Jul192012
Foreclosures dominance of housing market projected to end in 2015 or 2016
At some point, the dodgy loans of the housing bubble will be recycled, delinquency rates will fall back to normal, the shadow inventory will be processed, and foreclosure rates will decline to the point they no longer dominate market sales and keep prices from rising. But when will that happen?
Based on the most recent data from Lender Processing Services, I have extrapolated recent trends to attempt to answer that question. But first, we need to understand where we are in the process.
In early 2012, lenders halted processing shadow inventory of long-term delinquent loans to attempt one more round of loan modifications to comply with the national settlement agreement. They have taken advantage of this to greatly reduce their standing inventory, particularly in non-judicial foreclosure states like California.
As a result of this shift in processing, the ratio of aged loans to the total pipeline of foreclosures has been rising abruptly (see chart below).
And shadow inventory has started rising again.
Lenders hope they can cure the loans of the long-term delinquent through HAMP loan modifications because then they can pass those losses on to the US taxpayer. At least some in Congress are fighting this, but the banks will likely win in the end. Regardless of whether or not these loans can be save through loan modifications, the delays gives more time for the market to heal and time for banks to liquidate their standing REO inventories. By the end of 2012, banks will not be storing any REO outside their normal processing pipeline.
I took the long-term chart of mortgage delinquencies from LPS and projected the current rate of decline forward to the future to see when we get back to a normal rate of delinquency. The result was January of 2015 (see chart below).
The data series for extrapolation was two and a half years of data, and the trend is easy to define. I feel confident that unless lender behavior changes, we will see normal delinquency rates by early 2015.
Foreclosure Rates
The foreclosure rates are much more difficult to project because we have not turned the corner on foreclosure processing. Banks have been flatlined at the maximum rate of foreclosure processing their balance sheets can take and the housing market can absorb. Projecting the rate of future foreclosures first requires an estimate of when foreclosure processing will come off this plateau, then it requires an estimate of how quickly foreclosure processing will decline.
My estimate of when foreclosures will begin to subside from the plateau is when delinquencies approach the normal range. Since the declining delinquency rate happens in part because lenders clean up long-term delinquencies, the rate of foreclosure processing should slow down as lenders begin running out of borrowers to foreclose on. This rate should start to turn down before delinquency rates stabilize. I estimate foreclosures will begin to drop in early 2014.
Based on the rate at which foreclosures increased, I estimate it will take another three and a half years for foreclosure rates to drop all the way down to their historically low levels prior to the housing bust, but it may take much longer as the large number of underwater loanowners creates a long tail. However, somewhere in between, the total number of foreclosures being processed through the MLS will decline to where they no longer dominate total sales. At that point, foreclosures will no longer be a strong drag on prices. I estimate the market will reach this magic threshold sometime in 2015 or 2016. At that point, the choppy bottoming period of seasonal ups and downs will be replaced by normal market appreciation based on income and job growth. Some of the most beaten down markets may see above average appreciation as they rebound back up to levels of payment affordability matching historic norms.
If I am right, the housing market will begin a true recovery in 2015, a full ten years after the crash began. The bottoming period will have lasted for seven full years. I might be wrong. It may take even longer.
Analysis: In the U.S. housing market, recovery or Lost Decade?
Published: Sunday, 15 Jul 2012 | 8:04 AM ET
(Reuters) – The worst U.S. housing crisis since the Great Depression has been declared over. But is it?
What some of Wall Street’s forecasts for a recovery may be underestimating are tectonic shifts in the U.S. economy that make the housing market a different place from a decade ago.
Record levels of student debt, 15 years of flat incomes and the fact that nearly half of homeowners are effectively stranded in their houses look likely to weigh on prices into the indefinite future.
The housing bottom consensus could be very wrong.
… “We’ve gone through half of a lost decade since the crisis started in 2007,” said Robert Shiller, co-founder of the Case-Shiller U.S. housing price index and an economics professor at Yale University.
The so-called Lost Decade in Japan occurred after the speculative bubble in the 1980s, when abnormally low interest rates fueled soaring property values. The ensuing crash has continued to afflict the Japanese economy ever since.
“It seems to me that a plausible forecast is, given our inability to do stimulus now, for Japan-like slow growth for the next five years in the economy. Therefore, if there is an increase in home prices, it’s modest,” said Shiller.
Our monetary policy has certainly mirrored the Japanese experience during their lost decade, and the sluggish economic growth we have been experiencing during this so-called recovery has been equally as anemic.
A Reuters poll published on Friday showed most economists think the U.S. housing market has now bottomed and prices should rise nearly 2 percent in 2013 after a flat 2012.
Only the realtors believe prices will go back up quickly.
GENERATION STAGNATION
Consider the plight of college graduates, who go on to become the biggest group of first-time U.S. home buyers.
Many graduate into a climate of falling wages and soaring rents, members of the most indebted generation in history who owe an average $25,000 in student loans.
