By Edward Harrison of Credit Writedowns. Yves is stuffed again today, so I am going to post at least once or twice. Hopefully, we will also see something from Jesse or George as well.
This is a post I wrote overnight about rising delinquencies and shadow housing inventory. I am not convinced house prices in the U.S. are headed higher permanently and this post points out why.
The Mortgage Bankers Association is reporting that nearly one in ten households with mortgages are at least one payment behind. That is a record, my friends. And it certainly means we cannot believe house prices have permanently stabilized.
The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.
Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.
Translation: there are a lot writedowns in residential real estate still coming. This is one reason bank credit is not going up significantly despite zero interest rates. Remember when I wrote about “extend and pretend?” This is the kind of thing that is holding up bank balance sheets. The article I wrote in October on short sales in North County San Diego highlights the issues involved. But at some point banks will have to take the hit (unless house prices magically go up to near previous levels – what everyone except renters wants).
Ivy Zelman has the same sinking feeling I do here; we don’t think house prices are necessarily heading up permanently. She even throws in a mixed metaphor to get her point across. She says:
I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down.
Look, the fake recovery is now in full swing. But I expect the recovery to hit a brick wall by 2011, if not earlier. While the proximate cause of my concern is the likelihood of increased taxes and/or reduced spending by the Obama Administration, it is jobs that concern me. See Calculated Risk’s post showing the correlation between unemployment and mortgage delinquency and you see the connection. The fact is we have a record number of foreclosures and that is a direct result of rising unemployment. Unemployed people don’t have any money, so they don’t pay mortgages. It’s as simple as that.
The interesting bit about the New York Times article was this:
The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.
The fact is the F.H.A is the next Fannie Mae. If you’re looking and wondering where the next bailout will be, take a good look at the F.H.A. Not only is this agency guaranteeing hugely delinquent loans, but the Economic Stimulus Act of 2008 doubled the maximum loan that it could insure to $729,750 in order to cover jumbo mortgages common in cities like New York, San Francisco or D.C.. The purpose was to give liquidity to the frozen jumbo market in high-cost cities. However, the net effect is that the F.H.A was expanding at exactly the time when loan quality was falling. There will be significantly more losses as delinquencies mount.
To make matters worse, the F.H.A. has an abysmally low 0.53% insurance reserve ratio – that’s the lowest ever. Yes, this ratio includes expected future losses, but you don’t have to be a rocket scientist to know any downside wipes these guys out. And that means more taxpayer money will be forthcoming.
Is this a pretty picture? No. But, is this what is going to happen? Of course it is. So when the bailouts come because the foreclosures begin again in earnest and politicians start saying, “who could have known?” you will have every right to be disgusted.
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it is refreshing to see you refer to it as a fake recovery. Perhaps we ought to stop debating the symptoms and start to challenge the orthdocy of the ivory tower. Perhaps the best starting point is the low rate job nexus. it would be fascinating to know how a decade of below average rates and no job growth comports with the fallacy that low rates means job creation. It doesn’t and hasn’t and it won’t. Maybe justr maybe the place to start is rethinking trade dogma for a new age.
One can only laugh at Geithner casting aspertion on the “previous” adminsitration. Yet another reminder of how seriously bankrupt is the collective, economically and politically.
That’s OK, I’ve grown accustomed to having every right to be disgusted.
The bankers know that the public is onto the TARP money game, so they are looking elsewhere to fund their bonuses. For now, it appears they are going to keep jerking asset prices around in order to collect on the trillions in government guarantees. Just because congress hasn’t funded most of the guarantees yet doesn’t mean the bankers are likely to leave that money on the table.
At the same time that there are lots of new houses sitting empty, demand for affordable housing is growing just as a big problem has emerged. Financing for building the units has mostly evaporated.
Low-income housing tax credits are no use if investors are worried about over priced real estate. In essence the unexpected consequences of stopping asset prices from reaching there real level is a lack of confidence in asset prices which leaves houses empty and makes lots of people homeless.
As for the FHA well there is no charles bowsher to catch them out with creative accounting this time.
By the way, I have done quite a bit of travel in North America in the last 6-7 years and it seems like all the apartments being built were “luxury” condos or rentals. You look at DC, New York, Toronto, Vancouver, Miami – all of these cities seem like they hit on “luxury” housing as the path to riches. I did not see a huge number of new low-income housing projects. Quite the opposite: What I generally saw was a displacement of low-income housing as neighborhoods were gentrified.
Anyone have some anecdotes on this?
I’m an architect and I have worked for the past few years for a firm that has done a lot of affordable housing for local agencies and non-profits. Currently I’m on ‘furlough’ for a few months because of a shortage of work. There is a huge demand for affordable units – projects we have done are usually fully committed the day the contractor turns them over and I’ve seen people move into 30 to 40 units in one half-day.
However, much of the funding for these projects comes from resale of tax credits. The market for tax credits has been in the dumper for quite a while now so… no affordable housing projects.
Thanks. That’s the kind of color I was looking for. Your experience seems to validate my thinking about the demand for low income housing and the supply. Good luck on the employment front, Wally.
Yours is a good example of (unintended?) consequences the ‘distortions’ of crony capitalism’s subversion of moral hazard. There are many of us who sold early and or stayed renters when we saw the refi/reappraisal/bidding frenzy foaming around us and it is especially outrageous to witness criminal plutocrats readily jettison their beloved free market gospel when their yachts start taking on water, while so many have no roof over their heads.
