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A Bottom in Housing? No Way!

A Market in Ruins

by MIKE WHITNEY

According to a recent report by Clear Capital, “The nation’s home prices rebounded with quarterly and yearly gains of 1.7%.” The Home Data Index (HDI) report, which was released on July 10, shows that “Regional performance improved across the board”, and that “Home price forecast through 2012 shows continued growth for the nation…”

Hooray! Housing prices have hit bottom and the market is slowly recovering, right?

A growing number of experts appear to agree with this view, such as  the Wall Street Journal’s economics editor, David Wessel. Here’s what Wessel had to say in an article on Wednesday:

“The housing market has turned—at last…The U.S. finally has moved beyond attention-grabbing predictions from housing “experts” that housing is bottoming. The numbers are now convincing.”

And this is from The Economist: 

“In unsurprising but good news, Case-Shiller reported new home price data this week that showed a definitive upward move in markets across the country. From March to April, Case-Shiller’s 10- and 20-city indexes rose 0.7%, seasonally adjusted. All but three of the tracked markets saw month-on-month increases. Half of tracked cities notched year-on-year price increases in April…. America seems to have achieved bottoms for both sales and prices.”

And here’s a clip from the nation’s number one economic’s blog, Calculated Risk, in a post titled, “The Housing Bottom is Here”:

“There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices…. Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales.”

Naturally, people who’re thinking about buying a house (or who are interested in the overall condition of the economy) will want to know whether they can trust the sudden uptick in prices. Is this the real deal or is something else going on that’s making the numbers look better than they really are? That’s the question.  After all, no one wants to plunk down $300,000 or $400,000 only to find out that prices are headed right back into the toilet as soon as the ink on his mortgage dries.

So, here’s what we know: The sale of distressed properties (foreclosures, short sales, etc) dramatically pushes down aggregate prices. Why? Because bank owned properties are usually discounted by 30 or 40 percent which drags down the average. For example, let’s say  you have 5 houses in the Seattle area all going for $1,000 each. So, the average price is $1,000. Now imagine that 2 of those homes are foreclosures discounted by 40%. ($600 each)  That would pull the average price down to $840.

While this analysis may sound absurdly simple, in fact, it helps to explain what’s actually going on in the housing market. Prices are not going up as much as distressed properties are being removed from the MLS (listing).  By removing (or withholding) bank-owned properties from the market, prices look better than they really are. So, what we are seeing is another example of gross manipulation and collusion by the banks, who are presently under fire for their collusion and manipulation in rigging interest rates. (LIBOR) It’s the same here; more cheating by the world’s biggest cheaters.

Now, let’s look at the facts. This is from Foreclosure Radar (posted at Calculated Risk) under the title: “Foreclosure Inventory Continues To Decline”:

“June 2012 Foreclosure Sales were significantly down in the three largest foreclosure states in our coverage area. California Foreclosure Sales were down 13.4 percent over last month, and down 48.8 percent vs. June 2011. Arizona Foreclosure Sales were down 18.5 percent over last month, and down 42.1 percent vs. June 2011. Nevada Foreclosure Sales were down 14.6 percent over last month, and down 72.1 percent vs. June 2011 driven by the new regulation that took effect in October 2011. In addition, Foreclosure Filings are flat to down in all states in our coverage area, both on a month over month basis and vs. previous year. Arizona Notice of Sales were down 27.7 percent over last month, Nevada Notice of Defaults were down 22.7 percent over last month, and California Notice of Defaults were basically flat, being down 0.9 percent over last month.”

Ask yourself this: Why are foreclosure sales down nearly 50% year-over-year in California, 42% in Arizona, and 72% in Nevada? Have buyers stopped looking for good deals or have the banks stopped processing foreclosures in order to artificially prop up prices and avoid greater losses for themselves?

Or maybe there’s another reason altogether. Maybe the banks have whittled down delinquencies to the point where there are actually fewer foreclosures in the pipeline? Is that it?

No, that’s not it at all.  In fact the number of distressed homes in the pipleline is still humongous. Here’s a conservative estimate from LPS’s Mortgage Monitor report for May:

* 1,967,000 loans less than 90 days delinquent.

* 1,575,000 loans 90+ days delinquent.

*  2,027,000 loans in foreclosure process

That’s a total of 5,569,000 loans that are delinquent or in foreclosure as of May 2012. Keep in mind, that some experts predict that we are just barely halfway through this foreclosure deluge and that –according to The Big Picture’s Barry Ritholtz, “We may end up with a total of 8-10 million foreclosures before we are finished.”  How do you think that’s going to effect prices?

