Forbes Magazine recently published an article entitled, “Delinquencies, foreclosures likely to put a damper on 2010 recovery.” I’d like to ask which “recovery” is that? Evidence of the alleged “recovery” is about as scarce as unicorn scat.
Still, while evidence of a “recovery” is hard to find, evidence of continuing US foreclosure problems is hard to ignore. The Forbes article declared:
“The problem is the glut of homes that have been repossessed by banks or that seem headed in that direction. The glut is far bigger than it was a year ago. . . . the outlook is flat-out grim . . . . The percentage of homes that banks have filed foreclosure on or repossessed now account for 3% of all mortgaged homes. That’s up from 2.2% a year ago. In some large cities, the rate is two-to-six times the national average.”
2.2% may not seem like much. 3% may not seem like much. But a rise from 2.2% to 3% in one year is an increase of 36%. If the foreclosure problem was bad last year, it’s 36% worse today—and likely to be even worse, tomorrow.
The number of homeowners who haven’t yet succumbed to foreclosure—but are in serious danger of doing so—is also way up. In 2009, one US mortgage in 22 was at least 3 months delinquent. Today, that number is one in 14—3.5 million mortgages close to foreclosure. That’s a 57% increase in one year. In addition, another 2 million mortgages are at least six months delinquent.
Unlike unemployment, the delinquent mortgage rate is increasing.
One consequence of increasing foreclosures is falling house construction. So long as there are more homes for sale than there are buyers—housing prices will continue to fall—and there’ll be little point or profit in building more homes. In fact, the Commerce Department reported that construction of new homes and apartments fell 5.9% in February. Sales of new homes plunged 11% to a record low in January, the third consecutive monthly decline. Sales of previously occupied homes were down 7%, the sharpest drop since last June.
As housing sales and construction declines, there are less jobs and less income for construction workers. That decline in construction worker income necessarily causes many construction workers to be increasingly vulnerable to seeing their own homes foreclosed, and decreasingly able to buy a new home. All of which means less demand for houses at the same time we’re seeing increased supply. Result? Housing prices must fall further in most US markets.
In 2008, the first wave of foreclosures was primarily comprised of “sub-prime” borrowers—people whose capacity to repay their loans was doubtful from the beginning. Today, 75% of delinquent mortgagees were originally “prime” borrowers—people who had good credit and were legitimately likely to repay their home loans. Unfortunately, some of these formerly “prime” borrowers have lost their jobs in the Great Recession and have become “once-prime” borrowers and mortgage delinquents.
These “once-prime” borrowers are facing extended unemployment and often can’t make even reduced mortgage payments. To address this problem, Maryland lawmakers extended the foreclosure process from 15 days to 135 days and are considering more emergency legislation to force lenders into mediation with a borrower before foreclosing. Other jurisdictions have resorted to even more drastic measures to slow down the foreclosure process. There are cases where sheriffs are refusing to file foreclosure notices.
The increasing delay between defaults and actual foreclosures has created a foreclosure “shadow market”. The “shadow market”—the known supply of houses that should already be foreclosed or should soon be foreclosed—already begins to match the number of homes that are in foreclosure. In other words, except for the bank’s growing reluctance to foreclose, the actual supply of foreclosed properties available for sale could easily be double that which is currently reported.
Increased supply + decreased demand = falling prices.
Lenders overwhelmed by the number of borrowers who can’t pay their mortgages are increasingly reluctant to actually foreclose and then push more repossessed homes onto the market. As more foreclosed homes go on the market, the supply of homes for sale increases and that causes the prices for homes to fall further. As other homeowners see the assessed value of their homes fall, more find themselves “underwater”—joining the ranks of 11 million homeowners (nearly one-quarter of all US mortgages) who already owe more money on their homes than the homes are worth.
