A Housing Apocapyse is Coming
Source: Dr. Housing Bubble
There will be no sustainable housing recovery until the shadow inventory is cleared out. As of April with the latest data close to 6.4 million loans are delinquent or in foreclosure. This is a massive number of homes. What is downright disturbing of the 2.2 million homes in foreclosure you have 675,000 homes (31 percent of the pool) that have not made a payment in over two years. That is right, two full years. Apparently one-third of the bank’s strategy in dealing with foreclosures is simply to ignore missed payments. Glad it took them giant bailouts and four years to figure that one out. The housing crisis strategy is really a banking-centric one and that is why nothing has really been resolved since the crisis started. Banks are dictating the movement going forward so the idea of keeping prices inflated is simply one to protect banking interests. Since the market has very little desire for inflated real estate, banks just slip it under the rug for another day. Keep in mind that many Americans are seeing lower wages so lower home prices are actually good for their bottom line since it eats away less of their hard earned income. Plus, one-third own their home outright and another 30 percent rent. So this idea of keeping home prices high just for the sake of keeping them high is a ploy that comes out of the suspension of mark-to-market logic. Do people finally get that home prices have to fall to reflect local area incomes?
The state of distress in U.S. housing
First, it is probably useful to get a sense of the entire potential shadow inventory out in the market:
Source: Calculated Risk
According to CR we have the following:
-2.24 million loans less than 90 days delinquent.
-1.96 million loans 90+ days delinquent.
-2.18 million loans in foreclosure process.
-For a total of 6.39 million loans delinquent or in foreclosure in April.
That is a large number of homes. Now keep in mind many foreclosures are now starting to make their way onto the MLS since banks are actually taking full possession of the homes (although the reality that 675,000 people have not made a single payment in two years tells you where things stand). Think about the above data; you have roughly 600,000 to 800,000 as current REOs (all the way through the foreclosure process) but you also have 675,000+ people in foreclosure who haven’t made a payment in two years:
I’ve seen some pundits argue that many of these loans will cure. We know for a hardcore fact that if you are behind on your payments for two years it is likely that your home is going to move from the shadow inventory into the REO pipeline. This also doesn’t examine the fact that we have close to 2.2 million homes in foreclosure. How many have made no payment in one year? Keep in mind we are only looking at the foreclosure category so far. 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. Here is a good estimate of REO data in the U.S.
Source: Tom Lawler via Calcualted Risk
The above doesn’t cover the entire universe of REOs but does a good job. I went ahead and took a quick look at active foreclosures in the state of California and found the following:
Depending on what data source you look at California has roughly 80,000 to 89,000 homes that are REOs and ready for sale. That still leaves another 600,000 to 700,000 REOs across the country that need to be sold. You also have to wonder of the 675,000 foreclosures with two years of missed payments how many are in massively overpriced bubble states like California or New York? Well I can tell you that California currently has 157,000 homes in the foreclosure process that have yet to go REO. The bottom line is you have a massive pipeline of distressed properties waiting to make their entrance on the MLS stage.
And the foreclosures will work through the system like a rabbit filtering through a python. We have another 4.2 million homes delinquent where the foreclosure process hasn’t even started (1.96 million of the loans 90+ days late). Don’t fool yourself because many of these will end up as REOs at some point (could be years down the road given the absurd timeline we are experiencing). It can’t be stated enough that keeping the process slow and providing banks with trillions of dollars of bailout money is simply a method of clogging the financial pipes so the FIRE economy can figure out what other sector to gut and inflate into a bubble. In the end it is the taxpayer that will foot the bill unless something radical changes.
I wanted to draw the current distress universe to show how little of the shadow inventory is being shown to the public:
The bars are drawn to scale to show actual magnitude relative to other buckets. The only homes the public is viewing are those in the purple box above. But look at what we have coming down the pipeline. Things don’t seem to be changing so it is looking more and more likely that we will witness a Japan like real estate market with zombie banks walking the Earth in search of easy capital brains.
It is extremely troubling that we have so much money being lobbed at the banks with such horrible results. But what do you expect? Someone was going to pay for this decade long orgy in real estate. As it turns out it is the prudent public and middle class. The people living rent free are simply the other side of the coin to the morally bankrupt financial sector. We have to go back to watching archived films to remember a time when banking and finance actually carried a positive connotation.
I’m curious to know how many people are living in million dollar homes rent free. We’ve seen homes in foreclosure in Beverly Hills so it is certainly happening and readers have sent over confirmation of this in their own neighborhoods. Talk about a giant mess. The New York Times had an interesting graph showing how long it would take to move 872,000 foreclosures:
Source: New York Times
It would take roughly 40 months to clear the current foreclosure inventory (aka the tiny blue rectangle in our earlier chart). And more will be coming into the pipeline but banks are trying to make their speculative gains in other bubbles to soften the blow here. After all, they wouldn’t want to spoil the trillions in loot they have stolen from Americans.