By Michael Olenick, creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data
The normally astute Bill McBride of Calculated Risk has joined the chorus of cheerleaders to argue that an alleged decrease in housing inventory means that house prices are near their ethereal bottom.
Living in W. Palm Beach, FL, the epicenter of the foreclosure crisis, it seems more likely that analytical ethics related to housing finance is the only element nearing a bottom, and only then because the home price pundits on which people like McBride rely can’t go much lower.
McBride uses data from the National Association of Realtors (NAR), analysis by Goldman Sachs, trends in completed foreclosures, and traditional seasonal housing patterns to make his case.
My first inclination was to cross-reference whether the NAR data McBride relies on is before or after the NAR’s massive adjustment late December, when the real estate group admitted to overstating home sales by over one million in some years.
However, when I went to do preliminary research I found the NAR revised their post revision December sales estimate from +.5 percent to -.5 percent. I could almost hear them playing “Oops, we did it again,” as they wrote the press release. This group is so devoid of credibility nobody should use their estimates except maybe scholars writing about business ethics.
I’m one of the very few borrower-friendly analysts who somewhat admires Goldman Sachs, though in the same way I also admire a Bengal Tiger: they’re somewhat ruthless. But GS staffers, when faced with public policy versus morality issues, are like the characters in the movie Idiocracy who find the only thing they have in common is that they all “like money.” Their analyst may be correct, or they may be working — to quote prior internal email — on pumping another “shitty deal” like exploding CDO Timberwolf, structured-to-fail Abacus, or the financial destruction of Greece. Their reputation is better than the NAR, though their motives are not always clear.
Then there are those completed foreclosure figures. Yes .. they’re down. But only because the foreclosure processing packing-house came to a virtual stop, especially in high-volume states, thanks to a fraud-fest unlike any ever seen in US history.
Finally there is the argument that seasonal trends show a slight decrease in January inventory, which will nudge inventories higher (as in the some of the fall in inventories in January may be due to factors like sellers taking homes off the market, which means some of the reported improvement may not reflect fundamentals). I agree with this point: banks tend to ratchet down evictions during the holiday season and buyers tend to avoid moving in the middle of winter. But this seasonal adjustment will just make inventories higher. As the snow begins to melt away, and the unofficial foreclosure moratoriums end due to the AG settlement, if the banks open the floodgates inventory stands to spike.
I don’t want house values to fall through the floor. I own a house in Florida and expect the value to take a massive hit if the rocket-docket judges resume their reckless quest to throw fellow Floridians to the street. I stand to personally benefit on the tiny chance this relentless drive to deceive people into buying homes in an unstable market succeeds and stabilizes prices. But I’m neither delusional nor dishonest: there is not a single credible data point I’ve seen that home prices will increase anytime soon. They may stabilize if banks control inventory, but by definition that means buyers can wait to see what actually happens rather than what’s predicted to happen.
Cheerleaders should bet with their own money rather than just encouraging others to do so. There are many beautiful Florida houses for sale or in foreclosure within walking distance from my own home. If Jamie Dimon genuinely believes it’s a great time to buy a home then JPM should fund these loans, and retain the loans on their own books. If Bill McBride believes the same, he should come buy one.
Only government-owned Fannie Mae and Freddie Mac, the GSEs, are funding home loans, and they’re charging steep market risk premiums regardless of personal credit. Every borrower pays a quarter-point “Adverse Market Delivery Charge” regardless of his risk profile. Borrowers with, say, a FICO score of 810 and a loan-to-value ratio of 65% are going to pay an extra quarter-point in interest just because the GSEs say they cannot predict a market bottom, even if Bill McBride can.
Besides the GSEs there is the private secondary loan market. I’d argue it doesn’t exist but I searched EDGAR and it does: I found one publicly registered private MBS last year. That’s not a typo: Sequoia Mortgage Trust 2011-1 bundled 303 loans, the only apparent new publicly listed MBS. In comparison Countrywide had some months during the bubble where they’d create an MBS each month, usually for thousands of loans.
It’s noteworthy that the second densest population in Sequoia’s MBS is New York, NY, which has, by far, the longest foreclosure period anywhere in the country. So much for the theory that prolonged foreclosures, as opposed to anticipated housing gluts and uncertain markets, alienate investors.
As long as the private secondary market remains effectively dead and the gavels continue to slam on the foreclosures home prices will sway like a Banyan tree in a hurricane. Like that tree prices may go up a little, or down a little, but the real question is whether that tree, and the price of the house next to it, will be planted in the ground or floating in the Atlantic when the storm passes.
Alpha housing analyst Laurie Goodman of Amherst Securities estimates shadow inventory is about ten times higher than does housing data provider CoreLogic. Having worked through my own study of shadow inventory, comparing state-by-state delinquency rates cross-referenced to housing stock volume I concluded Goodman’s analysis makes more sense. However, there’s almost no point arguing because the fact that they are so far apart is a strong indicator that nobody has a good grasp on these vital metrics needed to call a market floor.
Warren Buffet noted in his 2011 roundup letter that last year he predicted “a housing recovery will probably begin within a year or so.” He goes on to note “I was dead wrong,” showing a level of self-confidence seldom seen in this field. Buffet predicts “housing will come back,” and he goes on to illustrate some positive trends, but declines to call out a specific timeframe.
As I’ve written in my own shadow inventory analysis the OCC reports there are about 52.25 million US homes with a first mortgage. But the 2010 US Census reports there are 74.8 million owner-occupied homes and that that 50.34 million of those have a mortgage. There are 131.8 million “housing units” to shelter about 313 million people. These housing figures simply cannot be reconciled except to the conclude that a) the US has an enormous number of post-bubble houses, b) many of those were mortgaged during an enormous housing bubble, and c) far too many American’s remain overleveraged with housing debt, and d) young people who could and should be forming houses are buying are saddled with too much student loan debt to do so.
For buyers who want a home, not a house — that is, if your primary purpose is to shelter your family rather than your money — and you don’t want to rent because you plan to make improvements, don’t plan to move for a decade or longer, and can purchase with cash, it may not be a bad time to buy.
But for all other buyers, which includes virtually everybody, heed the hindsight of those who purchased homes at every other phantom market bottom and who are now underwater. Wait until you see price appreciation, in the region you want to purchase, for a quarter or two. Your house may cost a few thousand dollars more in the short-term than at the genuine bottom but, in the long run, it’s a safer bet than losing tens of thousands of dollars in an unstable market.