Low home prices are a good thing, but falling prices, in the short-term, are a tough pill to swallow. Money and confidence are lost and consumer spending dries up. Moreover, given the backdrop of the enormous bubble and all of the outstanding loans, falling prices mean more strategic defaults, even more foreclosures, and more losses for our already undercapitalized banks.

There are literally millions of foreclosures in that will be coming to market over the next few years. Add to that a few million short sales and the rest of our shadow inventory, and we’re looking at a big heap of distressed property that will put immense downward pressure on home prices. The supply of homes for sale will be large.

Home prices are simply a function of supply and demand. Facing this coming large supply, the government either needs to increase demand or find a way to reduce that supply to achieve price balance. Since 2008, there have been a host of “extend and pretend” programs aimed at these two things: HAMP, Homebuyer Tax Credits, QE2, Foreclosure Moratoriums, etc.

While these programs have bought us time, they haven’t solved the fundamental problem: home prices are still too high. And without continued intervention, they will continue to fall – perhaps back to their historical trend-line, or perhaps even overshoot it.

Here are 4 ways the government might try to stabilize the housing market before the election:

1. Fannie Mae, Freddie Mac, and the FHA could rent out their foreclosures instead of selling them.

Pros: This would certainly reduce the supply of homes that come up for sale over the next few years.

Cons: But then what? Assuming they would sell them eventually we are just kicking the can down the road again. Besides, the GSEs don’t like this idea.

2. A Massive Principal-Reduction Campaign. This could either be up front, as banks are doing with option-arm loans, or after time as an incentive.

Pros: This would entice some would-be-strategic-defaulters to stay in their homes. But, are there really that many would-be-strategic-defaulters? If so, the housing market is much more bleak than we realize.

Cons: Moral hazard. How can you reduce some and not others? What about the guy who just paid his mortgage off? Voters won’t like this unless everyone gets free money.

3. Investor incentives. They already got what they could out of first-time homebuyers, but maybe they could stoke housing demand by giving investors reasons to buy lots of homes. They could offer special financing, free rehab money, and tax credits. How about “Buy Two, Get One Free”?

Pros: Especially at the low-end, this could spark demand and soak up excess inventory.

Cons: Now lower-end or first-time homebuyers will have a tough time competing with these investors. Besides, wouldn’t those investors rather simply buy the same house for less, without all of those gimmicks?

NOTE: This seems to be the least-horrible solution.

4. A National Foreclosure Moratorium. No foreclosing, no extra supply.

Pros: In the short-term, prices would hold and voters would probably approve.

Cons: Free rent = more strategic defaulters. And, in the long-run, this only makes things worse. And, U.S.S.A.?

Why Housing Gimmicks Are Needed

The only reason why all of these “extend and pretend” gimmicks are needed is that, with home prices at their current levels, there simply isn’t enough demand. If Uncle Sam would get out of the way and let prices find their bottom, then, by definition, there would be appropriate demand and the housing market would be in harmony.

The Obama Administration has to find a way to get us to happily pay $3 for widgets, when they are probably only worth $2, and five more widget factories just came on-line. And then re-elect them for their brilliant plan.

Such a theory is presented in the Herald Sun although one might not quickly spot it because of the headline Decade of pain for Melbourne’s property market

The good news for homeowners is that AMP Capital chief economist Shane Oliver and Grattan Institute program director Saul Eslake – the ANZ’s chief number cruncher for close to 14 years – say Victoria will avoid a US-style property crash which saw prices plunge by 30 per cent.

Instead, house prices will continue their single-digit slide into 2012 before stagnating for five to 10 years as wages catch up with a median house price which has climbed 133 per cent since 2000.

“We are facing a situation where we are just spinning the wheels for up to 10 years until incomes catch up with property prices,” Mr Oliver said. “You could have a five to 10-year period where you have prices rise before they come off again and basically track sideways within a range.”

Totally New Paradigm, Permanently High Plateau

That does not sound like a decade of pain, nor is it a “bleak” outlook. Rather, it’s none other than the entirely laughable “Totally New Paradigm, Permanently High Plateau” theory.

Flashback March 26 ,2005: It’s a Totally New Paradigm

Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that ”South Florida is working off of a totally new economic model than any of us have ever experienced in the past.” He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.

“I just don’t think we have what it takes to prick the bubble,” said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90′s. “I don’t think prices are going to fall, and I don’t think they’re even going to be flat.”

“I look at this as a short-term investment,” said Mr. Farquharson, 36, who works for a venture capital firm, “and plan to unload it as soon as things look dangerous.”

Now there’s a laugh. By the time it looks dangerous will there be anyone looking to buy?

Talk of “new paradigms” or “new economic models” has been associated with every major bubble in history, typically near the peak. Wasn’t it just 5 short years ago that Greenspan proclaimed the “productivity miracle” and everyone was counting “clicks” on dot coms as the “new economic model”?

