The economy and the housing market are conjoined twins. What each does affects the other directly, and immediately. The economy is driving down the housing market, which in turn is driving down the economy. Where will the rabbit hole end?
- 1 in 7 loans is now in foreclosure, up from 1 in 10 at the beginning of this year (highest on record since 1972)
- Foreclosures on prime mortgages (prime mortgages were supposed to be the “safe” ones ) are at 33% last quarter, up from 21% at the start of the year
- Mortgage bankers project foreclosures well into 2010
- The number of initial foreclosure notifications are up dramatically. Up 11% in October of 2009 over October 2008 and up 27% for this year to date
There are so many weights dragging home prices down. The government can only prop up, pump air into, artificially inflate, stick its head in the sand…for so long. These weights are heavy and will be weighing down on houses for years to come…home prices will have to succumb to these pressures no matter how much the government tries to resist it. The correction needs to happen, it is the only way. The longer the government interferes, the longer this recession will drag on.
Click on any images below to expand
The unemployment rate has been steadily climbing, now at 9.5% throughout the United States and 12% for California. The real unemployment rate is closer to 18% when you account for people who have stopped looking for jobs and people who took part time or lower paying jobs, the underemployed. That’s 1 in 5 people either unemployed or making less money. That’s significant…and it’s only going to get worse. Unemployed people have a hard time paying mortgages, so we can expect foreclosures to increase with unemployment.
Let’s not forget shadow inventory, currently estimated at 7 million homes. This shadow inventory alone is the equivalent of 1.5 years of all homes sold in a normal economy. That is an incredible amount of homes sitting out there that the banks are keeping off the market to keep home prices artificially inflated. They gambled a couple years ago that in a year or so, the market would recover and they could just drip-feed these homes back into inventory and be done with it. They are out of time. These homes will have to be released for sale and when they do, home prices are going to get crushed.
Or they can do something else. They can let people live in their homes for free…no mortgage payment. That lets them avoid the costs of the foreclosure process, avoid adding inventory to an already saturated market, and have someone there to cut the grass.
Chart below shows the growing number of homes in the shadow inventory.
Below are three maps of the United States, starting in 2007, then 2008 and finally 2009. The darker the blue, the more that state’s bankruptcy rate is climbing. Watch how dark it gets from 2007 to 2009. 2010 will be worse. Guess what someone probably isn’t going to do while in bankruptcy? Pay their mortgage…
The FHA has depleted their reserves by 72% just this year alone. They now only have 0.53% in reserves to cover the $685 billion in home loans they insure. So, unless the housing market is done declining as of…now…the FHA faces significant losses in the near future. Know what that means? Another bailout, or, the FHA tightens its lending standards, starts asking for more money down, better incomes or whatever… As soon as they do that, there is nobody left to make home loans…which will add even more downward pressure on home prices.
Personally I think the FHA will get another bailout and as a result of the bailout, will have tighter lending standards enforced. Which is humerous, because they should tighten the standards now, not later…but then the politicians won’t have anything to appease the angry mob when billions more tax dollars are used to prop up the FHA. So the politicians will wait until the FHA collapses, and then tell the American people that unfortunately we will have to bail them out, but hey, we politicians are tough and we beat the FHA up for screwing up, and we are telling them if they want the bailout money, they need to tighten their standards. What a big game it is to them. They should just tighten the standards now, but politically, that doesn’t get them the most votes.
Foreclosures are on the rise and so is shadow inventory. As foreclosures continue to pile into the market, the value of homes will decline. The second wave of foreclosures is happening now and will accelerate as the second wave of mortgage interest rates reset over this winter, leading to another wave of foreclosures starting next year.
The impending rate of inflation guarantees the destruction of the dollar. To counter that, the Feds will have to raise interest rates and stop buying up billions of dollars in treasuries which they’ve been doing to artificially suppress interest rates. When interest rates start to rise…more downward pressure on home prices. Chart below shows the dive of the dollar…
By the government bailing out banks who made bad loans, they’ve set an example of what is “O.K.” The government, with the bailouts, has said to the American people that it is OK to take a gamble and get bailed out for it by someone else. As a result, “strategic foreclosures” are on the rise. These are people who could make their monthly mortgage payment, but just decide not to. They stop paying, and walk away from the house.
As far as they’re concerned, if the banks don’t have to pay for their mistakes, then neither should they. This is what moral hazard is all about. It’s no different than when a son sees how his father treats his mother…this sets the standard in the son’s mind of how husband’s should treat wives, which is why it’s no surprise when the son acts much like his father later in life. When governments act a certain way in front of their citizens, the citizens learn what behavior is acceptable based on what the government says is acceptable through its actions.