The Next Leg of the Housing Crisis

[Master Shake]

in Five Simple Charts (from Zero Hedge).

Everything that the government has done so far, with a few minor detours, has been almost exclusively focused on maintaining home prices high, by tweaking either the supply or the demand side of the housing equation. As the bulk of consumer net wealth is concentrated in the housing sector, and a wealthy and confident consumer, much more so than the banking system, is critical to the recovery of America's economy, the Administration will do everything in its power to achieve its goal of artificially manipulating the housing market, thereby not causing an incremental loss of wealth to those still stuck with overpriced houses, while the real intersection of actual supply and demand curves would indicate a materially lower equilibrium price. This is ironic, as proper price discovery is critical for a true recovery, since Americans realize all too well that buying a house at prevailing levels in advance of the second down-leg in housing is senseless, the continued pursuit of such flawed policies by the Fed and President Obama merely pulls the market ever further away from its equilibrium, thereby making the anticipated second dip so much more likely and not that far off in the distant future. Below are 5 simple charts the highlight just how precarious the housing situation in the U.S. is, and how likely the second, and probably much more fierce, leg down in the markets is going to be.

A bearish report by CIBC 1captures precisely the highly unstable system that U.S. housing has become, and deconstructs it along the five key axes of weakness which while individually may be controllable to a degree, combined represent a recipe for disaster. CIBC's main sources of concern arise from:

1. Short-lived remedies; used by the administration to prevent further price deterioration (tax-credits);
2. Shadow Inventory; in reality when accounting for the surging shadow inventory which very few dare talk about, the total number of available unit sdouble to over 8 million, representing a record high 16 months of supply.
3. Strategic defaults; the amount of households with negative equity is roughly 10 million or about 20%, in 2009 25% of all foreclosures were strategic; as populist anger against banks accelerates look for strategic defaulits to keep rising
4. Quantitative Easing expiring; This needs no introduction: the sole reason why mortgage rates have been as los as they have, has been due to the Fed's constant manpulation of the MBS market via the $1.4 trillion MBS/Agency QE purchase program. With this program set to expire in 2 months, rates are set to explode.
5. House Prices are already entering a double dip; Previously we discussed the Case Shiller NSA home price index number which indicated that a double dip in prices has already commenced. A positive feedback loop will only lead to further deterioration here

Analyzing CIBC's factors one by one:

rest here;

http://www.zerohedge.com/article/nex...-simple-charts

[don]

Re: The Next Leg of the Housing Crisis

And, of course, the local area's economy. In real estate battered Florida, a friend is working in Flagler Beach. He called to tell me that he's noticed more and more parked, and empty, police cars at typical traffic control locations. Fits right in with the ghost suburbs...and will assist in breeding more.

[GRG55]

Re: The Next Leg of the Housing Crisis

And, of course, the local area's economy. In real estate battered Florida, a friend is working in Flagler Beach. He called to tell me that he's noticed more and more parked, and empty, police cars at typical traffic control locations. Fits right in with the ghost suburbs...and will assist in breeding more.

Hmmm. Interesting that they are at traffic control locations. Where I live most of the empty police cruisers are in the local Tim Horton's donut shop parking lot...

[Jay]

Re: The Next Leg of the Housing Crisis

Not far from me at a busy intersection heading toward a beach, there is a painted plywood cop car that has been in front of a ball field for years. It works really well to slow people down. By the time you realize it's fake, you have already changed your driving pattern. Only works for the out of towners though. I always wondered why I didn't see more of this nationally.

[loweyecue]

Re: The Next Leg of the Housing Crisis

When are the supposed wave of Alt-A loan foreclosures supposed to start hitting? I remember reading somewhere that should be somewhere around now? They didn't mention those in the article.

[reallife]

Re: The Next Leg of the Housing Crisis

Very interesting observation. I noticed an empty police cruiser parked near a 4 way stop in Tacoma, WA yesterday. It looked like it had been there for a day or so, no officer in sight. Then, in today's newspaper the Sheriff of Pierce County said, basically, that due to cutbacks in revenue and funding, citizens can expect longer response times for violence calls, and possibly zero response and zero investigation for thefts and crimes against property in the Sheriff patrolled rural county areas. I read this and since I live in a rural area I took this to mean that I and my family and my property are now thrown to the wolves. I guess it was a good thing I armed myself last year with shotguns and handguns. I guess we're on our own now. I didn't expect this to happen for a few more years at least. :eek:

[charliebrown]

Re: The Next Leg of the Housing Crisis

alt-a mort resets start ramping up in march of 2010.
There is another set of morts that is really scarry and that is POA
Payment option arms. These loans can and in most cases negatively amitorize. Thus when they reset, you now have a bigger principle to pay off in less time. The payments can really jump.

You can see the famous credit-swiss reset chart here.
http://www.businessinsider.com/henry...-a-myth-2009-8

This article states that many alt-a resets will reset at a similar or lower rate and the resets occur over a 15 year time period. Actually according to the chart I see alt-a resets will be strong until 2012, where they start leveling off. peak of resets is June 2010. Maybe this is why the Fed is really trying to keep rates down now, for the resets coming. I don't know if I understand what he is saying about 15 years. Anyhow, I suppose the problems really starts around 90 days out after the reset. How many people are proactively trying to get out of these ARM's? How many can with unemployment up and housing down. So you wait until you get the first "whopper" bill, then reality sets in, you knuckle down cut your spending and try to keep up, but then the unexpected happens, job loss, medical bills, car repairs, big tax increase, etc.
and you slip under the waves. So I suppose the crisis starts Sept 2010.

[sunskyfan]

Re: The Next Leg of the Housing Crisis

They think they are doing the country a favor with the "shadow inventory". True social unrest will start to happen when the substantial number of people "homeless" see their rents start to go up AND notice all the empty houses and condos NOT on the market.

Perhaps state and local governments raising property taxes will force the owners of the empties to sell and finally realize the true market value of their assets.

[GRG55]

Re: The Next Leg of the Housing Crisis

Rising FHA default rate foreshadows a crush of foreclosures

Washington Post Staff Writer
Tuesday, February 2, 2010


The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market's recovery.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

Although the FHA's default rate has been climbing for months and eating into the agency's cash, the latest figures show that the FHA's woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

If the trend continues and the FHA's cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses -- a first for the agency, which has always used the fees it charges borrowers to pay for its losses...

...Agency officials said they have cracked down on poorly performing lenders and announced higher qualifying fees for borrowers. On Monday, the agency projected that the fees should generate $5.8 billion in fiscal 2011, up from $2 billion this year. That would fatten the FHA's cash cushion, used to cover unexpected losses.

For now, just about every major measure of the agency's financial health is worsening...