Just as soon as I finished writing this post, I found a new quotation to add.
It’s perfect.

Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership.

“It is a new paradigm” he said.

Scroll back up and take a look at that first chart again. Current talk of “New Paradigms” and “New Economic Models” should tell you exactly where we are and where we are ultimately headed.

Flashback June 7, 2005: It’s time to shift the arrow

Yes, Mish readers I am pleased to announce that housing has now reached “A permanently high plateau”. I offer the following quotes from a New York Times article as evidence:

“I think we don’t expect prices to continue to rise at this pace, however, we don’t see a bubble bursting either,”he said. “I don’t recall a real estate bubble ever bursting that wasn’t preceded by bad economic conditions or some dramatic shock, and nobody is predicting any of that right now.”

“The interesting thing we’re seeing is, it’s a very stable, brisk market,” said Steven B. Schnall, the president of the New York Mortgage Company, a mortgage lender. Mr. Schnall pointed to continued low interest rates as the most important factor in the market. ”I don’t see prices continuing to skyrocket,” he said. “They’ve reached a very high level and this almost appears to be a new normal, and interest rates are helping that.”

Flashback …
“Stock prices have reached what looks like a permanently high plateau.”–Irving Fisher, esteemed economist, October 1929

Flashback November 01, 2005: Thoughts on Housing Construction

Many seem to thing that housing will plateau and there is no fear of a real slump. At the top of the list in believing the “permanently high plateau” theory is David Seiders, the chief economist for the National Association of Home Builders. According to Seiders, single-family starts numbered about 1.6 million, in 2004. He expects another record this year, even as the industry begins to hit ”the plateau we’ve been watching and waiting for.”

Also chiming in on the permanently high plateau theory is Erik Bruvold of the San Diego Regional Economic Development Corp. in the San Diego News article Housing economists raise yellow flag over San Diego.

Mr. Bruvold predicted a flattening in prices rather than a dramatic falloff. Already, the inventory of homes on the market is growing and sales prices are lower than asking prices. “I think we’ve hit a plateau,” Bruvold said. “I would not refer to it as a turning point.”

David Berson chief economist of Fannie Mae and David Seiders, chief economist for the National Association of Home Builders also seem to be giving some credence to the “plateau theory”. “Prices are so high that at some point there is the possibility people may simply decide it’s too expensive to move there,” Berson said. “Alternatively, prices may simply slow for a period of slow or no price gains.”

No one seems to be as optimistic as the Toll Brothers according to the New York Times article Closing Ground.

At the moment, Toll controls enough land for nearly 80,000 houses. Its competitors, which tend to build lower-priced houses on smaller lots, have even larger accumulations. K. Hovnanian has land for more than 100,000 houses. Pulte Homes holds 350,000 sites. Still others – Lennar, Centex Homes, D. R. Horton, KB Home – control hundreds of thousands as well. And all of them are in ferocious pursuit of more.

The company expects to grow by 20 percent for the next two years and then will strive for 15 percent annually after that. Those estimates suggest that the company’s expected production of around 8,600 houses this year will expand to at least 15,000 houses by 2010. Individual Toll developments now range in size from a few dozen to 3,000 houses.

“Why can’t real estate just have a boom like every other industry? Why do we have to have a bubble and then a pop?”asked Toll.

….

This cycle will not be any different. I do expect some home builder bankruptcies out of this mess but it is not easy to predict which ones.

Here is what the housing evidence suggests:

1. Homebuilders are clearly ignoring business cycles, affordability issues, tightening credit, and liquidity concerns. Money has been too easy for too long for anyone to understand what might happen in a liquidity crunch.
2. Homebuilders will keep buying more and more land and adding more and more to housing inventory in a foolish attempt to grow 20% every year fighting for “market share” right at the peak of the boom.
3. No one seems to see or believe the devastating consumer led recession that is staring them in the face. It’s simply “build or die”.
4. People will likely borrow to buy this housing bubble until lending literally seizes up.

I believe we can now answer Toll’s question: ”Why can’t real estate just have a boom like every other industry?”

My answer is “Patience Mr. Toll, you will, and it will end up looking a lot like the telecom bust of 2000 as well.”

We are now hearing exactly the same nonsense out of Australia.

Agents Withhold House Price Data

Please consider Agents Withhold House Price Data

MELBOURNE real estate agents and vendors are increasingly withholding or manipulating data provided to the Real Estate Institute of Victoria, prompting calls for the mandatory reporting of all property sales to protect consumers.

A Sunday Age investigation has found that 27 per cent of all auction results published by the industry body in June were missing critical information – including the sale price, passed-in price or the reserve. Many auctions were not reported at all, distorting clearance rates that are used by buyers and sellers to gauge market strength.

Nearly one in five properties sold at auction are now reported to the REIV with the price marked ”undisclosed” – a significant increase from last year’s property boom, up from 11 per cent then to 18 per cent now.

