Since I’m leaving today for a one week hiatus in God’s Country, the mountains of Northern New Mexico, to go elk hunting and hiking, I’m providing you with excerpts from my October issue of “Moving Markets”. There will be 3 excerpts total, one today and two more next week. For a complete copy of this month’s issue, click here: www.usawealthmanagement.com
But what about other reports indicating real estate values have recently begun to recover like this excerpt from an article published by Newsday on September 29, 2009?
Median prices for home closings fell from $402,000 last September to a five-year low of $350,000 in January, according to data from the Long Island Board of Realtors, which also covers Queens.
The median clawed up to $385,000 last month, and real estate agents said open-house traffic and deals have revved up.
Isn’t that proof the real estate market is truly recovering? Probably not.
A study conducted by Amherst Securities Group published on housingwire.com on September 24, 2009 stated the following:
Recent analysis by the Amherst Securities Group indicates the housing industry will not only worsen as a delayed pipeline of foreclosed loans begins to liquidate, but that the Administration’s Making Home Affordable Modification Program (HAMP) will have no lasting effect on keeping delinquent loans current.
The early signs of stabilization seen among housing industry observers may soon recede as an overhang of the shadow inventory of foreclosures waits to enter the market.
The general outlook that the housing market has bottomed is “premature” optimism, according to analysis this week from Amherst.
“The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate,” analyst Laurie Goodman said in an insight report Wednesday.
Amherst estimates this “shadow inventory” at around 7m housing units, or 135% of a full year of existing home sales, compared with 1.27m units in this bucket in early 2005. The backlog is due to high transition rates, low cure rates and a longer timeline for loan liquidation — in other words, loans continue to transition into the delinquency/foreclosure pipeline at a rapid pace, but are moving out at a very slow pace.
In other words, the ‘inventory’ of foreclosed homes continues to rise and currently there is 135% more ‘inventory’ than we’re selling in one year.
In case you’re not familiar with the term ‘cure rate’, let me explain. A loan is ‘cured’ when it returns to current status; in other words the borrower ‘catches up’ on payments. ‘Curing loans’ has been the primary goal of the administration’s Home Affordable Modification Program. If you want to learn more about the program’s objectives, you can visit the website established by the government to promote the program at http://makinghomeaffordable.gov/.
Here is a brief excerpt from the site:
If you can no longer afford to make your monthly loan payments, you may qualify for a loan modification to make your monthly mortgage payment more affordable. Millions of borrowers who are current, but having difficulty making their payments and borrowers who have already missed one or more payments may be eligible.
The site contains a questionnaire to help a visitor determine if he/she might be eligible for the program. According to the Amherst study, the program isn’t working.
Here’s another excerpt from the article published on housingwire.com:
Cure rates for these distressed loans remain low. Amherst noted a near 0% cure rate of all loans in foreclosure, 0.8% for 90 plus days delinquent, 4.4% for 60 days delinquent and 26.5% for 30-day delinquencies. All told, Amherst expects 12.42% of units (from the 13.54% of properties delinquent and in foreclosure) to eventually liquidate.
Let’s do some simple math. According to the study, currently 13.54% of all homes are either in foreclosure or delinquent on loans. Since there are about 120 million single family homes in the United States (Source: answers.com), that means approximately 16,250,000 homes could be in foreclosure or delinquent. The Amherst study expects 12.42% of these units will eventually liquidate; approximately 2.02 million homes.
While I am unsure what the average outstanding loan balance is on each of these homes, assuming $200,000 would be conservative in my opinion. If you take $200,000 times 2.02 million homes at risk of default or being liquidated, bad loans could account for $404,000,000,000, or $404 billion. And, that number in my opinion is conservative.
Add that conservative number to the potential commercial real estate number just discussed, and, from my vantage point, the real estate market is still almost a trillion dollar problem just waiting to happen. In my opinion, a problem SIGNIFICANT ENOUGH to be a drag on the economy for the next several years. The excess inventory will have to be dealt with before the economy can truly recover.
Securities offered through USA Advanced Planners (Member FINRA/SIPC). Advisory services offered through USA Wealth Management. USA Advanced Planners and USA Wealth Management are affiliated companies. The opinions expressed herein are those of the writer and not necessarily that of the above noted affiliated companies. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. The information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.
This information is education in nature and, therefore, is not intended to constitute investment advice and should not be interpreted as a recommendation to purchase, sell or hold a particular security. Prior to making any investment decision, the services of an appropriate professional should be sought as investment related recommendations are dependent upon the personal situation of each individual investor. Investing in market related securities involves a risk of principal loss.
