US treasury Sees Millions More Foreclosures

According to this Reuters article, U.S. Treasury sees millions more foreclosures, even with the ever increasing efforts of the Federal Government via the Home Affordable Modification Program, or HAMP, foreclosures will increase.  In fact according to Michael Barr, assistant Treasury secretary for financial institutions, "even if HAMP is a total success, we should still expect millions of foreclosures".

So we have an insiders view that foreclosures will continue to increase.  We also have the readily available news that unemployment keeps increasing.  Can somebody please explain to me how the real estate market is improving in spite of this these things?  To me, an improving real estate market defies logic and reason.  I see no evidence that the real estate market will improve anytime soon.

Be Wary of So Called "Good News"

According to this Reuters article, Pace of U.S. existing home sales fastest in 2 years, sales of previously owned homes increased by 7.2% in July 2009, to the fastest pace in nearly 2 years. That all sounds great, but later in the article it states "The inventory of existing homes for sale in July rose 7.3 percent to 4.09 million units from the previous month, NAR said. At July's sales pace, that represented a 9.4 months' supply, the same as in June."

Here is why that statement is foolish.  Sales are a subset of Inventory (you cannot have more sales than there are homes for sale).  If Inventory increases at a higher rate than sales and Inventory is a larger number to begin with then it is simple math to say that the overall number of homes for sale (i.e. Inventory) actually INCREASED.  The article spins this by using July's home sales number and then comparing that to the new Inventory level to conclude that total Inventory remained the same as June at 9.4 months supply.  Now ask yourself, is July a peak selling month?  If so, does it make sense to divide the new Inventory figure by a peak sales figure and state that Inventory has not increased?  Of course it doesn't.  Therefore, mark my words, the actual supply of homes for sale (i.e. Inventory) has indeed increased which is bad news for the real estate market.

My Real Estate Market Thoughts of the Day

This post may be a bit of a ramble so I apologize for this in advance. I just had to get some things off my chest.


The last time the real estate market melted down (think late 80's/early 90's) it took 7 years for homes to regain their losses. This meltdown is far worse because it is not just due to real estate over development/over building. It was caused by debt. Plain and simple. That is why the folks in Washington cannot fix this problem - you cannot fix a problem caused by debt with more debt. It defies logic and reason. The facts are that even at their current reduced levels, home prices are still out of line with incomes when compared to historical trends. Therefore, contrary to NAR homes are not actually affordable (Side note: I really cannot stand the NAR Home Affordability Index. Since when did Realtors become used car salespeople hawking homes by pushing the monthly payment instead of the price of the home?).

The reason loan modifications will not work is that they do not address the core problem: mortgage balances are too high relative to the market value of the homes. Many homeowners are actually now underwater (i.e. mortgage balances exceed the value of their home). According to a recent Deutsche Bank report, by 2011 about 48% of all US mortgages will be underwater. Since being underwater is now the #1 statistical driver of defaults (not credit scores) you can bet on high foreclosure rates for years to come.

Since the entire economy was built on consumer spending, and that consumer spending was fueled by debt, and that debt is no longer available you can be sure that when things do actually turn around unemployment will still remain relatively high with a likely range of 6-8% as opposed to the 4-5% range we enjoyed a few years ago. Based on the persistent debt problem and the long term unemployment problem I just do not see how the real estate market will recover anytime soon.

This whole thing is sadly comical. You have nonsense from NAR and the mainstream media about how the real estate market is turning a corner and recovering yet foreclosures and unemployment keep increasing. The US real estate market has never recovered under such circumstances and this time will not be the exception. Almost every day I fell like screaming "STOP THE NONSENSE." If our policy makers would just let housing prices decline to their normal (historical) sustainable levels and get rid of the FHA loans, other low/no down loans, ARM loans and other artificial financing not only would this type of problem never happen again, but the social engineers in Washington would not have to worry about "affordable housing" since housing would in fact ALREADY BE AFFORDABLE. Sometimes the answer is just plain old common sense. I predict that values will continue to fall rapidly through 2011 (when the large wave of Option ARM foreclosures ends) and then continue to decline gradually until the foreclosure rate reduces to normal levels and the unemployment rate reduces back down to a more realistic 6-8% mentioned above. At that point real estate values will recover at the normal 4-7% per year.

Middle Tennessee - Rutherford County TN - Residential Home Sales Market Statistics: A Comparison of Normal Sales versus Short Sales and Foreclosures in August 2009

According to the data I researched in the Middle Tennessee MLS (RealTracs) as of 9/1/2009, the following Market Statistics paint a troubling picture for the 3 main cities/towns in Rutherford County Tennessee:

Active Listings

• Murfreesboro TN -109 out of 1,322 Active Listings (or 8.25%) are shown as Short Sale or Foreclosure listings.
• Smyrna TN - 51 out of 389 Active Listings (or 13.11%) are shown as Short Sale or Foreclosure listings.
• LaVergne (or La Vergne) TN - 59 out of 291 Active Listings (or 20.27%) are shown as Short Sale or Foreclosure listings.