The investigation also revealed that 43 per cent of properties scheduled for auction in June had no published quote range, further frustrating buyers’ attempts to obtain basic information.

Last month, agency RT Edgar sent a newsletter to clients warning there was a ”serious question mark” over media reporting on the market because many agents were withholding sale prices and passed-in results.

REIV head Enzo Raimondo defended the institute’s voluntary reporting methodology, saying the ”small increase” in the number of undisclosed results did not affect the integrity of the system.

”It is not the role of the REIV to force home owners to publicly declare the amount for which their homes sell. If a person really wants to know the price for which a home sells, they can attend the auction,” Mr Raimondo said.

Favorite Comments From the Article

• Moral of the story? Don’t buy now. Wait. And with every day that passes take comfort in knowing that property investors and RE agents are dying the death of a million cuts (with every month, comes more news of further price falls)
• “If a person really wants to know the price for which a home sells, they can attend the auction,” Mr Raimondo said.” Bit of a childish, simpleton’s response there, Mr Raimondo. As head of the REIV your attitude only serves to underscore your industry’s dodgy reputation.

Dear Real Estate Buffoons

1. Prices are falling whether you disclose them or not
2. Not disclosing prices makes people mistrustful and rightfully so. That will hurt, not help sales

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

What You Need to Know About Seasonal Adjustments

Actual home prices are higher every Spring, then fall every Autumn and Winter – this is a consistent seasonal pattern. As such, some home prices reports will seasonally adjust their values (SA), while others report not-seasonally-adjusted data (NSA). By taking advantage of these adjustments (or lack thereof), home price reports can be spun in different ways.

Let’s break these reports down…

CoreLogic just reported that home prices rose 0.8% from April to May. Their numbers are not-seasonally-adjusted (NSA), so home prices should be increasing month-to-month. Digging deeper into their report:

“On a year-over-year basis, home prices declined by 7.4 percent in May 2011 compared to May 2010 after declining by 6.7 percent* in April 2011 compared to April 2010″.

In other words, the price increase that should happen was less in 2011 than 2010.

NAR didn’t include month-over-month figures in their report, instead saying that:

The national median existing-home price for all housing types was $166,500 in May, down 4.6 percent from May 2010. Distressed homes – typically sold at a discount of about 20 percent – accounted for 31 percent of sales in May, down from 37 percent in April; they were 31 percent in May 2010.

However, the April report shows a national median existing home price of $163,700, again, NSA.

The the recent Case-Shiller Home Price Index Report reported that:

Data through April 2011, released today by S&P Indices for its S&P/CaseShiller Home Price Indices, the leading measure of U.S. home prices, show a monthly increase in prices for the 10- and 20-City Composites for the first time in eight months. The 10- and 20-City Composites were up 0.8% and 0.7%, respectively, in April versus March.

Case-Shiller gives some some seasonally-adjusted data to work with…

Not-seasonally-adjusted, prices rose slightly from the March report:

But, seasonally-adjusted prices actually fell:

Conclusion

The actual median national home price is showing strength over the last 30-60 days, just not as much as it should be for this time of year.

Charts and tables are courtesy of “TC”.

Case-Shiller Nominal Price History 10 Least Expensive Metro Areas

click on any chart or table for a sharper image

Case-Shiller Nominal Price History 10 Most Expensive Metro Areas

Case-Shiller Nominal Price Declines Since Peak

Case-Shiller “Real” Price History 10 Least Expensive Metro Areas

Case-Shiller “Real” Price History 10 Most Expensive Metro Areas

Case-Shiller “Real” Price Declines Since Peak

TC writes …

Mish, I’ve attached several Case-Shiller graphs based upon most recent Case-Shiller data.

The charts show that all 20 metros are down from the peak prices between -10.7% (Dallas) and -58.6% (Las Vegas). Note that 13 of 20 cities tracked are presently at the lowest point in the cycle, while 7 cities are presently higher than their early 2009 low.

Of the 7 cities that are higher, San Francisco leads the way at +10.3% (+$43,461). However, San Francisco it still an amazing -40.6% (-$317,790) below peak prices.

Of particular interest is the “Price Level” column which displays how far back prices have reverted. For example, you can see that Atlanta has reverted back to April 1999 prices (and keep in mind this is nominal!). Three-fourths of the US is at the lowest point in the cycle, while 1/4 is up modestly and most likely temporarily.

The fourth chart is of March 2011 real (inflation adjusted) data. It is sorted identically to chart one and again shows that all 20 metros are down from their peak prices with again Dallas in the best shape (-21.6%) and Las Vegas the worst (-63.2%). It also shows that in real terms only 2 of 20 metros are actually higher than their early 2009 low and that both are only up +2.7% (and both still have huge declines of -47.4% and -35.3%).

