The Elephant in the Room.

 

As we continue to emphasize, the problem in housing is demand related. Despite all hope to the contrary, this problem is not going away.

 

Until the unemployment problem is solved with significant job creation, U.S. demand-supply imbalance will drive home prices down further across the U.S.

 

Low interest rates do not solve the problem.

 

The ability to qualify for and obtain the loans necessary to absorb excess housing supply in the U.S. requires:

 

1. A job with stable income;

2. An acceptable credit score to insure against risk of future default; and

3. A down payment of cash to mitigate risk in the case of future default.

 

The arithmetic is simple, but sadly, not enough Americans have the above three basic requirements. The number of Americans that are CAPABLE of purchasing a home (set aside willing for the moment) is nowhere near close enough to absorb the current, let alone increasing, inventory of homes that will continue to mount into 2011-12 as we projected in the July 2010 Catalyst Quarterly. Get your copy here.

 

The result: HOME PRICES WILL CONTINUE TO FALL ACROSS THE U.S. THROUGH 2011-12.

 

If you need to sell your home in the next 24 months, and you can, SELL NOW, with the exception of a few markets.

 

The Mortgage Bankers Association recently articulated the problem well:

 

“The disappointing news is that after declining since the beginning of 2009, the rate of short term delinquencies is going up, and the increase in these short term delinquencies may ultimately drive the foreclosure measures back up. The percent of loans one payment behind had peaked in the first quarter of 2009 at 3.7% and fell to 3.31% by the end of 2009. Unfortunately that rate has now risen to 3.51% (Qtr. 2, 2010.) The causes are likely two-fold; first, this increase in unemployment directly impacts mortgage delinquencies. Second, some percentage of the loans modified over the last several years has become delinquent again because those borrowers by definition have weak credit.”

 

The Association further declared, “Ultimately the housing story, whether it is delinquencies, home sales or housing starts, is an employment story. Only when we see a consistent increase in employment will we see an increase in sales and starts, and a sustained improvement in the delinquency numbers. Until we see the increase in the number of households that comes with the increase in the number of paychecks, all measures of the health of the housing industry will continue to be weak.”

 

We at Catalyst Analytics only disagree on “all measures will continue to be weak.” The supply side of starts is not governed by demand, as history has proved. Seasonal optimism, balance sheet demands to chew through land, and the ability to take advantage of “seize the day” subsidies by the federal government can drive starts, particularly for large public builders with cash.  Sales can be subsidized by utilizing reduced land assets written down for tax advantage in prior years. U.S. housing starts in 2010 would be more abysmal without large public builder construction on written down finished lots.

 

It is the land underneath the U.S. housing stock that is deflating. It will continue to deflate. Home price appreciation will only occur in the few U.S. markets where there is solid job growth and no significant inventory of discounted developed lots left.

 

Want to buy a public builder housing stock for the short term? Buy a company with operations concentrated in these few markets, under these temporary conditions!

 

Banks/lenders initially focused on foreclosure moratoriums for borrowers who would ultimately default as prices continued to drop, unemployment stayed high, and the ability to pay, let alone pay DOWN monthly household debt remained constrained.

 

Today there is a huge backlog of “underwater” homes that have been “pushed forward” with loan amendment/extensions where possible. In some cases, banks are accommodating live free but pay the utilities lifestyle.

 

There is no hope to accomplish a sale at current the house price held on the banks balance sheet. For many who can’t amend or extend their loan it will cost the banks less to let delinquent owners “squat” than to foreclose, resell, and take a price loss. It’s better to have someone not pay the mortgage but pay the utilities and maintain the property.

 

Not many were amending or extending loans in the start of the housing crisis, despite STRONG encouragement from the government. REMEMBER?

 

Time for the white hat…“Mr. Homeowner, how would you like to continue to pay us money on a home that isn’t going to be worth your monthly payment (albeit reduced)? Forget the fact that you can rent a nicer one for less. You were dumb enough to take out the mortgage originally; surely you’ll go for this terrific extension. An opportunity to pay even more money into a devaluing asset we really own!” Thanks for nothing, guys.

 

The new problem, partially created by the banks not dealing with this MUCH EARLIER when there was more political will for government partnership, is that the desperate American mortgagee has become “street smart” over the past two years. Desperate people do desperate things.

 

Many homeowners are taking a lesson from the banks….they are pretending they don’t really have a mortgage.

 

In many cases, the banks are pretending along with them. Are the banks in denial? Absolutely not. Are they just overloaded? Ever had a bank not call you on a small overdue amount of credit card debt?

 

Right or wrong, the “take the pain” and “pay down the deficit” political will has momentum… the huge  targeted fiscal stimulus needed for immediate job creation the country desperately needs ain’t happening. Continuing housing price drops will be the barometer of bad economic news. The problem goes deep. This is an economic downturn created by massive loss of private wealth. It is a crisis of debt/solvency. The American private sector continues to deleverage….pay down debt. We are battling deflation.

 

The second round of Quantitative Easing may be successful at keeping interest rates low for a time, and some new jobs may be created related to a devalued dollar, but QE2 will not create the private wealth necessary to solve the requirement of number 3 listed at the beginning of this article….DOWNPAYMENT.

 

This is the critical problem in the next wave of 2011/2012 foreclosures. Unlike the first wave, (which was concentrated in lower end home subprime loans) the next wave of option ARM, jumbo, and alt A loans foreclosures will be in the higher price ranges.

 

Bottom line: house prices will continue to drop into 2011/2012, with the exception of the few market types mentioned above.

 

Local housing trends have an impact on your business in 2011-12. What’s your next step?

 

Remember: “30 –day delinquencies are very closely tied to first time claims for unemployment insurance. The number of first-time claims fell through most of 2009, but leveled off in 2010; and have started to rise again. The increase in unemployment directly impacts mortgage delinquencies. Second, some percentage of the loans modified over the last several years has become delinquent again because those borrowers by definition have weak credit.”

 

Your immediate next step should be to measure the unemployment rates, mortgage foreclosure risk and housing trends (sales price, volume, price per square foot) directly around your business locations. If your concerns lead you to confront a major decision on a business location order our 3L Score report for the particular address you are considering.

 

Opening a new location or shutting down an underperforming one is a major decision. Use solid information to inform your assessment.