Housing Prices Analysis: The worst is yet to come

Submitted by a reader from an unknown source — might be Dr. Housing Bubble, which is another Blog

Housing never really improved – 10 charts showing the United States housing market is entering the second wave of problems. 1 out of 4 people with no mortgage payment in the last year are still not in the foreclosure process.

To put it bluntly, the U.S. housing market today is in deep water.  Nothing exemplifies the transfer of risk to the public from the private investment banks more than the deep losses at Fannie Mae and Freddie Mac.  Fannie Mae announced a stunning first quarter loss of $13.1 billion while Freddie Mac lost $8 billion.  At the same time, toxic mortgage superstar JP Morgan Chase announced a $3.3 billion profit for Q1.  This reversal of fortunes has been orchestrated perfectly by Wall Street.  Since the toxic assets were never marked to market, the big losses have been funneled to the big GSEs (and as we will show in this article, now makes up 96.5 percent of the entire mortgage market).  In other words, banks are making profits gambling on Wall Street while pushing out mortgages that are completely backed by the government.  We are letting the folks that clearly had no system of underwriting mortgages correctly or any financial prudence lend out government backed money and the losses are piling up but only in the nationalized Fannie Mae and Freddie Mac.  What a sweet deal.  Stick the junk in a taxpayer silo.

I wanted to go into the details on the current U.S. housing market and the data is not pleasant.  In fact, it is downright disturbing.  For background information, the U.S. has roughly 51 million active mortgages.  As we go through the next 10 charts, it is important to keep this in mind.  Whitney Tilson’s T2 Partners came out with some riveting charts regarding the current state of the housing market.  Let us go through 10 of the most crucial charts.

Chart 1 – Homes in foreclosure

The ultimate sign of housing distress is foreclosure.  This should be obvious.  So for all the talk of a housing recovery I point to the above chart.  Today, as in right now, we are in record territory for the number of homes in foreclosure.  14 percent of all U.S. mortgages are in some form of foreclosure.  If you do the rough math, this equates to:

51 million x .14                 =   7,140,000 mortgages in default or 30+ days late

I always get this question about how folks arrive at the figure of 7 million.  The above equation should give you an idea.  This by the way is not a good situation.  And with many toxic loans including option ARMs and Alt-As still lingering in the market, we have a few more years of problems baked in unfortunately.

Chart 2 – Foreclosure filings

Building off chart one, foreclosure filings are still at record levels.  In fact we are heading to a 3.5 to 4 million foreclosure year in 2010!  This is somehow a positive thing for the market?  People forget that foreclosures happen because of underlying economic issues.  If everyone was making big bucks and homes were going up in value then we wouldn’t have this problem.  Just look at the number of foreclosure filings back in 2005.  Roughly 60,000 to 70,000 per month.  Last month we hit 367,000+ which was an all time record.  When foreclosure filings get back down to more normal levels, then we can say the housing market is improving.

What about strategic defaults?  At most, 1 out of 5 foreclosures is probably a strategic default.  But that means 4 out of 5 are losing their home because they can’t pay.  This is why we absolutely need bigger down payment requirements.  If you get a government backed loan (aka the 96.5 percent of the market) then you should at the very minimum put down 10 percent from actual cash sources (no using tax credit nonsense).

Chart 3 – Home prices dropping

I think some people have a hard time understanding why home prices have fallen lately.  Well, when a large part of home sales are distress properties prices usually shoot to the downside.  We had a nice little bump from the alphabet soup of government programs including HAMP, tax credits, and other gimmicks but the trend is back to lower prices.  Why?  Because the underlying economy is still not healthy.  Now that people have to at least show some proof of income, it turns out that many cannot afford high priced houses.  Is this a surprise to anyone?  What do you expect when your strategy involves kicking the can down the road?  The above chart basically shows one World Cup kick to the can.

Chart 4 – Nationalized housing market

Congratulations, you are the housing market.  96.5% of all originated loans are now government backed.  Remember Fannie Mae and Freddie Mac and their epic continuing losses?  Apparently banks have no problem originating loans as long as they can use the government money to gamble in the stock market.

