I have been writing about housings downturn for sometime and housing has been trending downward for the last 57 months straight. Even with all the government support, various moratoriums, delays, refinances, loan reworks and a plethora of other gadgetry the trend still remains.
Now I am ready to call a crash. But before I get to that specific information lets look at some recent data.
In a normal RE market distressed sales made up about 2% of total sales the remaining could be broken out into new homes and organic resales. Today we have anything but a normal market. Just released for Sacramento RE in May 2011, 65.6% of all resales (single family homes and condos) were distressed sales. This is down from 66.8% in April but this is a very high percentage of distressed sales for May. A full two thirds of the market IS DISTRESSED sales in the Sacramento region. For the state it is over 45%. Foreclosures are selling for over 30 percent price reductions and in many areas including California foreclosures are a large part of the market.
A high level of distressed sales suggests falling prices. Some have tried to spin it that distressed and conventional are two different worlds, they are not. Home sales are set by the buyer, not the seller. The seller can set any price they want but reality is the DISTRESSED MARKET IS THE MARKET and anyone wanting to sell must compete in that market.
According to the WSJ as of June 2011 official unemployment in California stood at 12.1%. The broader, and more accurate U-6 rate is 22%. Almost 1 in 4 residents are either unemployed or UNDERemployed. Who will be there to buy the inventory that will be coming to market?
Shadow inventory is enormous and is growing exponentially. According to Calculated Risk there are 2.24 million homes that are under 90 days delinquent. Another 2 million that are 90+ days delinquent, and 2.18 million homes in the foreclosure process.
For a total if 6.4 million homes delinquent or in foreclosure. Whats more shocking is there are 675,000 owners who have not made a payment in over 2 years.
Apparently this is all part of the banks strategy of extend and pretend. So the entire U.S. banking system is being overwhelmed with 600,000 to 800,000 active REOs yet we have that many in foreclosure without two years of payments.
Professor Robert Shiller, one of the founders of the Case Shiller Index has made recent headlines by stating rather calmly that home prices will likely fall another 10 to 25 percent in the upcoming years. I think Professor Shiller is both too optimistic and it wont take that long to get there and here is why.
Unless something changes there is a perfect storm forming on the horizon. On June 30 the FED will end its QE2 program. On August 2 Secretary Geithner has stated the USGovt runs out of money to pay its bills unless the ceiling is raised. Combining all the information above is just the appetizer to the announced GSE and FHA dropping the loan limit amounts.
On October 1 the GSE's (Fannie, Freddie, and FHA) will drop the loan guarantee amount from $729,750 to the original amount of $417,000 for most areas of the country.
Since 2008 the GSE's have backed 90% of the market. That means 9 out of 10 new loans have been made by the USGovt. When banks can no longer offload "affordable" mortgages to the USGovt all homes currently priced in what is essentially the jumbo market will have no buyers. Prices must drop.
Part of the Dodd/Frank bill was to ensure the banking industry kept some skin in the game and requires the banks to hold 5% of the loans on their books. Conventional loans require 20% down, and some banks even 30%. down. One must also have impeccable credit and employment histories, and higher personal asset holdings. A credit score of 700 will get your foot in the door, but the pool of buyers will most likely be diminished.
When the GSE's exit the high dollar market borrowing costs will rise to offset the banks risk. Expect house prices to move inversely to interest rates. As prices fall because the buyer pool in anything but the low end of the market will dry up more homeowners will find themselves underwater and the cycle will feed on itself.