Every day a growing crescendo of housing cheerleaders posit the end of the foreclosure crisis. We’re flipping our way out of the mess that we flipped ourselves into, is their usual line of reasoning. I’ve looked at national data, local data, and even data on my own block here in Florida. I tried to make the evidence prove the market has found a genuine, sustainable bottom. There are clearly gimmicks giving a temporary boost, a great PR campaign that may or may not be coordinated, and some foreclosure flippers that may do well, until they don’t. But the evidence is overwhelming: home prices are anything but stable.
For background, a chorus of the same people that created the housing crisis have been predicting a housing bottom every year or so. They’ve always been right for anywhere from a few days to a few months, then the cycle of foreclosures and lowered home values restarts and causes prices to spiral downwards. This time though, especially in certain micro-markets, there does seem to be measured home price appreciation.
Two trends are apparent. One is that banks are delaying foreclosures, or not foreclosing at all despite long-term delinquencies. The other is that private equity firms – flush with cash thanks to Tim Geithner’s religious devotion to trickle-down economics and the resulting cascade of corporate welfare – have been bidding up and holding foreclosed houses off the market. These two factors have artificially limited supply and, combined with cheap mortgages rates, driven up prices. While we can debate whether these strategies represent the best public policy, these policies are obviously not long-term sustainable.
Using data from the Office of the Comptroller of the Currency’s Mortgage Metrics Report, the percentage of seriously delinquent mortgages was 4.8%, 6.5%, 4.8%, and 4.5% in Q1, 2009-2012 respectively. Foreclosures should follow delinquencies somewhat – a vector of non-payment is supposed to lead to a foreclosure – but, at least according to the OCC, this has not been happening. Delinquency rates slowly fell a little but foreclosure activity dropped through the floor. Stranger still, delinquency rates predictably rise and fall in measured movements whereas foreclosure filing volume gyrates wildly.
In Q1, 2009 there was a .2% quarterly change in the delinquency rate, from 4.6% to 4.8%, yet a 41.1% spike in foreclosures, from 262,691 to 370,567 (presumably the OCC reports only for the last month in the quarter or the filing volumes make no sense). Similarly, in Q1, 2010, there was .6% decrease in the delinquency rate resulting in an 18.4% bump in foreclosure filings. These non-correlations then reversed. In Q1, 2011 there was a .6% decrease in the delinquency rate but a -11.4% decrease in the foreclosure rate, and in Q1, 2012, a -.5% in the delinquency rate with a -1.8% decrease in the foreclosure filing rate.
Putting this in perspective the lowest change in the delinquency rate was a .6% decrease, and the highest a 1.1% increase, whereas the lowest change in the foreclosure rate was a -21.1% decrease and the highest a 85.7% increase. So delinquencies barely budge but foreclosure volumes wildly spike then drop.
Lenders argue the drop in foreclosures is caused by delays in the court system. However, Judge Jennifer D. Bailey, lead foreclosure judge in Miami-Dade County – epicenter of the foreclosure crisis – solidly rebuts that argument. “Here in Miami-Dade County’s Eleventh Circuit, there has been no delay in foreclosure case hearings for nearly two years,” Judge Bailey said in an Aug. 19, 2012 interview with the Miami Herald. “If you want to see a judge to hear your trial or summary judgment, you get a prompt court date.” This coincides with my own observations in foreclosure court, where judges rail at bank lawyers for repeatedly delaying their cases, even when borrowers are in no way contesting their foreclosures.
Holding back inventory means that the houses that are put on offer sell faster and at higher prices. That creates an incentive to delay foreclosures or not foreclose at all even when a home is delinquent. Though this seems obvious, the mainstream housing finance community – aided by a freelance “housing analyst,” – uses the faster figures to somehow prove banks are not holding houses. “In 2007, lenders needed a median of 10 months to sell a house they’d just foreclosed on,” reads a report “Fears recede of second crash from ‘shadow inventory,'” by Eric Wolff, published Aug. 28, 2012 in the San Diego/Riverside North County Times. “By 2008, they needed a median of six months. At the end of 2011, they’d reduced that median to four months in North San Diego and Southwest Riverside counties. An article addressing shadow inventory, that does not once use the word delinquencies, is the type of trick the cheerleaders use to drive speculators wild.
Besides lower foreclosure activity, the government is going all out to give away houses to private equity firms. Recently Fannie Mae sold 275 properties across metro Phoenix in one sale to a mystery buyer, according to a report by Catherine Reagor of the Arizon Republic. All Fannie disclosed is the buyer is an LLC, which Fannie apparently helped create, based at 135 N. Los Robles Ave., in Pasadena, CA. Google shows that is the US address of EastWest Bank, a bank whose tagline is “Your Financial Bridge,” presumably between Asian money and Phoenix real estate. Fannie’s decision to sell Phoenix to Asian investors keeps 275 houses off the local market, which drives up prices for Phoenix homes people intend to actually live in, rather than flip. (Update: Nick Timiraos points out by e-mail that Fannie’s address in Pasadena is the same as EastWest’s, and Bloomberg has reported that Colony is the buyer. But this still raises the question of why Fannie cooperate with what appears to be an effort to hide the identity of the buyer. California, a high tax state, does not look as if it was chosen for the domicile of the LLC for tax reasons).
