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That US home prices are once again
trending down is no secret. But just how bad things are likely to get is not
yet well understood. Consider this from the Atlantic's Daniel Indiviglio:
Has the state of the housing market
gotten better or worse since the first quarter of 2009? To answer this, you
have to define what you mean by the state of the housing market. If you mean
sales alone, then the state of the market hasn't changed much: existing home
sales are up a little from that time, while new home sales are down a bit.
But assessing the inventory of defaulted, unsold homes in the market probably
provides a better measure of health.
The following chart created by Laurie
Goodman, a housing market expert at Amherst Securities, shows the ominous
rise of shadow foreclosure inventory. It was part of a slide in a
presentation she recently gave at an event last week at the American
Enterprise Institute on how the Dodd-Frank financial regulation bill is
stifling mortgage credit.
This chart answers the question:
what's happening to the homes of all those defaulted borrowers that we hear
about? Many of those properties are a part of so-called shadow inventory.
This is the sort of limbo between when a home's loan defaults and when the
property is put on the market for purchase.
The increase shown above is
staggering. The shaded area shows mortgages more than 12 months delinquent or
in foreclosure (darker blue) and those seized by the bank (lighter blue). The
sum has risen from just below 2 million in early 2009 to 3.35 million in
April 2011. That's an increase of more than 67.5% over this period of about
two years.
Also interesting: despite
accumulating more defaulted properties, banks are very careful not to
increase the number of loans sold very much. Loans sold has
been very steady from 80,000 to 95,000 over this period. So recently prices
have begun declining again even though the inventory for homes available for
sale is being kept relatively low compared to the number that should actually
be available to buyers.
According to Goodman's presentation,
even though homes sold are only about 90,000 per month, inventory is growing
by around 60,000 per month. So the homes sold each month would have to
increase by two-thirds just to keep up with the growing inventory -- not to
begin to cut the 3.35 million homes in the shadows. To conjure up enough
demand to meet 150,000 sales instead of just 90,000, home prices would almost
certainly have to fall faster.
Wow. Housing is heading back into a
depression even though banks are keeping millions of foreclosed houses off
the market. Bank auditors won't let them hold these depreciating assets
indefinitely, so in the coming year the trend will reverse, as banks are
forced to clear out their real estate. That's a ton of new listings at a time
when even current listings aren't selling. So unless something radical
happens (a government subsidy aimed directly at housing, for instance), the
next leg down in prices should be epic.
This will cause consumers to spend
less as their main investment turns out to be an even bigger loser than they
currently fear. So a housing crash becomes a broader recession.
To my knowledge no one has tried to
calculate what kinds of losses banks are sitting on. So let's speculate that
the average foreclosed house is worth $20,000 less than its mortgage (a
conservative guess since most California houses are underwater by way more
than that). 3.5 million times $20,000 blows a $70 billion hole in bank
balance sheets that will have to come to light sometime soon.
Since the government's reason for
existing these days is to feed the banks, losses of this magnitude will
pretty much guarantee a response. If QE3 hasn't already happened, this will
bring it on.
John Rubino
DollarCollapse.com
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