One consequence of the “underwater” mortgages is a growing anger against banks—and government. Why? Because borrowers believe banks knew that the homes they were buying were over-priced. . . . they believe banks “duped” them into expensive loans . . . . they believe banks knew that they’d never be able to both make the mortgage payments and make a profit on their homes. . . . they see government bailing out crooked bankers but giving little or no significant relief to borrowers. These “underwater” mortgagees feel betrayed by their banks and their government.
Result? More and more homeowners are opting for “strategic defaults”. I.e., “underwater” on their mortgages and angry at banks, borrowers are choosing to abandon their homes, even if they can still afford the payments.
According to First American CoreLogic, borrowers typically begin to think about a “strategic default” once the value of their property falls below 75% of the value of the debt. About 5 million US mortgagees are in that situation.
Luigi Zingales, a professor at the University of Chicago’s Booth School of Business, said that “strategic defaults” by underwater mortgagees have increased from 23% of all defaults last March to about 35% in last December. That’s an increase of over 50% in the rate of “strategic defaults” in just 9 months.
This rate of increase goes far beyond mere mathematics or economics and signals a dangerous shift in public values. People who previously felt morally obligated to pay their debts and could still pay their mortgage obligations are simply refusing to pay. They are abandoning their properties because they recognize, at least in part, that the whole mortgage business is a racket run and manipulated by bankers and politicians for the sake of special interests rather than the people. Recognizing the “game” as fixed, people are refusing to play.
The psychological and political implications of this refusal are hard to predict. Even so, it seems certain that virtually every American who loses his home may be embittered and will be subject to adopting a prolonged, intense distrust for both bankers and government. Government has long argued that the value of our paper, fiat currency is based on the “full faith and credit” of the American people. Well, how much “faith” will remain in those who’ve lost their homes in what they regard as a rigged mortgage game? The consequences of this loss of faith and confidence might threaten governmental authority.
There are adverse consequences for a “strategic default”. A borrower who defaults on his mortgage may see his credit score fall by 100 points. That reduced credit rating will make it hard to borrow money, rent an apartment or get a job because many employers now routinely check the credit histories of potential hires. But if those who are foreclosed can’t get jobs or credit, you can bet that they won’t soon be buying another house. Thus, those who “strategically default” on their “underwater” mortgage will not simply dump the house they paid $400,000 for five years ago, and buy a new home tomorrow for $150,000. Instead, these “defaulters” won’t buy another house any time soon. They’ll be out of the house buying market. That means the supply of foreclosed properties will increase while the demand for homes continues to decline. That means home prices must continue to fall.
The growing problem of “underwater” mortgages is driving many homeowners to simply abandon their properties to the banks—which further increases the supply of homes for sale—which further depresses prices—which causes more homeowners to sink “underwater” and abandon their homes—which causes more construction workers to be unemployed, etc., etc.—and begins another round of this very vicious cycle.
These price declines will persist. Some economists project it could take at least three years for all currently foreclosed homes to be put on the market and purchased by new owners. That’s probably a conservative estimate since the number of pending foreclosures is virtually certain to grow much larger in 2010, 2011 and 2012. Implication: the price of homes could continue to fall for at least another three years.
It seems apparent that over the next two to three years 1) the rate of foreclosure is likely to increase; 2) the prices of homes must fall (perhaps dramatically); causing 3) more abandoned or foreclosed homes; causing, 4) even lower home prices; all contributing to 5) less construction work; which should cause 6) more unemployment; leading to 7) more defaults on home loans; causing 8) an increased rate of foreclosure, lower prices, etc. etc..
We’re caught a spiraling decline that’s unlikely to end until home prices have dropped dramatically, perhaps catastrophically.
In light of this grim prospect, the following report from the New York Times is hilarious, absurd and indicative of the impossible, catch-22 situation in which the US economy is currently ensnared. For me, this is gallows humor at its finest:
“WASHINGTON — The Federal Reserve on Tuesday affirmed its plan to stop buying mortgage-backed securities, expressing a degree of confidence that it could eliminate that pillar of support without undermining the nation’s economic recovery.”