They elbow their way into a labor market so rough that the number of people with jobs is at a 30-year low, health and retirement benefits are shrinking and the young workers face a greater chance of losing their jobs than any generation before.
Tomorrow’s buyers have too much other debt to afford large mortgage payments.
… Housing prices and income usually move in lock step. But real median household income is stuck at the same level as during the Clinton Administration in 1996 — at about $49,000.That means the housing market will remain troubled for “an extended period of time,” according to Sam Khater, a senior economist at housing data company CoreLogic.
“It’s not about job growth. It’s about income growth,” says Khater.
Now that people have to qualify to repay the mortgages based on real, verified incomes, prices can’t go up until incomes do.
Back in 1996, the median home price was around $80,000. When house prices soared to $200,000 in 2006 — the market peak — it was due to jumbo mortgages, not jumbo pay raises.
Banks lured consumers with low interest rates that later turned much more expensive and blew up monthly payments, eventually helping to cause the housing crash.
On the one hand, the housing implosion has created a bonanza for those buyers who can take advantage of it: U.S. real estate is now 36 percent cheaper than in 2006.
In nearly every city, it now costs less to own than to rent. …
As I noted, Monthly cost of home ownership down over 50% from 2006.
BUSTED CONVEYOR BELT
The housing market, as economists often like to point out, is a conveyor belt. A homeowner sells a house. The new buyer moves in, and the seller buys a better house. In time, that buyer in turn sells, and buys a better house.
Normally these so-called move-up buyers are the housing market’s biggest consumer group. They are what keep that conveyor belt moving.
Today the apparatus is broken.
That’s because about half of homeowners with mortgages simply can’t move.
Twenty-four percent owe more on their houses than they are worth. Another 25 percent are equity poor, meaning they have less than the 20 percent of equity required for a down payment to trade up to a new home, according to housing-data company CoreLogic.
Sean O’Toole, the CEO of foreclosure-data aggregator ForeclosureRadar.com, estimates that it will take at least another decade, at the housing market’s current pace of growth, for homeowners who are underwater just to break even on their houses.
“We went from $4.5 trillion of mortgage debt in 2000 to $10.5 trillion of debt in 2008 — and we are still only down to $9.8 trillion,” says O’Toole.
“All those people with negative equity, they can’t sell. They are stuck in a prison of debt.”
The strength of the market is the below median price points. Very little above the median is selling well because so few buyers have the necessary income and down payment to buy a move-up house. This problem will persist for a very long time. We need to get a new generation of buyers in at the bottom, and allow prices to rise about 25% before that group will have enough equity to sell and make a move up. If the market doesn’t start moving higher until 2015, it will take another five years for it to move 20%-25%, so we are looking at 2020 before the move-up market begins to function as it did prior to the housing bubble.
Excellent analysis, but, it wont be long before even 4%mortgages become unservicible for many…..
1) labor market consolidation is still underway
2) real wages continue to fall.
3) global wage arbitrage is predominant
4) corporations are in the wage suppressing business
5) US wage growth to GDP’s continues its long-term downward trend
http://static5.businessinsider.com/image/4fe2807e69bedd095c000005/wages-to-gdp.png
All signaling foreclosure dominance will likely continue well beyond 2016.
The foreclosures will continue long past 2016, but at some point, the numbers do fall below a threshold where they weigh on prices. If the economy continues to sputter, this will drag out longer and longer.
The masses seem unable to grasp that several forces are malign, in a long-term way. Something happened between 1980 and 2006 – I’m not sure what, but it could well be a convergence of several ugly facts – that has likely set us up for at least two lost decades.
Thanks to foreclosures and all the other forces you mention, we may be in for a string of single-term administrations, each of which the public will blame in turn for not running the economy better, all the while ardently denying that we are basically socialists in the sense that we expect the president to tweak and run the economy day by day.
The possibility of a generation of decline has not set in among the middle-aged and elderly. The young, always more open to understanding their current situation as the norm, may understand our possibly-Japanese future.
Personally, I would prefer a Japanese experience to reflating another Ponzi scheme to juice the economy.
Los Angeles Sues U.S. Bank Over Deteriorating Foreclosures, Evictions
Los Angeles’ city attorney, Carmen A. Trutanich, announced his office filed a civil lawsuit against US Bank over allegations that the bank allows its foreclosures to deteriorate into slum conditions and executes illegal evictions, according to a release Tuesday.
The complaint cites more than 170 properties as examples of US Bank’s illegal conduct.
The city alleges that in the past four years, US Bank acquired 1,500 properties in Los Angeles through foreclosure, and in some cases, the bank failed to make necessary repairs on the foreclosures.
The city also accuses the bank of applying deceptive and dishonest tactics when evicting tenants, including “serving notices requiring unreasonable demands, demanding occupants leave in an extremely short time in exchange for small amounts of money, causing or allowing utilities to be shut off, charging excessive rent in excess of the amounts under the Rent Stabilization Ordinance, and threatening legal action.”
The lawsuit seeks immediate injunctive relief including a stop to all illegal evictions, inspection of foreclosed properties, and compliance with all applicable state and municipal code requirements.