The remaining 18 metros are all at their lowest point in the cycle. Again, the “Price Level” column is of interest as it shows that 10 of metros are down to levels never seen before in real terms (noted with an asterisk) and have resulted in a “lost” 20+ years of home appreciation. Long story short, housing has collapsed across the country and in real terms national pricing is back to late 1987 pricing – ouch!

I should also mention that this is based upon the latest Case-Shiller data, but many of these homes sold in very early 2011 since it typically takes 45 – 60 days to close and get recorded. So actual current prices (June 2011) are likely even lower and with the lowering of the GSE limits around the corner, we’ll likely see even further declines.

On a positive note, prices today (especially when you account for near historic low interest rates) are the best they’ve been in 25+ years. While prices are still likely to head lower all markets have already experienced the majority of both their real and nominal price declines (i.e. San Francisco is already down in real terms -$420,000 and with median prices at $465,900 another -$420,000 is impossible). That being said, patience will still likely be rewarded with lower prices and maybe even lower interest rates. Time is on the renters side.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

It has come to this. A year after rescuing Greece from default, Europe is staring into the abyss. The bailout has proved insufficient. Greece needs more money, and it can’t borrow from private markets where it faces interest rates as high as 25 percent. There is no easy escape.

What’s called a “debt crisis” is increasingly a political and social crisis. Already, unemployment is 14.1 percent in Greece, 14.7 percent in Ireland, 11.1 percent in Portugal and 20.7 percent in Spain.

Some causes of Europe’s plight are well-known: the harsh recession following the 2008-2009 financial crisis; aging populations coupled with costly welfare states. But there’s also another less recognized culprit: the euro, the single currency now used by 17 countries.

Launched in 1999, it aimed to foster economic and political unity. For a while, it seemed to succeed. In the euro’s first decade, jobs in countries using the common currency increased by 16 million.

It was a mirage. For starters, the euro fostered a credit bubble that led to booms in housing, borrowing and consumer spending. But one policy didn’t fit all: Interest rates suited to Germany and France were too low for “periphery” countries (Greece, Ireland, Portugal and Spain).

Money poured into the periphery countries. There was a huge compression of interest rates. In 1997, rates on 10-year Greek government bonds averaged 9.8 percent compared to 5.7 percent for similar German bonds. By 2003, Greek bonds fetched 4.3 percent, just above the 4.1 percent of German bonds.

“The markets failed. All this would not have occurred if banks in Germany and France had not lent so much,” says economist Desmond Lachman of the American Enterprise Institute. “It was like the U.S. housing market.” Both American and European banks went overboard in relaxing credit standards.

“Markets Failed” Says Desmond Lachman

Few economic statement make my hair stand straight up more than that bit of complete nonsense from Lachman. The markets did not fail. Bureaucrats who dreamed up the Euro failed.

Those bureaucrats devised a currency union with nothing more than suggestions on fiscal controls. Making matters far worse, countries in the Euro-Zone have widely differing political philosophies and policies.

That currency union was not brought about by the market. The free market would never have done such a silly thing.

Every major currency union in history without a political and fiscal union has failed. There is a nice Table of Monetary Unions on the site Euro Know that shows just that.

Bureaucrats, not the free market knew better. Bureaucrats, not the free market failed.

Not Different This Time

Potential problem were recognized well in advance by many. In February 1995 The Independent wrote a misguided editorial Why we say Yes to a single currency.

The rationale of The Independent was “It’s different this time”.

The economic arguments that, on balance, Britain will be better off inside the currency union than outside are persuasive. The discipline of a permanently fixed exchange rate would significantly reduce the risk of a return to high inflation and create greater certainty for companies and investors. There would also be lower transaction costs. There is no doubt that a successful single currency would strengthen Europe’s position on the global economic stage.

The opponents of the single currency do not agree. They argue that the experience of the ERM and events since Black Wednesday show that to be locked into a single currency is damaging. Exchange rates, they point out, can act as important “shock absorbers” in times of unexpected crisis. These are powerful arguments. They are most powerful when applied to some EU members – notably Spain, Portugal and Greece – whose less developed economies would make the exigencies of a single currency regime punishing, unpopular and potentially disastrous.

But this is not the condition of Britain today. In 1992 the needs of the British economy were at odds with the priorities of the Bundesbank. They were trying to control inflation, we needed to get out of recession. By contrast, in 1999 six or seven countries will find themselves at the same stage in the cycle, with very similar economic priorities. So things are likely to be different.

Points of Failure Predicted In Advance

Things were not different were they?

Ironically, in that 1995 article, The Independent pointed out the exact points of failure: Spain, Portugal and Greece.

Tony Dolphin, Chief Economist of AMP Asset Management, wrote a response to that article less than a week later. Please consider,European monetary union: the benefits, the problems and the traveller’s tale

The potential benefits of European monetary union are questionable, the potential costs could be very serious. A successful monetary union requires that the economies joining it are broadly the same, especially in regard to their response to external and internal inflation shocks. This is not the case in Europe. Take two examples: oil and housing.