Ohh, so they have a “degree of confidence,” do they? Well, on a scale of 1 to ten, how many “degrees” of confidence to they have? One degree? Two?
“The Fed’s purchases of mortgage-backed securities, which will total $1.25 trillion and end March 31, have helped hold mortgage rates to near-record lows, and the Fed left open the possibility that the purchases might have to be resumed, particularly if the housing recovery stalls.”
“If the housing recorvery stalls”?!! Ifffff?!!! What freakin’ “housing recovery” are they talking about??? How can the Fed keep a straight face while claiming to worry that the “housing recovery” might “stall,” if there is no “housing recovery” to begin with? And if the Fed’s primary weapon to fight the recession are a bunch of obvious lies concealed only by their straight faces, what faith can Americans have in any alleged “recovery”?
Also, note that the Federal Reserve has injected $1.25 trillion into the mortgage market over the past year. Without that $1.25 trillion, we can only wonder how low the prices of homes might’ve been today. If the Fed fails to inject another $1.25 trillion over the next 12 months, how low will home prices be a year from now? And even if the Fed injects another $1.25 trillion in 2010, what about 2011, 2012 and 2013? Will there ever be a day when even the almighty Federal Reserve runs out of paper and ink and is unable to print more money to support into the housing market? What happens to the price of homes then?
“Marvin Goodfriend, a former research director at the Federal Reserve Bank of Richmond, said the Fed was essentially conducting an experiment by trying to end its purchases of mortgage securities. “It would like private money to come back into the mortgage market, . . . .”
Ohh, goody—in the midst of the greatest economic problem since the Great Depression, the Fed is conducting an “experiment”—and you and I are the lab rats. (Pass the cheese.)
And . . . the Fed “would like” some “private money” to come back into the mortgage market. Well, I “would like” a pony for Christmas, but I’m not holding my breath. Likewise, I wouldn’t recommend that the Fed hold its breath waiting on “private money” (greater fools) to enter the mortgage market. Everything indicates that the prices of homes could fall by at least another 10% per year for at least another 3 years. So, who, in their right mind would invest significant “private money” in residential homes?
It’s easy for me to mock the Federal Reserve and federal government. But this mockery doesn’t please me. The Fed/fed are in one helluva mess and there’s no obvious way out. If only the Fed/fed were in this mess, it would be well-deserved, and even hilarious. Ohh, what fun to see the lying, treasonous whores finally take it in the neck, hmm?
The problem is that any catastrophe suffered by the Fed/fed will also affect the American people—and probably with greater intensity. The Fed/fed will survive what’s coming. Some Americans may not.
In the end, the Federal Reserve, the federal government, the state and local governments and the American people can run, but they can’t hide. In the relatively simple arena of home mortgages, we can see evidence of an economic, psychological and political problem coming that seems unescapable and possibly catastrophic.
Can you see a “recovery”? Can you see any significant evidence for optimism for the next three years? I don’t.
If you’re planning to sell your home, you’ll probably be better off to sell now at almost any price you can get, then to wait—unless you’re prepared to wait 5 or 10 years.
Likewise, if you’re in the market to buy a new home, you might want to wait a few years. There’s no guarantee, but you might save at least 30% on the average price of today’s home if you wait 3 years to make your purchase. Three years is a long time to postpone buying something you really want. But a 30% reduction (maybe more) in a mortgage you’ll be paying on for 20 or 30 years is nothing to sneeze at.
And if you take the money that you want to spend on a mortgage today and instead put it into gold and silver, there’s a good chance that in just a few years, the money you saved by being mortgage-free now might grow enough to later pay for your new house outright. If you had enough gold now, you might not need a mortgage three to five years from now. Over the next several years, the price of homes might fall so low, while the purchasing power of gold rises so high, that you might actually have enough of your own “private” money to buy your dream home without a bank loan.
Buy a home without a mortgage? Now, that’s an American Dream.