"Housing Crunch Update: Another price-spiral is on the way"--Mike Whitney

[KoKo]

Housing Crunch Update: Another price-spiral is on the way
by Mike Whitney | April 9, 2010 - 5:28pm

The brief period of stabilization in housing is over and the next leg-down has begun. Mortgage rates are edging higher, foreclosures are rising, and the government programs that supported the sector, are being phased-out. The uptick in REO bank-owned properties is adding to surplus inventory and pushing down prices. A recently released report from First American CoreLogic shows that "distressed sales accounted for 29 percent of all sales nationwide." Nearly one-third of all home sales are distressed REOs. Also, according to a report from Clear Capital, "Home prices nationally have dropped 3.9 percent quarter to quarter, the first quarterly drop in nine months.

The brief period of stabilization in housing is over and the next leg-down has begun. Mortgage rates are edging higher, foreclosures are rising, and the government programs that supported the sector, are being phased-out. The uptick in REO bank-owned properties is adding to surplus inventory and pushing down prices. A recently released report from First American CoreLogic shows that "distressed sales accounted for 29 percent of all sales nationwide." Nearly one-third of all home sales are distressed REOs. Also, according to a report from Clear Capital, "Home prices nationally have dropped 3.9 percent quarter to quarter, the first quarterly drop in nine months. (Thanks to Diana Olick, Realty Check, CNBC) The bottom line, is that the foreclosure problem will get worse before it gets better forcing more people from their homes, taking bigger chunks out of home equity, and adding more red ink to bank balance sheets.

The Obama administration's Home Affordable Modification Program (HAMP) has largely been a bust. Of the 3 to 4 million potential modifications, only 170,000 homeowners have successfully converted into a new mortgage. Under the new "principal reduction" plan, lenders will be able to refinance into a FHA loan if they slash the face-value of the mortgage. This puts the government on the hook if the homeowner defaults. It's a great way for the banks to dump their loser loans on Uncle Sam. The program is designed with two goals in mind:

1-- Provide another bailout for Wall Street and the banks.
2--Keep people in their homes whether they can afford them or not.

Team Obama's plan allows jobless homeowners to stay in their homes provided they pay 31 percent of their income (which, in this case, means #1% of their unemployment checks) The idea is to maintain some cash-flow to the banks while slowing the deluge of foreclosures. Obama's revamped HAMP program should make a difference, although it is impossible to know just yet. But the inducements will be costly and the underlying problem will remain until the market clears and prices normalize.

On April 8, Housingwire published an article which focused on upcoming foreclosures at Bank of America and JP Morgan. The details are shocking. Here's an except:

"Two major banks are expecting major increases in foreclosures, by the end of 2010.

According to the Irvine Housing blog, Bank of America, which currently forecloses on 7,500 homes every month will see that number rise to 45,000 by December 2010.....

JPMorgan Chase is forecasting bigger foreclosure numbers in the coming months. According to a presentation at the end of February, JPMorgan expects the amount of real estate owned (REO) properties in its portfolio to reach between 33,000 to 45,000 in Q410. By comparison, in Q409, REO inventories were at 23,100." ("Big Banks Prepare for Major Rise in Foreclosures Ending 2010" Jon Prior, Housingwire)

Clearly, the big banks are not expecting Obama's modification program to make much of a difference. The 5X increase in B of A's projected foreclosures is particularly striking and suggests that housing prices (particularly in California) have quite a bit further to tumble. This will effect everything from private consumption to state revenues. Simply put, it's a disaster.

It's worth noting, that subprime defaults are largely over, and that, the new wave of foreclosures is option ARMs, primes and Alt As. Many of these are high-income individuals who are using "strategic default" as a means of backing out of--what appears to be--a bad business deal. In fact, the data shows that well-heeled homeowners are almost twice as likely to default than middle or low income people. So much for moral hazard.

So, why are we seeing this sudden rise in foreclosures a full three years into the housing crunch?

Besides the various government foreclosure moratoria and modification programs, the banks have been holding back supply to maintain prices. But there's more to this than meets the eye. The banks have been the sole beneficiaries of the Fed's Quantitative Easing (QE) program which has transferred $1.25 trillion in reserves to the banks in exchange for their toxic assets and nonperforming loans. This program has been controversial from the get-go, drawing critics on both sides of the aisle. The rationale behind QE is that--when interest rates are stuck at zero (a "liquidity trap")--the Central Bank has to implement unconventional strategies to push liquidity into the system. The problem, however, is not with the theory, but the way it's been applied. Bernanke's adaptation of QE is little more than another generous bailout covered-over with layers of public relations hype. If Bernanke had purchased state bonds, munis, corporate bonds or even bond-issues to rebuild crumbling infrastructure, then the policy would have provided desperately needed stimulus for job growth and consumer spending. Instead, he chose to purchase toxic assets and other securitzed garbage in order to bail out his friends on Wall Street. Now that the program is over, the banks--which have been recapitalized at the public's expense--are going to dump more and more inventory on the market driving prices down further.

More at............
http://www.smirkingchimp.com/thread/mike_whitney/27930/housing_crunch_update_another_price_spiral_is_on_the_way

[mike_c]

1. good....

I mean, the house I rent appraised for $140K in the mid-1990s, but neighboring houses were going for nearly three times that just six or seven years later, and they were exactly the same houses as they were before. The increase in value was all artificial. My gut feeling is that if property values lose 50-60 percent, that will be about right.

[Skittles]

4. I agree

[msongs]

2. short sales in riverside CA are still above market value so not selling. my house

refied and my appraisal was higher than expected but still way under prices for similar short sales for sale. banks are not gonna come down to market value to unload so they will hold those houses as tax write offs. anyone who thinks these corporate banks are gonna actually lose money is dreaming thanks to corporate welfare laws lol

Msongs

[chill_wind]

3. Bernanke. Just HAD to keep him.

Mon Jan 25, 2010 6:22pm EST
The U.S. Senate looked likely to grudgingly approve Ben Bernanke to a second term as Federal Reserve chairman this week after the White House stepped in to defend his crisis-fighting record and rally votes.

http://www.reuters.com/article/idUSN2517977820100125

Bernanke's adaptation of QE is little more than another generous bailout covered-over with layers of public relations hype. If Bernanke had purchased state bonds, munis, corporate bonds or even bond-issues to rebuild crumbling infrastructure, then the policy would have provided desperately needed stimulus for job growth and consumer spending. Instead, he chose to purchase toxic assets and other securitzed garbage in order to bail out his friends on Wall Street. Now that the program is over, the banks--which have been recapitalized at the public's expense--are going to dump more and more inventory on the market driving prices down further.

[Yuugal]

5. Hooray!

If prices drop even further maybe I can stop renting.