I’m a landscape architect and have experienced a similar slump in the wake of so many McMansion slum-dividers pulling up stakes—while driving their investors, consultants, contractors, and suppliers into bankruptcy. When the next crisis occurs we must insist not only on a more humane, sustainable commonwealth economy, but also on more humane, sustainable, green and artful communities to live and love in, built on more than speculative values.
Ed – I work in the industry and you are quite correct about luxury housing in the major cities. It was all anyone was doing.
At the same time, the issue is more complex than “building luxury housing” is bad. Without doubt, the recent builders of luxury housing who did not get out before the bubble burst lost everything, but the end product, as long as it can be filled with tenants or condo buyers, starts a process that is called “filtering” in urban land use. The chain of move-ups allows older buildings with fewer amenities to come available on a more affordable basis. Yes, there is displacement from certain gentrified communities, but there is usually not a decrease in available housing units. More units equals more supply, which should equal lower prices, just sometimes in a different area.
Listen, I’m also involved with numerous low income housing organizations. Of course I would love to see more resources devoted to ground-up low-income housing, but the resources devoted to luxury housing, while committing some crowding out of other ground-up construction, is not really the problem. The main problems for most dedicated low-income housing are (1) NIMBYs, (2) concerns over density and traffic as well as concerns over the racial and socioeconomic composition of neighborhoods, and (3) the increasing income and wealth disparities that raise land prices as the rich command more and more resources.
I’m glad you’re bringing up the topic!
I appreciate the color. I have no problem with gentrification to the degree the displacement does allow the older buildings to be used for lower income housing. And I believe cities are putting this kind of language in contracts.
The glut of luxury is a pure supply/demand question because low interest rates made luxury building (mostly condos) more profitable. In fact, you saw a wave of hotel/rental conversions due to the fungibility of housing stock and the profitability of the condo market. The Plaza Hotel in NY is a perfect example.
I should add, it is this kind of market distortion that makes me detest zero percent interest rates.
“Yet another reminder of how seriously bankrupt is the collective, economically and politically.”
Indeed!
We can only hope that knowledge is power and that this thing called the internet is able to expand awareness of our plight fast enough to have an immediate impact, else we are doomed.
Well shucks. I realize this is unrealistic but…
IF all those foreclosed homes are essentially owned by Fannie and Freddie…
AND F&F have been given so much federal cash as to be essentially owned by the taxpayers…
Why don’t we just publicly give up on the idea of a housing recovery, and auction off every last one with no reserve bid, one home per person, period?
Oh wait, I remember. You rich guys still think empty houses are worth more than a robust working economy. Oh yeah.
Back to my cardboard box I go…
(Don’t worry, I’ll get my revenge in a few years when we gen-xers cancel medicare.)
Extend & Pretend says it all.
This goes on well through 2011.
The situation at FHA is indeed worrisome, but I find the taxidermy of Yves truly alarming. Is a rescue operation being planned?
Ha! I thought the same, though not so cleverly. The expression, “get stuffed” or “I’m stuffed” sounds very different, sometimes objectionable, to ears down-under and elsewhere.
The choice is rather simple:cramdown or depression.
Pick your poison.
“No one could have foreseen the levees failing.”
This clarifies why it is that cheap Fed loans to bankster cronies are only inflating equities (and casino chits). As others described it, the Fed is “pushing on a string”.
David Michael Green has a more apoclyptic view of housing
http://newobservations.net/2009/11/20/delinquent-mortgages-equal-to-three-times-a-balanced-for-sale-inventory-3/.
He says the coming overhang will spike from 35% above normal sales inventory to 400%—more than ten times the oversupply (though of course not all of those will hit at once). Something’s gotta give. His closing is telling:
“Only a berserk fool is buying real estate today. Only a criminal is recommending to someone else that they buy a home.”
Ed is right, the FHA is a disaster. With the numbers from this report one has to conclude that they will need more capital soon.
It was 14 months ago that Fannie and Freddie went down. A key part of that story was that Paulson put portfolio limits on the Agencies. He had to to get agreement on the Concervatorship, the limits were part of the deal.
So right about that time there had to be a big huddle of some DC big shots. In that meeting they must have said,”We are in trouble without F/F. Who is going to make all the new mortgages? I know, FHA will do it!!”
The guys at FHA jumped on this and one year later we have another bailout in the works.
So here is what I want for Christmas. I want the minutes of those meetings. I want to know who was there and who called this shot. I want to know if there were any marching orders to FHA given at that time.
Paulson, Geithner and possibly Bernanke were involved. The folks from FHA were in the meeting too. My guess is that at that time they told FHA to write mortgages like crazy and damn the consequences. I think that Barney Frank had to be involved as well.
Anyone know how to file a FOIA?
While the Case-Schiller HPI has come off of its lows I agree here as well that the “glut of glamour” seemed bogus for a reason… it was. More than just the FHA to worry about, the U.S. has over 6% of all home owners in delinquency and you’d better believe that all of those will end up in foreclosure.
It’s impossible for the employment picture to steady out any time soon and the data this week may begin to show some of the real picture, now that the original home purchase incentives would be expiring.
The extension and alteration of the tax refunds to home buyers was so near the original expiration that it’s going to take some time for the new class of home owners to make a decision to go out and buy a house and the lower level first time buyers who would have bit the bait already have!
As for the second time higher bracket home buyers… there’s no time like the dead of winter to tour developments full of new and foreclosed homes with the heat shut off and cob webs collecting in the corners.
So you see, while I agree with all of your concerns that this “recovery” is founded squarely on a phoney stimulus bill, I don’t think it will last until 2011 and that it will expire like a prop plane running out of oil.