Another Blow to the Real Estate Recovery
As hard as I’ve tried to deflect all logic and believe that real estate values are done falling, I just can’t ignore the sledgehammer to my skull that is reason. I’ve gone to the well and reached for denial. I’ve dug deep into my soul for delusion. I’ve even, begrudgingly, pursued a special kind of ignorance. But alas, no can do. This is what I know (facts are just the worst sometimes):
10% of all US mortgages were in some form of delinquency through January, the highest ever.
Another wave of Option ARM’s (adjustable rate mortgages) is about to reset. States with the greatest exposure to these loans are California, Florida, Arizona, and Nevada. Don’t think that this real estate storm won’t reverberate to your neck of the woods, though. Many other states are exposed to exploding Option ARM’s as well. And with national mega-banks holding the loans, what happens in those states will affect you. (1)
As covered on SwiftEconomics.com, shadow inventory is piling up. That is, those properties banks are in the process of foreclosing on, or attempting to perform a short sale on. Loss mitigators are being overwhelmed by refinances, mortgage modifications and defaults. Within real estate investment circles, the already notoriously slow process of completing a short sale (mostly because of red tape, sometimes also due to sluggish bank employees) is dragging its heels even more. (1)
Data shows that consumers are electing to pay off their credit cards first, before getting to the mortgage. The credit bureau, TransUnion, put a study together which showed that 6.6% of consumers who where delinquent on their mortgage were current on their credit cards. Californians were above 10% in this statistic. Nationally, this figure was at 4.3% at the beginning of 2008. This phenomenon isn’t all that surprising given the fact most of these people are severely underwater on their home loans, and see no light at the end of the tunnel in either the real estate market or their own income-producing opportunities. Right or wrong, the mortgage commitment is being put on the queue. (2)
Speaking of income-producing opportunities, how’s that job market doing? 24/50 states reported an increase in unemployment in March. According to the Labor Department, the economy gained 162,000 jobs in March, but the national unemployment rate remained at 9.7%. (3)
Even the best of contractors, Wesley Snipes, isn't always helping the public good (although in his case, tax evasion to the tune of millions was the issue).
On a similar note, contractors all across the country applied for more new home permits. A 34.1% jump in permits were issued nationally through March, year-over-year. This was the highest number since October 2008. Keep in mind that as of February 2009, 1 in 9 homes in the US stood vacant. That would be 14 million empty homes which does not include 4.8 million seasonal/vacation properties. Amazingly, more than 9% of homes built since 2000 are vacant, compared with about 2% for older homes. All of this is Census data. It will be interesting to see an updated vacancy statistic, because I highly doubt it’s done anything but increase. And with builders doing what they do, the discrepancy will only get worse. (5) (6)
So there you have it. Between new waves of exploding mortgages yet to explode, shadow inventory, and builders going buck wild, the supply of housing on the market is increasing significantly. Between a lack of job growth, employees with jobs who have had their compensation cut dramatically, and those same possible buyers’ net worth being considerably less to draw from, the demand for housing is decreasing. Not to mention the $8,000 Obama home buyer tax credit expires later this month, which will cut into demand even further.
But if there’s any silver lining to this real estate conundrum, it is that the federal government owns or guarantees over half of the $12 trillion US mortgage market. Boy, that makes me feel so much better.
On a serious silver lining note, perhaps the real estate market will return to equilibrium one day, allowing mere mortals who make average or median wages, able to afford a quality home. A 2,800 square foot mini-mansion, decked out with granite counter tops and stainless steel appliances would do just fine. I’m sure plenty of those are in the 9% built since 2000 that are currently standing vacant. That is, assuming interest rates aren’t in the double digits at some point in the next few years.
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(1) More Money – Money Magazine’s Personal Finance Blog, CNNMoney.com, retrieved March 18th, 2010, http://moremoney.blogs.money.cnn.com/2010/03/15/mortgage-delinquencies-at-historic-highs/
(2) Skip the mortgage, pay the credit card – CNNMoney.com, retrieved April 15th, 2010, http://money.cnn.com/2010/04/15/news/companies/consumer_debt_payments/index.htm
(3) Unemployment rises in 24 states – CNNMoney.com, retrieved April 16th, 2010,
http://money.cnn.com/2010/04/16/news/economy/state_unemployment/index.htm
(4) Rebuilding Florida – one house at a time – CNNMoney.com, retrieved April 16th, 2010, http://money.cnn.com/2010/04/16/news/economy/Florida_home_building/index.htm
(5) Building permits surge to 17-month high – CNNMoney.com, retrieved April 16th, 2010, http://money.cnn.com/2010/04/16/real_estate/housing_starts_building_permits/index.htm
(6) No one home: 1 in 9 housing units vacant – USAToday.com, retrieved April 16th, 2010, http://www.usatoday.com/money/economy/housing/2009-02-12-vacancy12_N.htm
4 Comments
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This is a brilliant and horribly depressing article! I like how blunt and honest it is, everything is just laid out without sugar-coating. I can respect that, but it doesn’t make these facts sting any less! I can imagine that great majority of the population is stuck in that situation you wrote about, being forced to pick between paying off morgages and credit cards, rough times! I like to think that those people will figure it out, and we will come out of this with skills necessary to save money and live off less, but I’m not going to hold my breath.
There’s more.
The Megabanks hold $1.6 trillion in seconds, many behind non-performing firsts. They’ve negotiated the rate on many of these essentially non-performing loans down to 1%, in an effort to keep them on the books as performing and avoid writing them off.
The way it works is that an essentially zero% Fed Funds rate makes the loans profitable at 1%. If the Fed raises the Fed funds rate, the loans become non-performing.
Big problem for Wells Fargo et al, huge problem for Ben Bernanke.
The Fed and the big banks are in a huge trap, aren’t they? It’s delicious to watch this idiocy play out.
I should continue the point out that, at some point, Bernanke, beset by inflationary pressures, will blink.
The Fed will raise the Fed Funds rate.
The loans I mentioned, rendered uneconomic by a cost of funds higher than about zero, with many others worth trillions, will go south. The megabanks will collapse.
Bernanke, if he has any honor, will slit his throat, as what remains of the financial system collapses as well. The Congress, having been demonstrated to be a deadbeat debtor, will be powerless to prevent the conniption.
Buy a gun or two for your own protection. You might need one.
To continue,
(Edit: “…to point out…”)
Take care to observe that both households and businesses are behaving rationally by deleveraging at a rapid pace. Only the Treasury and the Fed continue to accumulate debt.
The banking sector (including the newly empowered investment banks) can borrow at the discount window for .5% and use the funds to purchase Treasuries for 3% or more. This transaction funds the deficit and clears the auctions. Since the Treasury obligations are risk-free (Really? LMAO!) The transaction sucks up more and more of bank reserves, crowding out private lending.
How long do you think this will continue?
When the private sector croaks, how long can the public sector continue to suck the life out of it before everything collapses?
I am open, by the way, to an energetic opposing point of view.