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Inventory Explodes Past the Worst of the Housing Crash

August 24, 2010

Soft demand for existing homes pushed up inventory to a record 12.5 months of sales and easily broke the previous high of 11.3 months scored in April 2008. By this basic measure, the price of homes may reasonably be expected to fall at the most torrential pace seen during our four-year-old crash.

Yet you will see only the most tepid warnings of this risk as described by the mainstream media — even with results released today coming in worse than the most pessimistic forecast of any economist surveyed by Bloomberg News. Please review the chart (above) and note that it is in record territory for the history of months-of-inventory for sale.

“I expect double digit months-of-supply for some time – and that will be a really bad sign for house prices,” said Bill McBride of Calculated Risk, commenting on the biggest one-month drop in sales ever.

Today’s stats are the first release of existing-home-sales data that gives us a view of buyer demand without the hugely popular down-payment prop from the federal government. Please note that inventory in units was comparatively benign with little change from June (Please see units for sale above.). We estimate the excess of units on the market as 1.1 million of the 4 million for sale.

Prices for residential real estate have been flat since August 2009, but they have fallen 34% from their peak in the summer of 2006 (based upon the 120-year series by Case Shiller). Not one commentator I reviewed on today’s stats explained that the perils of the American housing market have deepened dramatically since the killer crash let up and paused a year ago.

New risk factors now include a flood of negative equity. Foreclosures in progress are at a record level. Fourteen percent of mortgages are behind on payments — about 7.7 million borrowers or, more starkly, one in seven. Please note that inventory for-sale plus the 7.7 million delinquent borrowers is a number which is massively larger than the average unit sales of 480,000 a month (Please see “X” in the chart above towering over “Z” – monthly sales).

The risk doesn’t stop at one-of-seven behind on payments. The cure rate on delinquent mortgages is effectively zero once the loan goes to 60-days late. A record 4.63 percent of borrowers are in foreclosure. Intermingled among this mayhem are approximately 13 million homeowners who have no equity or negative equity. They would make nothing from the sale of their house if they could sell it. Or they would have to write a big check to sell. They are prime candidates for strategic default. One occasionally sees whispered warnings of a tipping point with default achieving a cache as was once given to hula hoops or pet rocks or station wagons.

“You end up in a home-price-depreciation death spiral,” Laurie Goodman told the Wall Street Journal. She is senior managing director at Amherst Securities Group LP and considered a guru on mortgages.

Other risks include massive imbalances between the exaggerated value of debt assets (mortgages) used to buy homes and the current huge fall in the value of property. Property values have fallen FIFTEEN TIMES further than the balances of mortgages. A recent report also called attention to the fact that even after a 34% fall, property values today are higher than they have ever been in any prior bubble excepting for the current one that we are in.

The huge number of late payers proves that home prices remain too high with our current unemployment of 9.5% even if affordability has skyrocketed and interest rates have plummeted.

Demand has held up surprisingly well given the awful scary facts just recounted (See chart above for actual unit sales released today.).

We are in a battle to the death and only fools rush in to this market. Wise men run for the hills. My suggestion? Rent. Don’t Buy. If you own, sell. Then wait out the storm. We live in interesting times. Don’t make yourself a statistic of them.

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PRINT Inventory Explodes Past the Worst of the Housing Crash

Michael David White is a mortgage originator in 50 states.

21 Comments
  1. Santa Fe Dave permalink
    August 28, 2010 6:11 pm

    Michael,

    Thanks for your blog and useful content.

    Interestingly, you are giving advice that is counter to your economic self-interest as a mortgage broker (“Rent. Don’t Buy. If you own, sell. Then wait out the storm.”). Thanks for the honest appraisal of the macro conditions – not another real estate “professional” touting “now really is the best time to buy”.

    From analyzing the charts and data sets, looks like the storm won’t run its course for another couple years. But, then also, “all real estate is local”, as is commonly said.

    Our family meets this profile. We sold our home in DC area and then moved here to Santa Fe. We are renting a home at least until May of 2011.

    The market here is tough for sellers – DOM is looonng, and multiple repricings seem the norm. Especially at the high end, the “months of supply” is better stated as “years of supply”.

    I would have thought that our timing then to buy would be good in 2011, but now not sure of that at all. May make sense to ride it out another year and rent until 2012.

    I am waiting for those jumbo defaults you have written about – There are probably a reasonable number of them around these parts.

    Btw, I saw parts 1 and 2 of that Jumbo Series, but nothing after that. When will you write parts 3 through 6. Also, is there any way for a prospective buyer to gain visibility to which homeowners (either specifically or generally in an area) are holding these jumbos – that doesn’t look like publicly available info.

    Thanks again for the great content.

    Dave.

    • August 28, 2010 7:32 pm

      Hi Dave, it sounds like you are working the crash the right way. risk is very high and in the jumbo market it is higher. i have the jumbo series written, but haven’t finalized the rest of it. as to private data on jumbo mortgages, and those which are in delinquency, i have in the past subscribed to a foreclosure report in my area (Chicago) that was very useful. Realty Trac is an expert in this data. thanks for your comment. mdw

  2. August 28, 2010 5:31 pm

    Thanks again, Michael. I just posted on it here http://markmartinezshow.blogspot.com/2010/08/our-continuing-housing-mess.html

    – Mark

  3. PhilBest permalink
    August 26, 2010 5:32 pm

    Considering USA-wide aggregates obscures the massive differences between States and cities. This looks a lot, lot worse in the few States that ARE the real problem. Furthermore, there is a total failure in every profession, to analyse what some States and cities have “got right”, so as to have escaped the worst of these problems; and what some States and cities “got wrong” so as to be the epicentres of these problems.

