Home Price Drop Was Sudden and Dramatic
Last week I profiled a neighborhood in Irvine that inexplicably dropped about 20% in value since the tax credit expired. As it turns out, widespread price declines are beginning to show up in the aggregate statistics. The leg down we have been expecting this fall and winter is happening now.
by KERRY CURRY — Friday, October 22nd, 2010, 12:25 pm
Clear Capital said a 6%, two-month decline in home prices represents a magnitude and speed not seen since March 2009.
“Clear Capital’s latest data through Oct. 22 shows even more pronounced price declines than our most recent (Home Data Index) market report released two weeks ago,” said Alex Villacorta, senior statistician with data analytics firm. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”
In other words, the billions the government spent trying to prop up the housing market was a complete waste of taxpayer dollars. We are right back were we started. Since I have consistently maintained that would be the result, I won’t pretend to be surprised.
Prices are now at the same level as in mid-April, two weeks prior to the expiration of the federal homebuyer tax credit. The drop, in advance of typical winter housing market slowdowns, paints an ominous picture that will likely show up in other housing indices in the coming months.
If previous correlations between the Clear Capital and S&P/Case-Shiller indices continue as expected, the next two months will show a similar downward trend in S&P/Case-Shiller numbers.
I have also consistently stated we will see the Case-Shiller roll over this fall and winter. We will likely take out the false bottom formed in April of 2009. The bear rally is officially over.
Clear Capital uses rolling quarter intervals that compare the most recent four months to the previous three months. The rolling quarters have no fixed start date and can be used to generate indices as data flows in, the multi-month lag time experienced with other indices.
So where does this leave us? If home prices take another steep drop, the resulting strategic defaults will end the bank’s denial and may lead to another TARP bailout, only this time, some believe the bailout will benefit loan owners instead.
Matt Schifrin — Oct. 18 2010 – 2:55 pm
I just got off the telephone with economist, Forbes magazine columnist and newsletter editor Gary Shilling. As you probably know by now, Gary has been spot-on in his predictions on the economy, global markets and housing.
I asked him what was new and he told me that he had revised his forecast for housing. Here are some of his comments :
“If I am right and we see another 20% decline in housing prices, then we figure that the number of mortgages underwater will go from 23% to 40%. That is a huge amount and at some point the dam breaks,” says Shilling.
Why does the dam have to break? Nobody thought we would get this many underwater loan owners. Why didn’t it break at 10% or 20%?
What would really cause problems is loan owner capitulation. If and when loan owners give up hope and accelerate their defaults, banks will have to deal with several million more delinquent squatters. So far they have been dealing with it through a combination of denial and government assistance. Why would a few million more delinquent squatters make any difference?
That’s bad news for the economy and bad news for homeowners and real estate brokers. It’s also bad news for banks and the stock market.
Shilling went on to say that if there is a bright spot in all this gloom it probably will benefit the profligate spending homeowners, who were lured by men like Angelo Mozilo into homes and mortgages they couldn’t afford.
Bailing out HELOC abusers is a bright spot? Perhaps for the HELOC abusers, but not for anyone else.
“Home ownership still has a lot of political clout in this country,” said Shilling. ” By hook or by crook, the politicians will come up with some kind of bailout for a lot of people underwater on their mortgages.”
In other words it doesn’t help anyone to have millions of homeowners foreclosed on and thrown into the street. Gary estimates that houses that are foreclosed on and vacant lose an average of $1,000 per month in value as long as they remain unsold. He adds that all the scrutiny that banks are under fire over concerning foreclosure procedures is creating the perfect environment for a massive bail-out of deadbeat homeowners.
If we bail out HELOC abusers, we will have made the final transition to “banana republic” status. You see the borrowers I profile here every day. Do you want your tax money to go toward paying off their debts? While you were being frugal and playing by the rules, they were out spending like kool aid intoxicated owners and having a good time. Now they are looking to you to pick up the tab.
Perhaps I am too cynical, but I also wonder if this story isn’t a plant to convince underwater homeowners to stay on a bit longer and make a few more payments. If there is a false or feeble hope of principal forgiveness, many considering accelerated default may delay the inevitable to see what happens. This is exactly the kind of story the banks want to have circulating the web.
Gary thinks we need a Resolution Trust Corp (RTC) type solution for the housing market. You may remember that the RTC was set up by the Office of Thrift Supervision in the 1980s to deal with hundreds of insolvent thrifts who, like homeowners, got in way over their heads. Some of them invested in Mike Milken junk bonds, others invested in real estate and other highly leveraged loans.
The RTC entered into a number of equity partnerships to help liquidate real estate and other assets it had inherited from insolvent thrift institutions. Gary says the key to the RTC’s success was that it acted relatively quickly and that is what is needed for the housing market in order to lift the giant overhang caused by our zombie homeowner situation.
We don’t need an RTC-type institution to clear out the housing inventory. What we need is for the banks to foreclose on the squatters and put the houses back on the market. The sooner we get this done, the sooner the housing market bottoms and the sooner we can get back to a healthy real estate market. Amend-extend-pretend creates an overhand of supply that will hinder economic growth for a decade.
I reminded Gary that many investors got rich from buying assets of troubled savings and loans, including billionaire Leon Black. We shall see who steps up this time. Any guesses?
Me for one. There are many people stepping up to buy these troubled assets. Cash is king in the aftermath of a debt-fueled asset bubble.