The existing home sales report came this morning and was better than expected showing a rise in the average price of homes sold.
But there's a lot in the report to be concerned about. The inventory of 9.7 months of unsold homes remained unchanged. But more importantly, the data shows the prices are rising because the sales are now including greater numbers of more expensive middle class homes as short sales and REOs. With 45% of all the home sales being problem properties; this increased monetary distress for the middle class is not a good omen. With the loss of the middle these class homes comes greater losses for credit cards and car loans; and a general reduction in spending. Analysts say this report is not nearly as good as it outwardly appears.
Our declining real estate market will continue well beyond 2012. The Monthly Mortgage Reset graph to the left shows large numbers of mortgage price resets that will take place well into 2012. This has been a big cause of the real estate market downturn to date. But if mortgage interest rates can stay below 6% until 2012; then the resets may not be as severe a portion of the real estate problem. I just don't see the Fed being able to keep interest rates down in an inflationary environment for more than one to two years; let alone for five years.
The home delinquency and foreclosure rates will continue relatively unabated for many years, but it will be driven more by job and income losses rather than a changes in payments. Also, there's the increasing problem with "jingle mail," where homeowners who are underwater with their morgages walk away from their homes rather than continue to pay off a devaluing investment (they send their keys in the mail to the bank - thus jingle mail).
Zillow reported 15% of all homes in the United States have negative equity; i.e., they owe more than their home is worth. For those who purchased a home in the past five years, 30% owe more than their home is worth. And with home prices expected to fall further this year and next, the number of "underwater" mortgages will increase signficantly. Christopher Thornberg of Beacon Economics reports the underwater phenomenon will be very bad in 2009.
In the real estate market, a six month supply of home listings is a stable inventory. When the inventory of homes rises higher than seven months, home prices will begin declining as it becomes a buyers market. Even in the situation where the inventory is in the process of declining from ten months to eight months, home prices will continue to decline. Only when homes reach a price level where they will sell in seven months or less will prices then stabilize.
RealtyTrac reported foreclosure-related filings on 2.3 million U.S. properties in 2008, an 87 percent jump from the year before, with 861,664 homes making it through the entire process to become REOs. As many of these homes were still in the process of foreclosure, or delayed foreclosure due to moratoriums on foreclosure activity by some lending institutions, it is likely the total number of actual foreclosures from the 2008 filings might reach upward to 1.5 million to 2 million homes.
The biggest problem associated with these foreclosures is that 75%± of all the properties foreclosed upon (REO) since this crisis began are still owned by the banks. Banks have been forced to bid on their own properties at the foreclosure auctions in the amount of their loan principal to prevent further deleveraging. When these foreclosures hit the market, the price of real estate will further plummet.
As of January 2009, the total FDIC insured REOs new home sales was 309,000 units (seasonally adjusted to an annual rate), and 4,912,000 for used homes; or 5,221,000 total annual home sales both new and used. The total number of homes with foreclosure filings since the third quarter 2007 was 3,900,000 dwellings. Of these, it is estimated 3 million units have or will become REO's. About 75% of all foreclosed properties since the financial crisis began in the third quarter 2007 are still held by banks and lending institutions as REO's, which is about 1.5 million dwellings. This number will likely grow to 3 million REOs owned by lending institutions in 2009. This estimate may be conservative as more homeowners lose their jobs or walk away from their underwater mortgages.
The 11-month inventory of homes in January was about 4,800,000 million homes. If the 3 million REOs anticipated for 2009 and prior years are placed on the market, the total home sales inventory would rise to about an 18-month supply. Or based on the newest numbers of unsold inventory at 9.7 months, it would equal a 16.7 month supply of home listings.
These homes will eventually hit the market, unless they are demolished, which has been given serious consideration as a solution by several economists. At what price would a home sell if all of these homes were listed for sale within two years? As ridiculous as it might sound, assuming a stable inflation rate, it is entirely conceivable home prices would fall to early 1990 prices whereby a home currently priced at $400,000 that was $600,000 a couple of years ago might have to sell for $200,000 or less; and a home currently priced at $200,000 might sell at $125,000.
This is the dire situation facing the real estate industry, the banking industry, and our economy. And I don't believe Turbo Tim's new plan is able to solve this problem. Though the federal government will provide guarantees, placing a large inventory of REOs into a declining real estate market is not economically feasible; and in fact would be a foolish thing to do.
