordable Modification Program, or HAMP, foreclosures will increase.  In fact according to Michael Barr, assistant Treasury secretary for financial institutions, "even if HAMP is a total success, we should still expect millions of foreclosures".

So we have an insiders view that foreclosures will continue to increase.  We also have the readily available news that unemployment keeps increasing.  Can somebody please explain to me how the real estate market is improving in spite of this these things?  To me, an improving real estate market defies logic and reason.  I see no evidence that the real estate market will improve anytime soon.

Be Wary of So Called "Good News"

According to this Reuters article, Pace of U.S. existing home sales fastest in 2 years, sales of previously owned homes increased by 7.2% in July 2009, to the fastest pace in nearly 2 years. That all sounds great, but later in the article it states "The inventory of existing homes for sale in July rose 7.3 percent to 4.09 million units from the previous month, NAR said. At July's sales pace, that represented a 9.4 months' supply, the same as in June."

Here is why that statement is foolish.  Sales are a subset of Inventory (you cannot have more sales than there are homes for sale).  If Inventory increases at a higher rate than sales and Inventory is a larger number to begin with then it is simple math to say that the overall number of homes for sale (i.e. Inventory) actually INCREASED.  The article spins this by using July's home sales number and then comparing that to the new Inventory level to conclude that total Inventory remained the same as June at 9.4 months supply.  Now ask yourself, is July a peak selling month?  If so, does it make sense to divide the new Inventory figure by a peak sales figure and state that Inventory has not increased?  Of course it doesn't.  Therefore, mark my words, the actual supply of homes for sale (i.e. Inventory) has indeed increased which is bad news for the real estate market.

My Real Estate Market Thoughts of the Day

This post may be a bit of a ramble so I apologize for this in advance. I just had to get some things off my chest.

The last time the real estate market melted down (think late 80's/early 90's) it took 7 years for homes to regain their losses. This meltdown is far worse because it is not just due to real estate over development/over building. It was caused by debt. Plain and simple. That is why the folks in Washington cannot fix this problem - you cannot fix a problem caused by debt with more debt. It defies logic and reason. The facts are that even at their current reduced levels, home prices are still out of line with incomes when compared to historical trends. Therefore, contrary to NAR homes are not actually affordable (Side note: I really cannot stand the NAR Home Affordability Index. Since when did Realtors become used car salespeople hawking homes by pushing the monthly payment instead of the price of the home?).

The reason loan modifications will not work is that they do not address the core problem: mortgage balances are too high relative to the market value of the homes. Many homeowners are actually now underwater (i.e. mortgage balances exceed the value of their home). According to a recent Deutsche Bank report, by 2011 about 48% of all US mortgages will be underwater. Since being underwater is now the #1 statistical driver of defaults (not credit scores) you can bet on high foreclosure rates for years to come.

Since the entire economy was built on consumer spending, and that consumer spending was fueled by debt, and that debt is no longer available you can be sure that when things do actually turn around unemployment will still remain relatively high with a likely range of 6-8% as opposed to the 4-5% range we enjoyed a few years ago. Based on the persistent debt problem and the long term unemployment problem I just do not see how the real estate market will recover anytime soon.

This whole thing is sadly comical. You have nonsense from NAR and the mainstream media about how the real estate market is turning a corner and recovering yet foreclosures and unemployment keep increasing. The US real estate market has never recovered under such circumstances and this time will not be the exception. Almost every day I fell like screaming "STOP THE NONSENSE." If our policy makers would just let housing prices decline to their normal (historical) sustainable levels and get rid of the FHA loans, other low/no down loans, ARM loans and other artificial financing not only would this type of problem never happen again, but the social engineers in Washington would not have to worry about "affordable housing" since housing would in fact ALREADY BE AFFORDABLE. Sometimes the answer is just plain old common sense. I predict that values will continue to fall rapidly through 2011 (when the large wave of Option ARM foreclosures ends) and then continue to decline gradually until the foreclosure rate reduces to normal levels and the unemployment rate reduces back down to a more realistic 6-8% mentioned above. At that point real estate values will recover at the normal 4-7% per year.