    Texas is the obvious model for success, and California is the obvious model for failure. If Texas was a separate nation, it would be one of the strongest economies in the world. If California was a separate nation, it would be in the company of Spain, Ireland, et al – “once were successful” nations.

  4. maxxx permalink
    August 26, 2010 6:36 am

    Add to this the absolutely huge investment made by boomers in housing as their main investment vehicle. Many are already wondering not what they will get but whether they can even sell. The first of them are just retiring now. When everyone heads for the exits…. you know the rest.

    But rest assured, the MSM just considers this just a possible double dip. Someone should move their deck chair so they can see the iceburg.

    • August 26, 2010 7:31 pm

      Hi Maxx, we may see a stampede and collapse. strangely that could be the best that could happen for the eonomy — to reprice the cost of living in the USA. thanks for your comment. mdw

      • PhilBest permalink
        August 26, 2010 7:52 pm

        You mean a stampede and collapse to lower the cost of living, in those States where prices are way too high compared to “sane” America.

        California needs the stampede and collapse, Texas does not. New urban frings homes for $120,000 are the historical norm in Texas. This keeps the prices of ALL homes sane.

        The reason that prices have been able to go “insane” in parts of the USA, California foremost, is that urban fringe land has become the subject of a “racket”. You can call it “planning” or “smart growth” or something dignified if you wish, it is still a racket.

        The price of land anywhere in a metro area, is a “factor” of the price of fringe land. Convenience of location commands a price premium over and above fringe pricing. If fringe land prices are 10 times too high (or 20 or 30 or 50 or 100 or even more) then of course the price of all metro land is going to be many times too high and all sorts of distortions to the economy result from that (look at the ratio of land value to structure value for a start).

        There is hundreds of times as much “non urban” land available beyond the fringes of all US metros areas as there is “urban” land. It is impossible for the price of raw land to be 10, 20, 30, 50, 100 times as expensive as THIS land without there being a “racket” enabled by the land use regulators. “Sane” USA does not have these rackets running.

  5. Steve NewHampshire permalink
    August 26, 2010 12:01 am

    Possible Outcomes:

    A. Housing and CRE collapse, the financial system follows closely behind, political chaos, angry citizens, riots, looting, no Monday night football.

    or….

    B. Money & wealth are really just offshoots of human confidence. Does a paper dollar have value if you’re in a terrible car accident and about to die? Is gold worth anything if the system collapses, and you don’t also possess food, guns & ammo? The Feds know this, and they also know that there is absolutely no inflation going on anywhere… cheaper technology, RE, cars, gasoline, nat gas, etc.

    So what will they do? “Create” more dollars anyway they can. They have to. Option A. is unacceptable, and as long as the sheeple keep dancing for dollars, they’ll keep printing more.

    What will the Feds do about housing? Exactly what they’re already doing. Lowering mortgage rates to extremely low levels. Expect treasury’s to continue the rally and 30Yr rates to get to 3.75%. If that doesn’t work, they’ll lower rates to 2.5%, 1%, -1%. Whatever it takes, they’ll do it. They have to. Allowing RE and CRE to crash further is just not in the cards.

    Buy high quality stocks with large dividends. Hope for the Fed plan to work, and that confidence is restored. If they fail, you’ll be better off owning weapons and a farm, vs. anything in the S&P500.

    The system is totally screwed up and a charade, but it still beats having to grow my own potatos and hoping that marauders don’t attack me while I’m plowing the fields.

    MDW, you’re right to be angry, but stop hoping for the sheeple to wake up and become as knowledgable as you about macro-econ. They couldn’t handle it. Protect yourself and your family. Read CalculateRisk and you’ll be ahead of the curve. Most importantly, maintain a strong mind and body, and you’ll always be happy.

    Good luck from the Granite State.

    • August 26, 2010 7:32 pm

      Hi Steve, i believe a collapse can be a great opportunity for an economy. if debt is reduced to match the fallen size of the economy, a great boom can follow deflation. thanks for your comment. mdw

  6. Hank permalink
    August 25, 2010 7:44 am

    Barry Ritholtz had a great post yesterday :

    http://www.ritholtz.com/blog/2010/08/housing-still-widely-misunderstood/

    In particular, the charts from Ned Davis Research :

  7. August 25, 2010 7:32 am

    Great story, just gave it a Digg! But also quite depressing. Here in Louisville, we have the same situation, just smaller, but huge drops in the number of sales and soaring inventory levels. But everybody still seems pretty optimistic, even with all of the available data, not sure why.

    • maxxx permalink
      August 26, 2010 6:46 am

      “everybody still seems pretty optimistic, even with all of the available data, not sure why.”

      Main stream media.

      Smoke some pot, have a few drinks, watch Cramer on CNBC and invest in the US stock market. You have my word, everything will be just fine.

    • August 26, 2010 7:35 pm

      Hi Greg, if you have a chance send me a report about days-on-market and inventory supply. will try to use it in next post. thanks Mike

    • PhilBest permalink
      August 26, 2010 8:00 pm

      It is a tragedy that this crisis has dragged down the entire US economy to the extent that those parts of the USA that did NOT indulge in land racketeering and bubble mania, are also suffering fallout from it. The only bright spot for “flatland” USA housing markets is this; prices do not have far to fall if they were not insanely inflated in the first place.

      Of course properties that went from $300,000 to $1,000,000 in 7 years, (eg in California) need to suffer a price collapse. It is less fair for people who live in markets where a $300,000 house stayed at around $300,000 through the same period (because new ones were always available on the urban fringes for $120,000 odd) if their perfectly reasonably priced homes suffer a drop now.

      • August 26, 2010 10:18 pm

        Hi Phil, I don’t pretend to be an expert on history, but i would bet that you would find fairness to be an exception rather than the rule. thanks for your comment. mdw

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