Will 2012 begin the unclogging of 6,000,000 distressed properties? Over 40 percent of the 2 million active foreclosures stand with no payment in over two years and some with three years and more. Foreclosure starts surge 28 percent in last month of data. Mid-tier markets in Los Angeles and Orange County contract severely in 2011.
The housing market is clogged like backed up plumbing in an old building. The shadow inventory is still very present even though visible inventory declined last year. It seems like we are diving back into the rabbit hole where information is disguised and bad news is spun as being good. Take for example the number of homes actively in foreclosure. Early in 2009 we had roughly 2,000,000 homes actively in foreclosure. The number today? 2,000,000. The Catch 22 of the giant bank bailouts and financial shell game was the bet (hope) that housing prices would have gone back up after five years especially with trillions of dollars funneled into the banking sector. I mean what can go wrong when you trust banks with housing right? The reality is sinking in that home prices are going nowhere but down unless household incomes rise and that is why we saw foreclosure starts surge last month. The shadow inventory is coming online and that means lower prices. Don’t think this is a shell game? Over 40 percent of the 2,000,000 foreclosures have not had a payment in two years. This isn’t even factoring in the 4 million delinquent loans that are working their way into the REO side of the equation.
The current state of shadow inventory
It is always helpful to see where things stand today in regards to the distressed inventory pipeline:
Over 2 million loans are actively foreclosed (ether with a notice of default filed, scheduled for auction, or flat out owned by the bank as REOs). Another 4 million are delinquent bringing the total distressed inventory pipeline to over 6 million. This number sounds familiar because it really hasn’t moved in well over a year (like pretending the toilet magically unplugged itself if you simply choose not to flush it).
The best way to envision this is by looking at the length some of the homes have been in foreclosure:
You see the orange and blue above? This is what happens when your strategy involves ignoring the problem. Home prices are still largely inflated in many parts of the country including California. Take a look at how backed up things have gotten:
“(Chicago Tribune) Almost three years after she last paid the mortgage, Linda Ganguzza remains in her New Milford, N.J., home, one of many troubled homeowners caught in a drawn-out foreclosure process.
“I have no idea where I stand, how much longer I have,” said Ganguzza, a 58-year-old nurse, who says her divorce left her unable to afford the home where she raised three children. “Do I move, do I hang tough, do I talk to the bank?”
Trillions of dollars to banks and the best strategy they came up with was simply ignore the problem and keep paying those big bonuses to all those investment bankers that setup this mess. We’ll talk about the collapse in the mid-tier for California shortly but let us keep breaking down the distressed pipeline.
Foreclosure starts and sales sharply up
Foreclosure starts jumped up by 28 percent showing a sign of some movement in 2012. Keep in mind that foreclosure sales typically sell for lower prices. This is what banks have been trying to avoid for half a decade now. This is also why we have millions of homes in the shadow inventory in spite of trillion dollar bailouts and artificially low interest rates. What good is a low interest rate if household incomes are stagnant or falling?
The collapse of the mid-tier market
Redfin has some nice charts on the collapsing mid-tier market in Los Angeles and Orange Counties. Every tier of Los Angeles and Orange County is moving back lower again:
The above chart reflects this:
December 2011 (latest data)
Month to Month: Down 1.1%
Year to Year: Down 5.2%
Prices at this level in: August 2003
Peak month: September 2006
Change from Peak: Down 40.8% in 63 months
Low Tier: Under $289,982
Mid Tier: $289,982 to $474,017
Hi Tier: Over $474,017
Redfin then adds this chart that shows the obvious trend:
Tens of thousands that bought in the summer of 2010 thinking it was bottom missed the second round. Take a $400,000 home bought with a 3.5 percent FHA insured loan. Not only is that down payment gone, but where will that 5 to 6 percent come from if they decide to sell? They are merely one of the 35 percent of California homeowners that are in negative equity or near negative equity. The property ladder days of the last decade are long gone.
All of this of course makes sense. Those that try to ignore area incomes are delusional and drinking their own Kool-Aid. Of course local household incomes count and when ratios get out of whack like they did, prices will adjust even if it means severe corrections (the Case-Shiller LA/OC data set is down 40 percent from the peak by the way). Buying volume is low because people need only look at their wages or bank accounts and home prices in certain areas will appear expensive still. People fall into manias in a lemming like pattern but gain their sanity one by one.
The housing pipeline is beginning to unclog and shadow inventory in mid-tier markets is likely to depress prices well into 2012. The only thing that will change this is a sudden surge in good paying jobs and wage increases. Nationwide with a median price home of roughly $150,000 prices may dip slightly this year but they are more in line with household incomes. In mid-tier markets like the Los Angeles/Orange County Case-Shiller range prices are very likely to fall yet again as it is clear a movement in shadow inventory is now starting and prices have a good way to go before they are in line with local income metrics.
Any predictions on where the Case-Shiller will be one year from now? Nationwide? Los Angeles?