The effect of a sustained, steep rise in the oil price will be very different in Germany, which is highly dependent on imported oil and gas; in France, where nuclear power is used to generate a high proportion of energy needs; and in the UK, where the North Sea sector of the economy would actually benefit. Imagine trying to set an appropriate, anti-inflationary interest rate policy for a monetary union including these three economies should the oil price double.

The housing sectors of European economies also differ, with the UK’s high level of home ownership financed by variable rate mortgages not being found elsewhere. It is easy to envisage a situation where the interest rate policy of a European monetary union was entirely inappropriate for the housing sector of the UK economy.

These and other structural differences between European economies will not disappear over the next four years, nor at any time in the foreseeable future. Until they do, the economic argument against European monetary union is powerful, and far more clear cut than the political arguments for or against.

Yours faithfully,
Tony Dolphin
Chief Economist
AMP Asset Management

Failure of the “One Size Fits Germany Policy”

I have no idea what Tony Dolphin is doing today but put him in the class of those who can say “I told you so.” Here is the key paragraph:

“It is easy to envisage a situation where the interest rate policy of a European monetary union was entirely inappropriate for the housing sector of the UK economy.”

The UK did not adopt the Euro but Spain did. Interest rates in Germany were not appropriate for Spain. The result was a Spanish housing bubble of epic proportion that has now collapsed.

One interest rate policy simply does not work. For further discussion, please see ECB’s “One Size Fits Germany” Policy; Rate Hikes to Stress PIIGS

Compounding Spain’s misery, Trichet has embarked on a rate-hiking campaign at the worst possible time, with Spanish unemployment in excess of 20%, and youth unemployment near 40%.

Housing Market Nonsense

Note that Lachman also blames US banks for the housing bubble.

“It was like the U.S. housing market.” Both American and European banks went overboard in relaxing credit standards.

That too is nonsense in that it does not place the blame where it belongs, on the Fed. The Fed held interest rates too low, too long. Money was too loose, banks lent.

Blaming banks for lending when real interest rates are hugely negative is tantamount to placing a bottle of vodka in front of an alcoholic, telling the alcoholic it is the best vodka in the whole world, then blaming the alcoholic for what happens next.

Fed is the Problem

Not only did the Fed hold interest rates too low, too long, the Greenspan Fed endorsed derivatives, subprime loans, and adjustable rate mortgages. Meanwhile Bush was praising the “Ownership Society” and Barney Frank was in the back pocket of Fannie Mae and Freddie Mac.

Ben Bernanke was totally clueless, in complete denial about the bubble, going so far as to say home prices were “based on fundamentals”.

None what has transpired has had remotely anything to do with the failure of the free markets. We have a failure of regulation, not a failure to regulate. Lachman, like Bernanke, really needs to get a clue.

You cannot fix a problem until you understand what the problem is. Unfortunately, politicians and economists in both the US and Europe are still in denial. Statements by those blaming markets instead of politicians and the Fed, do not help.

Addendum:

The biggest failure of regulation was the very creation of the the Fed. That should be be obvious but the sad state of affairs in regards to economic understanding says I need to spell it out.

Those screaming about the free market need to answer this question: Could the free market possibly have done any worse the serial bubble-blowing moral-hazard policies of the Fed?

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Please consider April Pending Home Sales Drop After Two Monthly Gains.

Pending home sales fell in April with regional variations following increases in February and March, with unusual weather and economic softness adding to ongoing problems that are hobbling a recovery, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, dropped 11.6 percent to 81.9 in April from a downwardly revised 92.6 in March. The index is 26.5 percent below a cyclical peak of 111.5 in April 2010 when buyers were rushing to beat the contract deadline for the home buyer tax credit.

The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, said the dip in contracts may be due to temporary factors. “The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months,” he said. “The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.”

Yun notes the growth in retail sales slowed measurably in April, while sales at furniture and home furnishing stores declined sharply. “Nonetheless, the magnitude of the fall in pending home sales is larger than can be implied by broad economic factors, so we need to see if it’s just a one-month aberration.”

Yun said tight credit is the primary long-term factor holding back the market. “No doubt the continuing excessively tight mortgage underwriting process is making the housing market recovery unnecessarily slow,” he said. “Lenders and bank regulators need to be mindful of the historically low default rates among mortgage borrowers of the past two years. A robust economic and housing market recovery cannot occur as long as banks continue to hold onto huge cash reserves.”

Excess Reserve Nonsense

Banks lend when they think they have a good credit risk provided they are not capital impaired or concerned about capital impairment. That provision is critical.

Banks do not lend from reserves or even need reserves to lend. Loans come first, reserves second.

Please see Fictional Reserve Lending for a detailed discussion. Note: I wrote that piece in December 2009 so the charts are old. However, the concept about reserves and lending still applies.

Capital Impairment the Critical Problem

That banks are not lending is a sign of at least one of the following problems, and likely all three.

