STOCK MARKET WATCH -- Tuesday, 24 January 2012

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7. The Next Housing Bailout By Mike Whitney

http://www.informationclearinghouse.info/article30331.htm


The Banks Need to Offload Millions of Unwanted Homes. Guess Who's Going to Buy Them?

Why are housing prices falling when the number of houses on the market continues to decline? Usually, when supply shrinks, then prices rise, right? So, why isn’t that happening now? The reason is that housing market never completely cleared, which is to say that the Fed’s interventions and the manipulation of inventory by the banks prevented the market from finding a bottom. So, now– a full 6 years after the peak in home sales in 2006–the real estate depression continues while prices drift lower still. And–here’s the bad part–no one knows how much farther prices will drop, because the existing inventory of homes on the market (according to the Wall Street Journal) is presently 1.89 million while the shadow inventory (according to CoreLogic)… is “1.6 million units” which represents another 5 months supply, “the same level as reported in July 2011.”

So we’re back to Square 1.

Here’s more from Corelogic:

“Currently, the flow of new seriously delinquent loans into the shadow inventory has been offset by the roughly equal flow of distressed (short and real estate owned) sales.

CoreLogic estimates the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of distressed properties not currently listed on multiple listing services (MLSs) that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders.” (Calculated Risk)

So, there’s a mountain of backlog to work-off before the market touches bottom and prices stabilize. But even that doesn’t accurately describe the troubles facing the market. The biggest obstacle to any real recovery is the millions of distressed homes that are set to come onto the market in the next few years. Those numbers will swell by many orders of magnitude when the banks and the 50 Attornies General agree to a settlement on the Robosigning fiasco some time in early 2012. When an agreement is finally reached, a flood of foreclosures will pour onto the market pushing down prices, wiping out precious homeowner equity, further eroding bank balance sheets, and forcing more underwater mortgage holders to “walk away”. Here’s how CNBC’s Diane Olick sums it up:

“The biggest headwind facing the recovery unquestionably is the distress leftover from the housing crash– foreclosures and properties with delinquent loans. ….Right now, there are approximately 6.2 million properties that have delinquent mortgages or are already in foreclosure….. Now not all of the delinquent loans will go to foreclosure especially if legal settlements involve principle write down and more loan modifications….

There is however a worst case scenario …from Amherst Securities which looks at loans that have been modified but likely to default. Amherst claims there are around 10 million loans in trouble. … 4 million 60 days past due. 2.5 million modified claimed will default. and 3.6 million under water loans that they say will likely go bad.

Add all that to the current inventory of bank-owned homes, Fanny, Freddie, FHA, the banks, private label, and you get close to 3.4 million properties.” (CNBC, Diana Olick—Watch the whole video at CNBC http://video.cnbc.com/gallery/?video=3000068580.)

Did you catch that last part? The banks are going to have to get rid of another 3.4 million distressed homes even though the market is already completely saturated. That means prices have only one way to go…DOWN. Remember, the banks find themselves in this pickle after having already been bailed out 3 times to the tune of many trillions of dollars. (The $700 billion TARP, the $1.25 trillion QE1, and the Fed’s lending facilities which provided blanket support to a cross-section of financial institutions for an estimated $12.4 trillion in loans and other commitments) And now, there’s going to be a 4th trillion dollar bailout, which many expect President Obama to announce on Tuesday in the State of the Union Speech. Here’s a little warm up for that event which appeared in the New York Times:

“President Obama will use his election-year State of the Union address on Tuesday to define an activist role for government in promoting a prosperous and equitable society, hoping to draw a stark contrast between the parties in a time of deep economic uncertainty.. ….

Advisers and other people familiar with the speech say Mr. Obama will expand again on the administration’s effort to resolve the housing crisis with both carrots and sticks to lenders dealing with homeowners behind on their mortgage payments —

(Obama’s) economic team holds that until the housing market recovers, the broader economy cannot — and that all Americans suffer…… Mr. Obama said he would call for “a return to American values of fairness for all and responsibility from all….”(“Obama to Draw an Economic Line in State of Union”, New York Times)

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