Now take a look at this from Dr. Housing Bubble who explains what’s going on:

“The decrease in nationwide inventory is an ongoing trend.  Keeping supply constricted has clearly helped with pushing prices higher as demand is now competing for a smaller number of homes. … The recent moves in the housing market are spurred on by record low interest rates and constrained inventory.  Yet this should not be mistaken with an improving economy that is pushing prices higher which would be healthier.

Inventory is back to levels last seen in 2005.  The strategy of leaking out inventory in a controlled fashion while leveraging low mortgage rates seems to be the ongoing plan….the market is like a Hollywood set and is fake.

Right on. Dr. Bubble is talking about existing inventory here (which is down nearly 22 percent year-over-year), but the same rule applies to distressed inventory which pushes prices down. Some of the reduction has to do with the fact that 24 percent of all mortgage holders are currently underwater, so they’re waiting for prices to rise before they list their home to avoid taking a loss on the sale. But the number of distressed homes on the market has also sharply declined mainly because the banks have slowed the foreclosure process to a crawl. According to analyst Keith Jurow, the number of homes in the shadow inventory is vastly larger than previously thought. Jurow has done extensive research on serious delinquencies in the New York City metro area. By checking   the “pre-foreclosure notices”  that are sent to all delinquent owner occupants, he has pieced-together a picture of a housing market that is essentially in ruins. Here’s some of Jurow’s findings that were posted on Business Insider:

“Through the end of March 2012, a total of 192,000+ pre-foreclosure notices had been sent to delinquent owners in NYC. This does not include delinquent investor-owned properties because the law did not require servicers to send notices to them. There are lots of 2-3 family homes in the four outer boroughs of  NYC. I estimate that there are roughly 75,000+ delinquent investor-owners.

This means there are roughly 265,000 seriously delinquent homeowners in NYC who have not yet been foreclosed. Why so many? The banks do not foreclose in NYC. As of May 24, foreclosure.com reported a total of 301 foreclosed properties on the active MLS and 103 in Brooklyn. Together, these two boroughs have a total of 4.7 million residents. That is more people than live in Maricopa County where Phoenix is situated.

Hard as it may be to believe, the situation is even worse on Long Island. With fewer than 3 million occupants, Nassau and Suffolk Counties showed a total of 175,000 pre-foreclosure notices sent out as of the end of March.

If  you think the reduction in foreclosing is limited to the NYC metro markets, you’re mistaken. Take a good look at this revealing chart for Phoenix from foreclosureradar.com. Bank repossessions in Maricopa County plunged from 3,159 in April 2011 to a mere 767 a year later. Clearly, the banks are gambling that this will help to stem the decline of home prices.

Or let’s take a look at Miami — a market that suffered one of the largest price collapses since the bubble popped. In 2010, the banks repossessed 23,000 properties just in Miami-Dade County. They foreclosed on 54,000 properties in the 3 south Florida counties of Dade, Broward, and Palm Beach. Although they sharply curtailed repossessions in 2011, that number still totaled roughly 35,000.

I spoke with the head of data for the Miami Association of Realtors on May 18 and was amazed to learn that there were only 282 repossessed properties on the active MLS.

A similar tactic has been occurring in Phoenix. During the height of the credit crisis in early 2009, 2/3 of all homes sold in Maricopa County were repossessed properties. That percentage was down to 40 percent a year ago.” (“KEITH JUROW: Prepare For The Coming Housing Collapse”, Business Insider)

Okay, so let’s break this down a bit: Of the “265,000 seriously delinquent homeowners” in NYC area, a mere 404 are listed for sale? (301 foreclosed properties on the active MLS and 103 in Brooklyn)  How can that be? That means the banks are sitting on roughly 264,000 distressed homes that don’t even appear in the shadow inventory figures.

And it looks like the same shenanigans are going on in Florida and Arizona, too. And, maybe across the entire US, which is what this article from DSNews appears to suggest:

“45 percent of YouWalkAway.com clients are in pre-foreclosure status, and on average, they are 17 months past due and still have not received their first formal foreclosure notice. In California, 59 percent of the agency’s clients are in pre-foreclosure status, and on average, they are 15 months behind and still haven’t received a foreclosure notice.

“Eighty-five percent of the homeowners we’re working with are in pre-foreclosure and have not made a mortgage payment for an average of 14 months,” said YouWalkAway.com CEO Jon.”

Sure, these are just the people that have consulted with YouWalkAway.com (presumably) to decide whether they should stop paying their mortgages or not, but–all the same–the numbers are shocking.  It suggests that the banks have collectively settled on a strategy that will keep the market in the doldrums for years to come without providing any real relief (principle reduction) to the people who need it the most.

This whole matter needs to be taken out of the banks’ hands so the gigantic backlog of distressed homes can be liquidated in an orderly manner and so the people who need help can get it. Enough is enough!

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