• Capital impairment
• Lack of good credit risks
• Lack of consumer demand

In spite of what the Fed or the FDIC may want you to believe, many banks are capital impaired. They hold massive amounts of garbage on their balance sheets (especially real estate and commercial real estate), at marked-to-fantasy prices, not marked-to-market prices.

The excess reserves Yun cites are a mirage.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

From the report:

As more cities across the nation experience double dips in home prices, more than half (54 percent) of U.S. adults believe recovery in the housing market will not happen until 2014 or later, according to the survey released today. In a previous survey conducted six months ago, 42 percent of American adults said they thought the market would turn around by 2012 or had already turned around. Now, only 23 percent continue to think this will happen.

“Most Americans, as our latest survey revealed, overestimated how quickly the housing market would bounce back, but when it does, it will likely be a long and gradual process. Looking at the recent double dips in home prices, I expect the rest of 2011 to be volatile for real estate,” said Pete Flint, co-founder and CEO, Trulia. “On the flip side, mortgage rates won’t stay low forever and even if home prices continue to fall for a bit, now is still a good time to enter the housing market. In my eyes, we have another 18 months until we start to see signs of price stability in the housing market.”

“Our survey reflects a growing perception among potential homebuyers that the housing recovery is still a long way off,” said Rick Sharga, senior vice president of RealtyTrac. “Demand remains weak, loans are increasingly difficult to qualify for, and the shadow inventory of several million distressed properties is weighing down the market. All of these things need to improve before housing can recover.”

One quibble…

The semantics here are confusing. What, exactly, does “housing recovery” mean? Does it mean with home prices recover? – which many would directly define as returning to their previous levels. Or, does it mean that the recovery will begin – which is a nicer way of saying that this is when people think home prices will actually hit bottom and have nowhere to go but higher.

Given that some respondents replied that housing had “already recovered”, it is clear that these people answered the question in terms of a price bottom. Yet, I find it hard to believe that 54% of all respondents don’t think a price bottom will happen for three years or more. Many of these respondents are probably thinking in terms of prices returning to peak levels.

Point is, the trend is clear. Social attitudes are changing as home prices double-dip. But the actual statistics are pretty worthless.

The punishment lenders inflict on strategic defaulters are lighter than most realize, and likely to lessen as lenders need customers in the future.

Trust me,
Believe me,
It’s all in the art of stopping

Wire — In the Art of Stopping

There is an art to strategic default. There are many options, and some have stronger consequences than others. Does the borrower want to maintain some lines of credit? Will selectively defaulting on certain debts hurt their credit score more than others? Will strategic defaulters need to declare bankruptcy?

Now that millions have defaulted on their mortgage, we have anecdotal data and research studies on what really happens to those who quit paying. The results will surprise some and inspire many.

Eroding the Fear of Foreclosure: New Research Shows Strategic Defaulters Experience With Post-Foreclosure Credit

Posted on May 12th, 2011

One of the most cited deterrents of deciding whether or not to foreclose or strategically default is the fear of a catastrophic and irreversible hit to one’s credit score, leading to an inability to rent, purchase a new car or home, or open a new credit card.  After polling some of our 5,000 clients nationwide, YouWalkAway.comhas discovered it’s a fear that may be blown way out of proportion.

Susan Edwards is a client of YouWalkAway.com, a company that walks defaulting homeowners through the foreclosure process.  Edwards recently walked away from a property in Southern California.  “Prior to missing our first payment, my credit score was 805,” Edwards stated “I checked it again in June after we missed the 5th payment and it was 680.  At the time, it was commonly reported that the average foreclosure would lower your credit score about 150 points.  I had assumed it would stay in that range for up to 7 years.  I was wrong.”

So, what is Edwards credit score now?  According to Edwards, after only 3 months following the foreclosure auction of her property, her credit is back up to 734 and climbing. Fortunately, the hit taken to her credit was not nearly as bad as most people, including those who claim to be experts, might have depicted.

If this woman’s credit score gets back above 740, there will be no real ramifications for her default. Most lenders don’t have a super-duper category for those with FICO scores over 740, so the borrower with a 745 is getting the same rate and the same treatment as someone with an 805.

Edwards is not the only YouWalkAway.com client to see her credit rebound so quickly.  New York resident and YouWalkAway.comclient Jodi Romanello has walked away from two investment properties in Florida.  While she has never closely monitored her credit score, Romanello has yet to see any negative repercussions of a credit drop.  “When I first skipped payments on my first foreclosure, CitiBank Diners Club abruptly canceled my card due to ‘undesirable changes in my credit rating,’” Romanello explained.  “I got very upset because I hadn’t thought this would happen, but to my enormous relief none of my other cards did this.  I have a high limit with American Express Gold, Visa, MasterCard and a lot of store cards, and Amex just renewed my card with an invitation to go Platinum.” Romanello continued to explain how she staved off the negative credit effects of two foreclosures, “I am careful to pay all other bills instantly when I receive them, I run no balances on any cards month over month.”