Wall Street enjoys handing your money out.  They like to beat on their chest about the free market but have no intention of lending out their own money (i.e., your bailout funds).  In fact, Wall Street has convinced itself that your money is basically their hard earned cash.  For the risky housing market, they’ll be the middleman in lending out mortgages that are defaulting in mass.  What do they care if the economy is on stable footing?  They don’t care if you lose your job and can’t pay the mortgage in one or two years.  By then, the banks will be gambling in another bubble putting another sector of the economy at risk.

Chart 5 – Housing overhang

Remember that 7 million figure?  Well there it is.  Keep in mind that we keep adding to this pile because foreclosure filings are running at 300,000+ per month.  So the market is actually saturated with inventory.  You may not always see this in the actual data but we’ve gone through multiple case studies of shadow inventory.  This large amount of overhang will add additional pressure to housing prices in the next few years.  In fact, with this amount of housing we have anywhere from 7 to 9 years of inventory to clean out!

Chart 6 – Distress inventory as sales

The dip you see in 2009 was basically the failed efforts of HAMP and other bank stalling efforts.  Now that banks have basically nationalized the housing market and have made Fannie Mae and Freddie Mac their dumping ground, they really don’t care.  They can use the taxpayer money they get under the guise of helping homeowners to speculate on Wall Street while funneling GSE debt to the public.  An absolute win for them.  The biggest and most risky of debt gets pushed to taxpayers while the lion share of profits stays in house as bonuses.  The system couldn’t be more corrupt or broken.

Chart 7 – Not paying and living with no foreclosure

This is a stunning chart.  24% of those that have made no payment in the last year are still not in foreclosure!  In other words, you have tens of thousands of people living rent free while banks pretend everything is fine and claim billions of dollars in profits.  What a sham!  Just look at the 24 months with no payment column.  39,000 people have not made a payment in 2 years and no foreclosure has been filed!

Chart 8 – Home equity lines

With so many homes underwater, the second mortgage market has virtually disappeared.  But we still have $842 billion in loans made during the peak of the bubble outstanding.  Most of these are actually held by the big four banks and that is probably another reason why banks are moving aggressively against some while letting others stay in their home without payment.  In fact, if you look at the above chart it seems that if you leveraged yourself with multiple mortgages banks might wait to move on you while if you only had one mortgage backed by a GSE, you’re out.  Fannie Mae and Freddie Mac defaults on standard mortgages are spiking to record levels.        

HELOC defaults are soaring:

This means further bank losses but can Wall Street gambling outpace the losses from the housing market?

Chart 9 – nonpayment savings

There is an upside to not paying on your mortgage.  More money to spend!  Ironically some of the recent increase in consumer spending hasn’t come from job gains or actual employment improvement.  It has come from people not paying their mortgage, downsizing (or getting a similar house for half off), and using the freed up income to spend.  The estimate is that $8 to $12 billion per month is freed up from people not paying on their mortgage.  You must have some uncanny self delusion to spin that as good news.

Chart 10 – REO vs distress

This chart pretty much sums it up.  Banks are moving on current REOs (the small batch that they have) and pumping this up as good news but the 90 days plus foreclosure number is still trending up.  How is this magic done?  We’ve talked about it above.  You simply don’t move on delinquent homeowners.  You ignore actual losses.  You mark your assets to fantasy valuations.

In total the housing market is in worse shape today than it was a few years ago.  If the stock market was tied to housing we probably have a Dow 20,000 with 14 million foreclosures.  The bailouts have been one large transfer of wealth to the banking sector.  Remember that the bailouts were brought about under the guise of helping the housing market and keeping people in their homes.  None of that has happened.  Ironically the only thing that seems to keep people in their home is when they stop paying their mortgage!  If that is the strategy we have arrived at after $13 trillion in bailouts and backstops to Wall Street we are in for a world of problems.

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Related Posts:

Ross Perot Charts: How I Learned to be a Housing Blogger from Ross Perot.
Foreclosed: Predicting Foreclosures in California. How Many Homes will Be Foreclosed in 2008?
Housing Perception Foreclosing on Reality: The Fundamental Housing Attribution Error.
Banking Solution to Financial Crisis is to Ignore Distress Inventory – California had 1,200 Foreclosure Filings Per Day in 2009 – The California Real Estate Foreclosure Machine. Countrywide Financial, WaMu, and Wells Fargo top Foreclosure List in Q4 of 2009.

