Same Old, Same Old

Who am I to disagree with National Association of Realtors chief economist Lawrence Yun, who said: “We expect greater activity in the months ahead.” This quote came this week after it was announced that the number of U.S. homebuyers who agreed to purchase a previously occupied home in April posted the largest monthly jump in nearly eight years. The news immediately made the talk-show circuit. It was declared the housing market bottom was in, and that price appreciation could be following right behind. Unfortunately, having observed this declaration many times in the past, I viewed this commentary with strong doubt.

Housing in many parts of the country is bottoming for three reasons. First, it’s the normal Spring-early-Summer selling season. Second, median prices are down in excess of 40% over the past two years from the peak, thereby making the LOW-END affordable. Third, and perhaps most important, foreclosures have been cut dramatically through moratoriums, thereby reducing supply.

However, the moratoriums have ended, short-sales are in disaster, and the number of pending foreclosures is massive. The backlog is gaining ground everyday, and could eventually become overwhelming. Notice of Defaults are at record highs (sorry, green shoot enthusiasts), and Notice of Trustee sales are back to nine-month highs. These escalating foreclosures are not only from the LOW-END (sub-prime alt-a), but also up to several million dollars in present value (prime.)

The latest housing numbers are showing strength in the ultra-low to mid-low range. As the foreclosures escalate in the upper range, the imbalance should crash the mid-to-upper priced properties. Early season hard data has already proven this. However, false bottoms with cash bonuses, and have-to sales, could prove illusory.

How will this play out? The red-hot LOW-END housing market will ultimately cool, as participants cannot, or will not, step up to the next level. For years, move-up buyers have been the life-blood of home sales, but now they are becoming extinct. That leaves the first time buyers to carry the bulk of the sales. Good luck on that one since all the incentives are being used up now. The mid-to-upper bands could experience additional declines of 40%. Investors who have been buying all the way down could get hurt on two fronts. First, falling rent rates, making their properties less attractive, and second, greater risk of default as supply enters the market.

It could get worse. A few years down the road all the loan adjustments and modifications which have been used to postpone the inevitable will start coming to fruition. These include teaser-rates, leverage, 1.5 times LTV, and balloon adjustments. You might call it Mortgage Implosion Armageddon Part II.

Remember, the demise of the LOWER-END of the housing market created ALL the economic havoc that we are currently experiencing. What happens when the MID-TO-UPPER housing market experiences the same precipice fall that happened in 2007?

You ain’t seen nothin’ yet.

Till next time,

Bill


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