The key to keeping a high credit score is to selectively default. Some people who strategically default stop paying on all their debts, often as a precursor to bankruptcy. Anyone hopelessly overloaded with debt is probably wise to follow that path. However, for those who can afford to maintain other credit lines, and feel the need to do so, can simply stop paying their mortgage and keep paying everything else.

When I first reported that borrowers were defaulting on their first mortgage and keeping their second mortgages current, I was shocked. I conjectured most borrowers would default on their second mortgage and keep the first mortgage current to prevent a foreclosure because it’s unlikely an underwater second would foreclose. That isn’t what people are doing.

Most borrowers are defaulting on their first mortgage and keeping other debts current which is helping their credit scores.

According to the study, credit cards, car payments and student loans are the most common forms of additional debt, with personal loans and medical loans rounding out the bottom.  Surprisingly, only 23% of those surveyed have ever defaulted on any other debts.  Many YouWalkAway.com clients have never even had a late payment on their record prior to strategically defaulting from a property.  Although, 91% of underwater homeowners surveyed are facing other debts in addition to their mortgage, YouWalkAway.comhas seen these recurring trends amongst many clients.  Those who have handled the foreclosure strategically by closely monitoring their credit and other debt are fairing much better financially after the foreclosure.

Lenders should be thrilled that borrowers can’t seem to kick the habit. People want signatory debt, and they would rather walk away from their underwater house than default on their other debts. Personally, I think people should get rid of all their debts and live on the positive side of the financial ledger, but that isn’t what most borrowers are doing.

Even borrowers who opt for a short sale have seen quick restoration of their credit.  San Diego Real Estate Broker, Jeff Grant can attest to his credit recovering after a short sale of his investment home which was upside down by more than $200K.  “After my own short sale, missing a total of 8 mortgage payments, my credit went from 729 to 679. But it quickly recovered to 728 a year and four months later!”

Less than 18 months after a short sale, and his credit score is basically unchanged. Why would anyone fear the credit implications of a short sale?

Following in suite, Wynn Bloch’s house in Palm Springs, CA sold at foreclosure auction in March 2010.  As a result of the foreclosure, her credit score fell just 45 points – from 780 to 735.  “It didn’t hurt me really at all,” Bloch stated, “In fact, I was foreclosed upon last March and just bought a new house in December!”  While it may be unlikely for all defaulting homeowners to purchase a home so quickly, 51% of YouWalkAway.com clients polled do wish to purchase a new home within 5 years.

From foreclosure to homeowner in less than a year. Perhaps lenders should be tougher on these people, but the need for warm bodies to sign a loan document is prompting lenders to forgive and forget.

In reality, many YouWalkAway.com clients are more than happy to shed the excess baggage of their underwater homes and downsize to a rental.  Nearly, 100% of clients report saving money by renting, and 52% chose to rent a house smaller than their previous one.   Jon Maddux, CEO of YouWalkAway.com explains, “Eighty-one percent of our clients have experienced no issues renting after a foreclosure or short sale.  Only, 18% were asked to provide a slightly larger deposit.”

As Susan Edwards shares, “I love being at our new house.  I can imagine my dogs in the yard and our family sitting at the table for Thanksgiving.  Funny,” she continues, “but I’m more excited for [my new rental] than I was when we bought this house.  It really is a new beginning for us.”

Renting is a huge relief to people escaping a huge mortgage payment. Home is where the heart is, it doesn’t require a big loan.

Edwards, Romanello and Bloch are not exceptions to the rule or lucky strategic defaulters who have fallen through the credit reporting cracks.  They are living proof that if homeowners continue to keep on top of other debts and their credit scores, they can rebound much faster than initially predicted.

Maddux continues, “There has been a lot of misinformation regarding the effects foreclosure has on one’s credit.  More often than not, it is those who have an agenda to deter homeowners from walking away who use scare tactic phrases such as, ‘Foreclosure will destroy or decimate your credit.’

That is exactly why lenders try to foster the perception that default will be harmful. It’s only harmful to those who want to use credit, and apparently it isn’t very harmful to those who want to get another home loan.

Due to the nature of how credit scoring works, I prefer to describe the effects of foreclosure as wounding one’s credit.  Blemishes will heal on their own as long as one continues to keep other lines of credit current.  Seeing it first hand with our own YouWalkAway.com clients, a homeowner’s credit will improve over time as the delinquent payments move further into the past.” …

Lenders want to keep the millions who would benefit from strategic default in a state of fear and confusion to compel the borrowers to keep paying. They would prefer to publicly endorse borrowers most macabre fantasies of strategic default while quietly soliciting new customers behind the scenes. Prior to the blog era, they might have been successful.

