Posted by MataHarley on 9 May, 2011 at 9:30 pm. 10 comments already!


Burning House of Dollars -

It’s four months shy of three years since I penned the post, “A Perfect Storm of Housing and Lending Events.… the crash of the US housing market and economy. Since then, it’s been stimulus after stimulus spending… albeit all with different names to disguise the same. In the weeks following the Obama inaugural, economist Chris Low was saying the housing market hit bottom, and that 2009 was a year of stabilization and recovery.

It was not to be. Five months later, the POTUS was sticking his finger in the housing dike, promising to stop the flash flood of foreclosures.

It will still not to be. Nothing slows progress more than government intervention, and by Jan 2010, it was obvious that Obama, Bernanke and Geithner were engaged in attempts to reinflate a housing bubble that was supposedly entering into “recovery summer”.

And where are we now? In late March, S&P’s David Blitzer admits he sees no end in sight to the housing price decline.

“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future … These data confirm what we have seen with recent housing starts and sales reports. The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing.”

I will repeat what I’ve said before… there is no economic recovery without a housing recovery – despite many overly optimistic economists saying to the contrary. I would say we are in a double dip housing crash, but the fact is the housing industry never recovered. It had a brief blip of life, infused by taxpayer stimulus dollars, and the heart monitor flatlined again. The cheerleaders at the National Association of Realtors, the WH Press Corp dais, and bullish economists can no longer cover up reality …. housing prices continue to plunge for the 57th consecutive month, with no end in sight.

Oh wait… they do see “an end”. Now they are kicking the housing “recovery” to 2012 or 2013. Right… And we should believe them why?

Absolutely no reason whatsoever.

Here’s the point… the foreclosure shadow inventory still looms large. Unemployment remains high. And even tho delinquencies are coming down, the new foreclosures pile on, bloating the pipeline.

“31% of loans in foreclosure have not made a payment in over 2 years.” So about one third of the 2.22 million loans in the foreclosure process haven’t made a payment in over 2 years.

The decline in the delinquency rate is partially seasonal, but the sharp decline is a positive. A key problem is all those homes in the foreclosure process. As LPS notes: “Delinquencies have dropped to about 1.8 times the 1995-2005 average, foreclosure inventories are 8 times historical “norms”.” There were only 94,780 foreclosure sales in March and 270,681 foreclosure starts – so the foreclosure inventory just keeps growing.

Housing prices are now off 30% from the already unnaturally high 2006 prices. To put a visual to how high that “off 30%” still is in the scheme of reality, just have a gander at the history of real housing prices in the US.

In the real world – with long term unemployment slated to remain high, and wages stagnant or dropping as higher paid industrial jobs head to friendlier countries for manufacturing – 30% decline from 2006 is no where near where the housing prices need to be to accommodate for the cost of living wages this nation can anticipate. They simply must come down considerably more. Not only to be in line with wages, but to also allow the flexibility for prime rates to control the inflation that we now stare down daily.

While the picture points out the need for prices to come down, the fiscal repercussions of this reality is more complex. It becomes a nightmare carousel ride as the amount of toxic assets pile on to the original problematic toxic assets. With the continued decline, every new purchase during this housing “stimulus”, 2008 crash stage, is yet a new toxic asset lurking as a future short sale or foreclosure. Those who aren’t having problems meeting their mortgage, but have refinanced in the past 10-12 years are sitting on a toxic time bomb they can’t sell.

This translates to a catch-22 housing cycle. The new buyers, purchasing foreclosures cheap, feel like winners. But reality is, they are underwater the day after closing. There’s nothing wrong with this if they are locked into a mortgage they can sustain until some semblence of stability can occur. Housing has, after all, always been and up and down investment historically. But if the rest of the toxic assets cannot sustain their overpriced mortgages… well… there goes the neighborhood, as the saying goes. We simply start a new cycle of short sales/foreclosures and price declines. Same game… different players.

More toxic assets mean more financial losses for banks, and more potential bailouts by the taxpayers. With the amount of banks failing yearly, we move even more into a “too big to fail” world with each loss. The thought of this encroaching monopoly in the finance world is ironic in the wake of the 2010 banner year for financial stocks – buoyed by Bernanke’s low rates, enabling almost risk free profits for financial assets trading. Bernanke’s non-stop Fed printing presses, combined with Geithner’s buying up treasuries left and right didn’t hurt them either.

While this ugly cycle of government injected taxpayer cash into the financial institutions bodes well for those investors that hold financial stocks, not to mention the health of the financial institutions themselves, just how long can this nonstop carousel keep spinning in what is tantamount to a funny money game, with the taxpayers absorbing all the risk?

I’m not sure how to end this vicious cycle, but someone better put some serious thought to some realistic free market solutions. Government intervention has exacerbated the problem instead of alleviating it.

And we haven’t even gotten to the icing on the cake for home prices plunging further… Bernanke’s inevitable rate increase.

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