The city attorney is also seeking compensation for current and former tenants and reimbursement for the city for costs incurred.
In an emailed statement, US Bank said, “We are extremely disappointed that the City Attorney’s office has chosen to file this lawsuit. The city attorney has chosen the wrong party – we are not the owners of the properties, nor are we responsible for the servicing of the properties. The homes are owned by trusts, consisting of investors, and are serviced by other companies. Those companies are responsible for maintenance of the properties and compliance with city ordinances. Our role as trustee is purely administrative.”
The bank’s statement further noted that the only reason its name is associated with the properties is because it serves as trustee, but the foreclosure actions are performed by the servicers on behalf of the trusts and merely in the name of the trustee.
Holding to the argument that it is not responsible for the foreclosure actions as trustee, US bank said it intends to bring the servicers into the lawsuit.
According to the release from the city attorney, US Bank was repeatedly notified of the conditions through citations, orders to comply, and hearing notices from various city agencies, but the bank failed to respond and act.
However, US Bank said it has attempted to resolve the issues.
“We have made multiple requests of the City over the past couple of years to obtain detailed information on properties they considered to be in disrepair in order to immediately identify and work with the responsible servicer to address outstanding issues. Until very recently, the City has refused to provide us with that information,” the bank said in a statement.
I’m seeing a lot of cities go under. I wonder when there will a lot of federal, state, and local workers that will be laid off. I heard on the radio anywhere from 1 to 4 million government workers will be laid off since there is really no money to pay for these workers, it’s all borrowed. Even the ones that won’t get laid off will received reduce compensation and less benefits.
We should see the impact on housing in the next few years. Another mini housing burst?
Diana Olick @diana_olick
Mark Hanson: W/ #mortgage rates down 150bpsYoY, that’s 15-20% more purchasing power, but home prices only up 6%, so real house prices DOWN
The Sacramento housing market went crazy during the bubble, and has since corrected by 50%; but I think this market will continue to suffer due to the heavy reliance on public employees.
I wonder how this “public employees’ wages/benefits/job security” issue is affecting a market like the greater DC area? A friend of mine moved from LA to DC two years ago to join the newly created CFPB. His salary is still frozen and the Congressional Republicans are trying to freeze federal employees’ salaries for another few years.
Just for fun, here’s the salary of the GM and Assistant GM for Eastern Municipal Water District for 2010. I got it from the State Controller’s Website. I’m sure they got a CPI bump for two years to:
Executive Deputy General Manager — $197,891 $197,891 $202,267 2.5% @ 55
Executive General Manager — $246,813 $246,813 $248,875 2.5% @ 55
The 2.5% @ 55 is their pension. 2.5% of your largest yearly salary for every year you worked at the district eligible at 55. Can the private sector please come up with pensions and long term employment? Not.
gotta love ZH….
“even the NAR couldn’t put lipstick on this morning’s pig of an existing home sales number.
The biggest drop MoM in 16 months and the largest miss to expectations in 24 months
http://www.zerohedge.com/news/what-housing-recovery-existing-home-sales-miss-most-2-years
You might be on with that 2015 or 2016 timeline….
80% of Consumers Believe Recession Will Last Three More Years: Retail Expert
By Stacy Curtin | Daily Ticker – 2 hours 4 minutes ago
Despite falling retails sales and a decline in consumer confidence, the National Federation of Retailers expects Americans to spend more on back-to-school shopping this year versus last.
The industry advocacy group predicts the average shopper will spend $688 on items this fall, up from $603 in 2011, which would be the most money spent on back-to-school goods in the last decade. At the same time, PriceGrabber.com expects more than 60 percent of shoppers to spend at least $500 this year, versus 48 percent last year.
Forecasts suggest Americans will spend $30 billion on K-12 back-to-school items and more than $50 billion on college supplies, reports the Wall Street Journal.
This is welcomed news for retailers like Wal-Mart (WMT), Macy’s (M) and Target (TGT) that are competing for shoppers’ dollars. June retail sales fell 0.5 percent from May, marking the third straight month of declines —the first time that’s happened since the height of the recession in 2008.
But some analysts who watch retail stocks are not as optimistic and have been lowering their forecasts for third quarter earnings. According to CNBC, Citigroup (C) has lowered its price targets for J.C. Penney (JCP), Kohl’s (KSS), Macy’s and Target.
Wendy Liebmann, CEO and Chief Shopper of WSL/Strategic Retail, conducts surveys of consumers recent shopping habits and sentiments. In the accompanying interview, she joins The Daily Ticker to discuss her findings and what they suggest about the state of the U.S. consumer: It’s bleak!
Eight out of 10 Americans told Liebmann they “think the recession will last another three or more years,” she says. It is an across the board sentiment, she adds, and people are being smart with their money any way they can by using coupons and shopping sales.
Americans have been on a “tremendous rollercoaster” and remain wary about the job and housing markets, she says. Even lower energy prices have not convinced consumers to go out and shop.
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