11 May, 2010 Fannie Mae, Freddie Mac, alt-a, bailout, banking, debt, foreclosures, fraud, housing-2010, housing-data, market analysis, mortgages, wall street, write-downs

19 Responses

  1. No Holes Judy….

    Good luck to you!

  2. PJ, your logic has a few holes.

    I’m no where near any fault line but I did feel a minor tremble earlier this afternoon. The jets overhead can make the house shake far worse that the quake that occurred.

    I used to live in ‘tornado alley’ in Kansas. Those winds shook the house I grew up in worse than the moderate quake that occurred last month.

    The activity is along a fault line many miles away.

    Many states have problems with flooding. Many states have problems with wild fires caused by lightening just as most of our fires were.

    Listing wild fires as a reason to not build would have vast areas of OTHER STATES such as KANSAS, TEXAS and FLORIDA as areas not to be built in. Of course, rugged mountain areas that are forested such as in CO, CA, WA and OR would fall into that restriction too.

    I AM all in favor of not allowing any rebuilding in any area prone to FLOODING anywhere in the country. If DIKES are require, move the city or town. Oh, and that would take care all of New Orleans PERMANENTLY. Flooding along the Missouri river would no longer be a problem, just force those towns to move.

    CA is not the only part of this country that has to deal with earthquakes, Major earthquakes have occurred in the eastern part of the US. Geography has even been changed with rivers re-routed due to earthquakes back east.

    Gotta find ALL the fault lines everywhere and no more building there, where ever it is.

    No more building of houses in tornado alley unless they are completely below ground. But they have to be well away from anywhere that can flood. We won’t be building there either.

    Oh, and I left out hail storms and the communities that get hit by hurricanes. We don’t need to build all those buildings over and over where there are hurricanes (and the flooding caused by water forced inland for miles).

    Oh, yeah, then there are the ice storms that can kill people because their power is cut off or they get into accidents on the roads. Do we add that to the list? Several states were hard hit for over a year, just getting power and telephone poles replaced. Yeah, gotta get those all buried real deep but protect the lines from flooding. But do we force everyone to move if the ice storm takes out the houses?

    When to say ‘when’ comes to mind with this logic.

  3. 2 Judy…

    Perhaps you find my post’s a bit to hard… but am watching many, many innocent individuals suffer , some actually having land owned for decades attempted to be stolen out from under them…

    But must be honest here… could give a rat’s ass about the state of CA… a state that allows people/ builders, whom ever, to rebuild in areas of mud slides, fires and on fault lines…. when all indicates “do not build there again… the same speculative cramp is reconstructed.

    That is another “shadow cost” that has been placed on the backs of the American Taxpayer under the radar. Yet, each and every taxpayer turned a blind eye to the shut off of water in the most fertile valley in CA?

  4. 4 Ian

    Hope this makes your day…know you were very concerned with this issue. The very same thing happened with a GSE servicer PHH back in 2007(?), question is why make the announcement before you dig into the book’s… just seems odd that two “under the radar” PTC’s involved with this whole mess have been baited and dropped by the same suitor…


  5. 2 Judy… one word VOTE!

    Like the once speaker of the house, Tipp O’Neil said “all politics’ are local”

    Underwater properties, that have yet to be foreclosed on, if you read the above post , have people living in them for years without paying the mortage, insurance and or taxes, either are the “bank’s” Servicers, Investors and or Trustees”… This is going on all over America and placing an undue burden on people, who have been and are current in the fiduciary responsibilities (for now) but more importantly seniors who own their homes outright and are living on a fixed income… And all others in between…

  6. I have long been telling people that the U.S. has recently turned into a socialist country through backdoor transformation. How? More than 95% of real estate is owned by the government (fannie and freddie)! Actually, it is even worse, as it is not clear who gets the house after foreclosure. Seems like it’s the servicer, not fannie/freddie, so 95% is ultimately owned by the banks.

  7. To PJ:
    “So Judy, you are actually lamenting about “your” propery taxes , which were inflated by the hyper speculation in the state of CA… and now you expect a “bailout” on the backs of people in Peoria…”

    You made either some presumptions or some interpretations that are incorrect.