Anybody who has been a landlord seems to quickly tire of it so, assuming there isn’t a pending planned mass immigration to Phoenix, these investors will eventually want to cash out by selling these houses. Further, they will want to minimize maintenance expenses while they are renting out these houses, so the eventual sale of these houses will increase supply and prolong the housing crisis. Geithner’s policy of shaking down Main Street to help Wall Street continues to hurt your street.
Taking account of the delayed foreclosures and the beginning of mass purchases of houses would mean there should be a surge in home prices, but we’re still seeing little movement in many areas. This is especially puzzling given how inexpensive mortgage are. Let’s look at a typical Florida home and assume that a $400,000 loan was required in 2007, whereas a $200,000 loan is required now due to depreciation. In August, 2007, the average 30-year interest rate was 6.6% so the P&I payment would be $2,554.64. Today the interest rate for a 30-year fixed mortgage is about 3.8%, so the payment on a $200,000 loan – same house, it just cost lots less – is $931.91, 64% less. Since taxes are based on the value of the property these would also be lower, leading to a much lower monthly mortgage payment.
Of course, this assumes that people can get mortgages for these houses, though many can’t. Young people especially are hopelessly in debt thanks to out-of-control tuition hikes predictably caused by equally out-of-control student loan policies. Some owe the same or more for overpriced degrees than they would for a house. So payment streams that should be flowing into communities are instead flowing, at high interest rates despite low risk, into banks. Further, the GSE’s decision to “punish” people who defaulted by prohibiting them from buying a home again for years, regardless of the reason for the default, keeps otherwise creditworthy borrowers out of the system. Consider the case of a person who paid their mortgage for years while parking a reasonable amount of savings into a medium-risk mutual fund. Thanks to the financial crisis they lose both their job, their savings, and their house. But eventually they find a new job, work there for a year or two, and the value of their portfolio returns. I think it is fair to question whether they are really a serious credit risk, unless there is another financial catastrophe, in which case everybody is a serious credit risk.
New home sales figures give us additional insight in the so-called housing recovery. From June, 2010 to June, 2012, the median number of months to sell a new house was 7.9, 6.7, and 8 months respectively, according to data compiled jointly by the Census and HUD. While the number of homes sold went up slightly, from 28,000 sold last June to 33,000 this June, there are 144,000 new homes for sale. It seems reasonable to believe that if the demand for houses is real – if there really are no existing homes for sale – then demand for new homes would have spiked, but that isn’t the case. However, new houses are obviously are more difficult to flip, because somebody can just buy their own new house next door, suggesting that increased demand for existing homes is due to speculation.
Further out anecdotal, yet interesting evidence, also exists: television shows. Spike TV announced that they have purchased a second season of Flip Men, a show about two men who flip foreclosures. Enough public interest in foreclosure flipping to justify a reincarnation of Flip This House, which ran from 2005 (cough) to 2009, suggests a speculation bubble is brewing. Interestingly, one of the two flippers, Doug Clark, told the Wall Street Journal there are fewer houses at foreclosure auction now than in 2004. I’ve reached out to their publicists for clarification of whether he meant fewer houses they are able to purchase, at prices enabling a profitable flip, or fewer houses total. If there are fewer total houses at local auctions now than in 2004 – when the availability of a pulse-loans meant that anybody could easily refinance a house to delay a foreclosure – something is clearly amiss.
Finally there is shadow inventory, a figure that is either so small it is meaningless, as housing cheerleaders seem to believe, or the end of the world as we know it daunting, which I believe is more accurate.
I’d like to make a strong prediction but trying to gain credible insight into housing and foreclosure information is difficult because the industry, including and especially Fannie Mae and Freddie Mac, continue to hoard housing data. We can’t measure what we can’t see, and thanks to murky and inconsistent housing data all we really know is that there is a lot we don’t really know.
To illustrate how bad some housing data is I’ll refer to a three-part series written by Nick Timaros of the Wall Street Journal, which ran Aug. 14-16, arguing that shadow inventory does not matter. Embedded is a graph showing the total number of vacant properties nationwide, sourced from Freddie Mac. Freddie’s graph does show a steep recent decline in vacant properties, but at the upper end it never crosses the two million unit mark in its twelve-year history. That is, according to Freddie Mac’s Office of the Chief Economist there were never more than two million vacant properties nationwide.
In contrast, the 2010 US Census reports 10.3 million vacant housing units, after backing out the 4.6 million seasonal houses. Two million empties – a figure Freddie argues we never reached – is far less than 10 million, the figure the far more objective census reports. Even the OCC data I cited above is suspect, since they report the same number of outstanding first mortgages in Q1, 2009 as Q1, 2010, which seems impossible to believe given the number of foreclosures and tighter credit standards.
Thanks to low lower foreclosures, real-estate speculators buying in bulk, and low interest rates there is enough direct and anecdotal evidence to suggest that we may be seeing a real-estate recovery on paper. Further, these policies are clearly calibrated to bring about a bubble, despite that bubbles are difficult to control and are not, by definition, sustainable: they always eventually pop. Let’s at least hope that when this bubble bursts the new Wall Street bulk buyers are treated with the same ruthless “free market” vigor that the prior owners of these houses were treated with after the last bubble burst. However, I doubt the mystery Asian money buyer, that Fannie sold Phoenix to, will ever be subject to something like the rocket docket.