Given that REOs will not let up until at least 2011, the private investor's Geithner hopes to purchase these homes will have a holding time of 5 years to sell; otherwise, a quick introduction of these homes into the real estate sales market will create a glut, which will cause home prices to plummet further. If private investors held onto these homes for an average of 3 years before selling them to maintain some semblance of market stability; using an annual acceptable return of say 25% (though 30% is more realistic), then home prices would need to be discounted by about 95% for the three years holding time if purchased at an unleveraged price. Using 5:1 leverage, or a 20% down payment as Geithner's plan proposes, the home purchases would require an instant 20%± discount to the price paid by private investors. And this does not include the costs associated with property management, upkeep, property taxes and other carrying costs. The point is, there are all kinds of problems with Geithner's plan, which the market will soon figure out.
RealtyTrac reported foreclosure-related filings on 2.3 million U.S. properties in 2008, an 87 percent jump from the year before, with 861,664 homes making it through the entire process to become REOs. As many of these homes were still in the process of foreclosure, or delayed foreclosure due to moratoriums on foreclosure activity by some lending institutions, it is likely the total number of actual foreclosures from the 2008 filings might reach upward to 1.5 million to 2 million homes.
The biggest problem associated with these foreclosures is that 75%± of all the properties foreclosed upon (REO) since this crisis began are still owned by the banks. Banks have been forced to bid on their own properties at the foreclosure auctions in the amount of their loan principal to prevent further deleveraging. When these foreclosures hit the market, the price of real estate will further plummet.
As of January 2009, the total FDIC insured REOs new home sales was 309,000 units (seasonally adjusted to an annual rate), and 4,912,000 for used homes; or 5,221,000 total annual home sales both new and used. The total number of homes with foreclosure filings since the third quarter 2007 was 3,900,000 dwellings. Of these, it is estimated 3 million units have or will become REO's. About 75% of all foreclosed properties since the financial crisis began in the third quarter 2007 are still held by banks and lending institutions as REO's, which is about 1.5 million dwellings. This number will likely grow to 3 million REOs owned by lending institutions in 2009. This estimate may be conservative as more homeowners lose their jobs or walk away from their underwater mortgages.
The 11-month inventory of homes in January was about 4,800,000 million homes. If the 3 million REOs anticipated for 2009 and prior years are placed on the market, the total home sales inventory would rise to about an 18-month supply. Or based on the newest numbers of unsold inventory at 9.7 months, it would equal a 16.7 month supply of home listings.
These homes will eventually hit the market, unless they are demolished, which has been given serious consideration as a solution by several economists. At what price would a home sell if all of these homes were listed for sale within two years? As ridiculous as it might sound, assuming a stable inflation rate, it is entirely conceivable home prices would fall to early 1990 prices whereby a home currently priced at $400,000 that was $600,000 a couple of years ago might have to sell for $200,000 or less; and a home currently priced at $200,000 might sell at $125,000.
This is the dire situation facing the real estate industry, the banking industry, and our economy. And I don't believe Turbo Tim's new plan is able to solve this problem. Though the federal government will provide guarantees, placing a large inventory of REOs into a declining real estate market is not economically feasible; and in fact would be a foolish thing to do.
Given that REOs will not let up until at least 2011, the private investor's Geithner hopes to purchase these homes will have a holding time of 5 years to sell; otherwise, a quick introduction of these homes into the real estate sales market will create a glut, which will cause home prices to plummet further. If private investors held onto these homes for an average of 3 years before selling them to maintain some semblance of market stability; using an annual acceptable return of say 25% (though 30% is more realistic), then home prices would need to be discounted by about 95% for the three years holding time if purchased at an unleveraged price. Using 5:1 leverage, or a 20% down payment as Geithner's plan proposes, the home purchases would require an instant 20%± discount to the price paid by private investors. And this does not include the costs associated with property management, upkeep, property taxes and other carrying costs. The point is, there are all kinds of problems with Geithner's plan, which the market will soon figure out.
We have some serious real esate problems, which will be with us for many many years, at least through 2012 and perhaps 2015. Real estate values will never again in our lifetimes rise to those prices experienced in 2006 in real dollars as an artifically created bubble. But they might in inflated nominal dollars within the next couple of years when mass inflation takes over.
Not related to the above article but would appreciate your comments on the $CPC 10d MA being 0.75.
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