    My answer is no, I’m not expecting a ‘bailout’ but many cities across this nation may be in for some dangerous times ahead. That is what I’m really afraid of. Riots would be even worse than bridges collapsing.

    If I lament anything, it is the illegal pension funding that our city leaders did behind closed doors. We already had problems that caused severe problems with the city’s credit rating and we were only getting over that. The pension funding problems were never properly sorted out and I’m actually wondering when we will see that hit the news again. Wall Street’s effect on the investments can not have helped.

    I do realize we are not the only city and county with a big budget mess. We may be the one that has the biggest mess with the local retirement funding that was promised. It was tremendously underfunded.

    Regarding the resetting of property taxes: The ability to get the taxes reduced based on current property value is state law in CA, provided you file the request with the county. The base tax for property is tied to the lower of what your property valuation is under the benefits of Prop 13 OR the current valuation. For the people who bought in the last 5 years, the recorder’s office website even provides a means of getting a comp from a recent sale in your immediate area. That comp is then to be submitted if you need to get your taxes lowered.

    How do you think I know that the banksters are picking up the tab for the property taxes if you don’t pay? Why would I complain about the banksters having to pay up for that at least? If you want to argue that TARP funds went into it, well it is better spent on the property taxes than on the fat-cat bonuses!

    They breached the permanent mod I signed. They presumed that they would get to take the taxes out of the proceeds from my house. They know who the NEW attorney is. So now we start a new game of chess.

  8. To Judy- there are a large number of states/cities/municipalities/townships/towns which derive their funding from real estate taxes. Alot of them are in serious trouble. They all seem to have based their spending on an ever-increasing amount of taxes being collected. Now, not only has the housing “boom” stopped, with a resulting decrease in revenue, property owners nationwide(residential, commercial, hotel, mixed use) are clamoring for a reduction in assessed value of their properties. Tax bureaus are loathe to effect that change, because then a precedent is set. HOWEVER: if anyone can connect the dots linking wall street with inflated (bogus) appraisals used in the loan securitization process, then an ironclad case can be made that, no, your property isn’t now and never was worth xxx, it was only ever worth xxx divided by 2, or 3, and your re taxes should be lowered accordingly. Appraisal fraud was rampant, liar’s loans (fudged up by the mortgage agent or the underwriter) were rampant, there is enough ammo to hang everyone, I for one know it. However, I am not the one for various reasons, to get this program rolling. Perhaps you are- but all real estate taxes should be cut by 30- 70%, Everywhere. Elected officials love to spend money. But they have to be reminded that they don’t have any money to spend until they take it from us. Or our businesses. Or until they sign our names as taxpayers on a loan, bond, bailout or whatever. But get your property taxes halved on your own, it is doable.

  9. 2 Judy… seems that you, might have a clue… but have you ever availed yourself to any public meeting in your community? Have you ever voiced your opinion on how your federal tax dollars are actually being spent?

    “Our infrastructure is already crumbling. Remember the bridge collapse just a few years back? I know that some of the federal/tax-payer money to bolster the economy was to go to highway projects and I am seeing that occur. What I do not see is funding coming to the local regions to replace what they have lost and will continue to loose in property tax revenues.”

    So Judy, you are actually lamenting about “your” propery taxes , which were inflated by the hyper speculation in the state of CA… and now you expect a “bailout” on the backs of people in Peoria…

  10. People in CA already have been requesting that their property taxes be reset, based on actual fair market value. With any house that was purchased in the last 5 years, they are probably getting significant relief on their property tax bills, hopefully to a level that they can afford to pay.

    But while the property taxes get paid by either the banksters or the owners, the local and county governments are in a mess. In CA, the state is taking a share of the local property taxes. What local government entity EVER set their forward-looking budget based on a big DECLINE in revenue? Unless it is an area with some known future disruption, such as a major military base closure, none of the local governments were working with budgets that planned for this size of disruption.

    When we know that there are states that are in danger of defaulting, think what this means to the budgets in local communities. The city and county level services are going to be facing problems.

    State-funded public schools are already cutting back on hours of instruction.

    Our infrastructure is already crumbling. Remember the bridge collapse just a few years back? I know that some of the federal/tax-payer money to bolster the economy was to go to highway projects and I am seeing that occur. What I do not see is funding coming to the local regions to replace what they have lost and will continue to loose in property tax revenues.