Pending Sales

• Murfreesboro TN -32 out of 242 Pending Sales (or 13.22%) are shown as Short Sale or Foreclosure listings.
• Smyrna TN - 11 out of 60 Pending Sales (or 18.33%) are shown as Short Sale or Foreclosure listings.
• LaVergne (or La Vergne) TN - 29 out of 61 Pending Sales (or 47.54%) are shown as Short Sale or Foreclosure listings.

As you can see in all the towns above the % of Short Sales and Foreclosures is high for both Active Listings and Pending Sales. However, the worst part is that when looked at as a percentage of Pending Sales the Short Sale and Foreclosure share of Pending Sales is relatively high when compared to percentage of Active Listings to the tune of 50%+. This means that regular (i.e. non Short Sale and Foreclosure) listings will have a difficult time selling as a large share of Pending Sales are lower priced distressed properties.

For Murfreesboro and Smyrna the % of Pending Sales that are Foreclosures and Short Sales remained about the same as last month, but for La Vergne the % increased from 34% to 47.54%. While the real estate markets in Murfreesboro TN and Smyrna TN are definitely hurting and prices are declining, the La Vergne real estate market is in really bad shape.

Prime Mortgages Make Up One Third of Foreclosure Actions

According to this Forbes.com article, Prime Mortgages Are Failing, between April and June of 2009 13% of all homeowners in the United States were either behind on their mortgage payments, or in foreclosure. If that is not bad enough news, the article goes on to state that while subprime (sub prime) ARM loan defaults decreased, the decrease was offset by large a large increase in the number of delinquent prime mortgages (that is mortgages to the most credit worthy borrowers who actually invested down payments, had verifiable jobs and excellent credit). The article quotes Jay Brinkmann, chief economist of the Mortgage Bankers Association (MBA), as stating "Prime fixed-rate loans now account for one in three foreclosure starts. A year ago they accounted for one in five. While 41 states had increases in the foreclosure start rate for prime fixed-rate loans, 43 states had decreases in that rate for subprime (sub prime) adjustable-rate loans." According to the article, the MBA defines delinquencies as those between 30 and 90 days past due. Homeowners beyond 90 days past due, or in foreclosure, are identified as seriously delinquent. The article blames increasing unemployment and declining property values (think underwater homeowners) as the main causes of this huge increase in prime mortgage foreclosure starts. According to the article, California, Florida, Arizona and Nevada continue to make up the largest % of foreclosures, but that % has decreased from 46% in the 1st quarter of 2009 to 44% in the 2nd quarter of 2009. The article states that Florida is in particularly bad shape with 12% of mortgages in the process of foreclosure, and at least 22.8% are delinquent. Also, according to the article, there was a major jump in Federal Housing Authority (FHA) foreclosures.

Here is my synopsis of the real estate market based on the information above and other information.

• The most financially responsible borrowers (prime mortgagors) are hurting. Even large down payments are not enough to counter the huge price declines. More homeowners underwater = more foreclosures.
• Foreclosures are increasing in general. This will cause more price declines.
• While the "Fab 4" (California, Florida, Arizona and Nevada) are still the kingdoms of foreclosure and prices will surely continue to fall in those markets, the decrease in % of total foreclosures nationwide from 46% to 44% while overall foreclosures increased means that foreclosures in other states increased at a higher pace that the "Fab 4" states. This means prices will decline nearly everywhere.
• More distressed homeowners will cause more people to try to rent out their homes. Until prices decline to a point where monthly rents exceed total monthly housing payments prices will continue to decline. Rampant foreclosures will make sure prices actually head below this normal equilibrium.
• Government meddling (expanded FHA mortgages, tax credits, etc.) has not and will not work to save the real estate market. The market is correcting itself to sustainable levels. FHA mortgages are now failing at alarming rates. Tax payers will once again have to foot the bill for regulatory incompetence. It seems that very few people are stating the truth about the real estate market. That is that high housing prices are bad for people (especially lower income people) and high commercial real estate prices are bad for business, which is in turn bad for job growth. Also, real estate has never (until the last few years) been the driver of the economic bus. It has been the passenger, meaning that economic growth (and the resultant business, job and income growth) caused housing prices to increase and new construction to increase. Not the other way around. Any attempt to work in reverse logic = insanity.

Please be clear about my opinion. "The worst is yet to come." I have been saying this since early 2006 and I see no reason to change my outlook on the housing and commercial real estate markets.