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Another 11 Million Foreclosures in the United States?

Foreclosure Crisis Goes Global

by MIKE WHITNEY

Even though housing is in terrible shape in the US, it’s not nearly as bad as Ireland. Irish real estate is in freefall. Prices have plunged 60 percent across the country and 65 percent in Dublin. Austerity measures have sent unemployment soaring (18 percent) and housing into the doldrums. According to the Guardian, prices dipped 8 percent in the last quarter alone, “the largest ever quarterly fall in house prices in Ireland.” (“Ireland’s house prices at lowest levels since 2000″, The Guardian)

And things aren’t so hot in neighboring Spain either where housing prices slumped 7.4 percent in the third quarter year-over-year, “the fourteenth straight quarter of falls.” (Reuters) The wreckage from Spain’s housing bubble is visible everywhere, from the dysfunctional, underwater banking system, to the skyhigh unemployment (22 percent), to the droopy state revenues. The
country’s dreary finances have led to the ousting of Prime Minister José Luis Rodríguez Zapatero and his Socialist government to be replaced by rightwing hardliner Mariano Rajoy. (Rajoy promises to slash government spending wherever possible, even if it means rolling back popular social programs.) Here’s more on Spains’ housing bubble from Reuters:

“House prices have dropped around 24 percent in real terms since their peak in 2007 and are expected to decline between 35 and 40 percent over a 10-year period, with demand hit by high unemployment and low population growth.” (“Spain housing prices fall 7.4 pct in long slump”, Reuters)

In the US, homeowners have seen their equity vanish in a matter of a few years. According to the benchmark S&P/Case-Shiller Home Price Index, housing prices have slipped 32 percent from their peak in 2006, wiping out roughly $8 trillion in home equity. The price-reversal has caused a sharp decline in consumer spending as nearly $500 billion per year had been drawn from Home Equity Withdrawals (HEW) during the bubble years.

So, how far will prices fall in the US, and is there any chance that the US follows Ireland’s lead and lobs off another 30 percent or so?

That seems unlikely, mainly because the big banks appear to be working with the Fed to control the amount of supply that comes online. So, for example, (according to Calculated Risk) “Existing home inventory declined 18 percent year-over-year in December” (2011) whereas, the “shadow inventory” of homes barely budged. Here’s how Calculated Risk defines shadow inventory:

Housing inventory “that is currently not on the market, but is expected to be listed in the next few years. Shadow inventory could include bank owned properties (REO: Real Estate Owned), properties in the foreclosure process, other properties with delinquent mortgages (both serious delinquencies of over 90+ days, and less serious), condos that were converted to apartments (and will be converted back), investor owned rental properties, and homeowners “waiting for a better market”, and a few other categories – as long as the properties are not currently listed for sale.”

So, while existing home inventory is back to about 2005 levels (2.5 million units); shadow inventory adds another 3 million to that sum. If that shadow supply was suddenly dumped onto the market, prices would fall precipitously. So, my guess, is that the Big Boys are colluding with our friends at the Fed to maintain pricing by releasing the backlog in dribs and drabs. Even so, the downward pressure on prices is impressive. For example, the banks reduced supply by roughly 18 percent y-o-y, and yet, prices STILL went down nearly 4 percent! Normally, you’d think that if that much supply was kept off the market, prices would rise, but that’s not the case.  This just shows that the attitude towards owning a home has changed dramatically. Even with historic low interest rates, people are shunning home ownership in droves.

Readers may have heard rumours in the last few days that the Fed is pushing a program to convert an undisclosed number of foreclosures into rental units. Unfortunately, this just looks like another Ponzi-scam that will have little effect on overall sales. Let me draw your attention to the key passage in the Reuters summary of the proposed program:

“Fed Chairman Ben Bernanke, in a letter accompanying the recommendations, said the U.S. central bank was responding to requests for advice about what could be done to halt the spiral of falling home prices and rising foreclosures.

Among the recommendations: allow Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) to refinance loans that they have not guaranteed.” (“Fed says expand Fannie, Freddie role to aid housing”, Reuters)

So what the Fed wants to do is refinance the private-label garbage mortgages that are left on the banks’ balance sheets, that way the taxpayer is left holding the bill. The whole rental thing is just a diversion; just another bailout.

Let’s get back to the meat and potatoes: “CoreLogic reports that shadow inventory as of October 2011 is still at January 2009 levels.”

From Seeking Alpha:

“As of October 2011, shadow inventory remained at 1.6 million units, or five-months’ supply and represented half of the 3 million properties currently seriously delinquent, in foreclosure or in REO.

Of the 1.6 million properties currently in the shadow inventory, 770,000 units are seriously delinquent, …430,000 are in some stage of foreclosure … and 370,000 are already in REO.” (Seeking Alpha)

So, there’s roughly twice as many homes that will eventually come onto the market than we see in the reported current inventory. Does that mean that prices could fall another 32 percent?

Probably not, but they’ll certainly drop another 5 or 10 percent. That’s inevitable. But sticker shock is just small part of a much more serious problem. 1 in 5 homeowners are already underwater on their mortgages. If that number goes up, so too will the foreclosures further devastating working class people who’ve already had the rug pulled out from under them countless times since the crisis began. Unfortunately–on our present trajectory–we’re headed straight for the cliff. If the Obama troupe doesn’t change the present do-nothing policy, and take aggressive steps to keep people in their homes; we could see foreclosures triple before this thing is over. Here’s the scoop from Business Insider:

“A major bear on the housing market, Amherst Securities’ Laurie Goodman has predicted since 2009 another housing crash as banks are forced to liquidate tons of bad loans.

Up to 11 million mortgages are likely to default, according to Goodman. This is a frightening figure, seeing as only several million have been liquidated since the crisis began. When it happens, the market will be flooded with supply.

Goodman reached 11 million by projecting default rates for non-performing loans, re-performing loans, and underwater loans.(Check out the  excellent graphs)

Meanwhile banks are refraining from liquidations in hope that bad loans turn good. Thus the shadow inventory keeps growing.” (“Laurie Goodman On Why Another 11 Million Mortgages Will Go Bad”, Business Insider)

For those who think we should “Let the market work this out”; keep in mind the different standard that’s been applied to the banks, who not only perpetrated this crisis, but who’ve also been its main beneficiaries via unlimited public support. (A “blank check”)

Isn’t it about time we gave the victims equal consideration?

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at fergiewhitney@msn.com