    The feds funded PROJECTS, not replacement of funds for on-going services and maintenance items in the local or state budgets.

    Just as the housing mess will take years to deal with the foreclosure inventory, the mess created for our communities is going to be long-lasting. And, just as the housing mess has not hit bottom, the mess for the local governments has not hit bottom either. Some cities have additional burdens in unwise contractual agreements that were made to employee groups or unions. (An ugly example is the mess created in San Diego.)

  11. Judy, I am with you 100% !

    Again, the banksters don’t see that mass foreclosures are going to affect the property taxes and in a domino effect, next year the counties are going to have more budget problems, they will lay off more employees and they will not be able to pay their homes causing yet another wave of foreclosures.

    They really messed up !

  12. In reply to PJ’s comment: “In CHART #7 should supply the data on how many that are not paying their mortgage are also not paying their property taxes… which places an unfair burden on other people..”

    Even without having an impound account for the taxes, most of these properties have the property tax payments advanced by the banksters. They don’t want to loose the property to a property tax auction, not when they are getting to steal the house if you do not fight off foreclosure.

    They may pay after the taxes were actually due, requiring that they pay the late penalty.

    Since they created the housing bubble that ripped everyone off, I do not feel bad at all that the banksters paid the taxes. In my own case, they tried to scam me a second time around, giving me a mod and then PROMPTLY BREACHING it. So now, I have my attorney. I’m not interested in that mod anymore. It is proof of their treachery in my case. They no longer have a cake-walk to take my house.

    The REAL unfair shift of the burden of the property taxes occurs with the foreclosure properties. Both those FC houses and any in the nearby area that are sold post-FC, will be sold at a price that is impacted by that foreclosure. That means the property taxes on those homes will be significantly less than it was previously, in many cases.

  13. anyone i think property tax and insurance IS paid (paid is paid) from the CO MiNGLING of funds remember the loan is pooled and tranched so neednt get upset about that one right now am i right?

  14. PJ

    Yes, the CEOs made huge profits while the market was good, but the banks they oversaw are now in bad shape – despite recent “fabricated” recovery. And, many small and middle size bank have gone under.

    All that happened during mortgage the “Mardi Gras” which was orchestrated to tap the wealth in American homes. First, banks solicited credit in the form of credit cards – and applied high interest rates that guaranteed default if consumer faced adverse circumstances. The banks insured that credit reporting was loaded with errors in order to generate low scores that limited mortgage purchase and refinance.

    Then the banks solicited high interest rate mortgage loans in order for consumers to pay their credit card debt (or else face judgment by relentless debt buyers). The banks did not care about the credit card debt – they wanted the big prize – the mortgage loan. The plan was well thought out – but in the process they “bit the hand that fed them” – the consumer. The consumer and the consumers home were the source of profit for the banks and their CEOs, but the consumer cannot feed them anymore.

    The game is over – and the country will suffer for a very long time.

  15. 2 Anonymous,

    “The CEOs bit the hand that fed them. And, unfortunately, the entire country and economy suffers.”

    Bit the hand? Seriously you jest… they are lapping in the hand of luxury at the taxpayers expence.

    Had enough!

  16. PJ

    The foreclosures are a result of fraudulent mortgages to start with. The past ten years has been nothing but a siphoning of all wealth from the American public – to the CEOs who fraudulently procured bogus loans with egregious terms. All was thought out and well planned.

    Unfair burden on other people??? You betcha ya. The CEOs bit the hand that fed them. And, unfortunately, the entire country and economy suffers.

    Do not blame the people. They were and are victims. All that has been done is a public outrage. People cannot pay their property taxes because they have been drained of every ounce of ability to pay by the very parties – motivated by greed – that caused the meltdown.

    And, I am not in foreclosure – and pay my property taxes. The fraud out there – is incredible.

    America needs to wake up..

  17. In CHART #7 should supply the data on how many that are not paying their mortgage are also not paying their property taxes… which places an unfair burden on other people..

  18. Here is the entire 203 page report that the charts came from if you are interested…

    Fascinating Report on the Housing and Economic Crisis and Why There Is More Pain to Come


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