Study: Mortgage-only defaulters may be safe credit risks

By Julie Schmit, USA TODAY

People who default on their mortgages — but no other debts — are not as risky as expected, according to a new study from credit monitor TransUnion.

TransUnion’s research shows that those who only default on mortgages are less likely to then default later on new car loans or credit cards than are people who default on mortgages and at least one other debt at the same time.

The study results, to be released Tuesday, also show that mortgage-only defaulters saw credit scores rebound faster than people who defaulted on multiple loans, which could include people who went bankrupt.The mortgage-only defaulters “are less risky than they appear,” says Steve Chaouki, TransUnion vice president. “Lenders will want to lend to these people in the future.”

There you have it. The already light punishments for strategic default will be lessened even more in the future, provided the strategic defaulter is calculated and selective in their default.

TransUnion, like other credit-management firms, is seeking insight into mortgage-only defaulters, who could prove to be a big market for lenders. In the past five years, almost 4 million U.S. homes have been lost to foreclosure, says market researcher RealtyTrac. A chunk of those were “strategic defaults,” in which homeowners who could afford to pay their mortgages walked because home values had tanked so much.FICO, keeper of the widely used FICO credit score, last month released one of the first credit studies on strategic defaulters and found them to be savvy about credit, with better credit histories than other mortgage defaulters.

As with FICO, TransUnion did its study — “Life After Foreclosure” — after enough people had defaulted and results could be considered valid.TransUnion’s research should diminish expectations that mortgage-only defaulters will join the ranks of habitual defaulters, Chaouki says.

Fear of being lumped in with the riff-raff is largely what prevents many with good credit for defaulting. Information like this will likely push many off the fence and into a new rental.

For instance, 5.8% of mortgage-only defaulters examined in the study were at least 60 days delinquent on new car loans which were opened after they defaulted on their mortgages. But 13.1% of the multiple defaulters were at least 60 days delinquent. The mortgage-only defaulters also had lower 60-day delinquency rates for credit cards, 11.4% vs. 27.1%. Both measures were taken at least 120 days after mortgage defaults.Credit scores for mortgage-only defaulters bounced back quicker, TransUnion also found. For instance, consumers with Vantage credit scores — a competitor to FICO scores — in the 631 to 650 range saw their scores rise a median 8 points 12 to 17 months after defaulting on mortgages. People in the same credit score range with multiple defaults saw their credit score drop by 2 points. Vantage scores range from 501 to 990. …

People considering strategic default who wish to maintain their credit use should default only on their primary mortgage. The punishments aren’t that bad, and they are likely to be lessened as time goes on.

Although, there are some consequences….

The NYT reports:

Until the market recovers, the entire recovery is imperiled. Falling home equity dents consumer confidence, making things even worse.

Since the problems in housing are not self-curing, a government fix is in order. But the Obama administration’s main antiforeclosure effort has fallen far short of its goal to modify three million to four million troubled loans.

Its basic flaw is that participation by the banks is voluntary. Most have joined the program but face no real pressure to meet its goals. Another big problem is that banks often do not own the troubled loans; rather, they service the loans for investors who own them. As servicers — in charge of collecting payments and managing defaults — banks can make more from fees and charges on defaulted loans than on modifications. Not surprisingly, defaults proceed and modifications lag. Banks win. Homeowners and investors lose. The economy suffers.

That does not have to be the end of the story. In a recent hearing in a Senate banking subcommittee, witnesses proposed new laws and regulations to change loan-servicing standards in ways that would prevent banks from putting their interests above those of everyone else.

For starters, various government guidelines on loan servicing would be replaced with tough national standards. Among the new rules, homeowners would be evaluated for loan modifications before any foreclosure — or foreclosure-related fee — is initiated. The bank analysis used to approve or reject modifications would be standardized and public, and failure by the bank to offer a modification when the analysis indicates one is warranted would be grounds for blocking any attempt to foreclose.

National servicing standards could succeed where antiforeclosure programs have failed, namely, in compelling banks to help clean up the mess they did so much to create.

One way to keep home prices stable in a time of weak demand is to reduce supply accordingly. Legally requiring loan modifications would help to hold foreclosures in check.

Employment status of the class of 2010

Source:  John J. Heldrich Center for Workforce Development at Rutgers University

I found the above data reported this week rather startling.  Of the class of 2010 22 percent are not working.  Ironically in the survey many reported that they were going on to graduate school and going further into student loan debt.  I’m all for higher education and owning a home if purchased correctly.  This is the absolute nucleus of the issue here.  The only reason housing ever increased to the levels that it did was first, Wall Street juiced the market and turned it into a casino and second the government was there to backstop the entire mess.  The same is happening with higher education being privatized by sub-prime non-profits that simply push out degrees that are one step above junk mail.  You might as well go online and stream free courses for some of these institutions.  This only can happen because of Wall Street turning education into another sector to be exploited but also massive government loans that have also infiltrated the private and state college systems chasing tuition up.

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