Wall Street and Washington have teamed up to save the housing market. The government gave out $8,000 new homebuyer credits, reduced the Fed rate to nada, and bought up 80% of the mortgages.
Wall Street’s banks have helped by taking the slow road to foreclosure, because they know that if the massive inventory of houses hits the market at once, the bottom would fall out.
The large portion of loans that aren’t being paid, yet haven’t hit the foreclosure process, is being called the “shadow inventory.”
But you won’t hear about that on the nightly news. No, Katie Couric et al. are hyping the fact that home prices went up in July.
According to The Wall Street Journal:The S&P Case-Shiller home-price indexes showed the home price rebound continued in July, with 13 of the top 20 markets measured having had price gains for at least three straight months now. Just two of 20 metropolitan areas showed declines: Las Vegas and Seattle.
"The housing numbers are certainly looking better and better," said Rick Klingman, head of Treasurys trade at BNP Paribas in New York.”
Sure Rick… sure.
Housing prices went up because mortgage rates went down. According to Reuters:
U.S. mortgage rates held at their lowest level since late May in the latest week, low enough to continue to spur home loan demand and help the hard-hit U.S. housing market recover. Attractive rates are a positive for the U.S. housing market, which has been showing some signs of stabilization, with sales rising and home price declines moderating, and even rising, in many regions of the country.
It Cannot Last
Mortgage rates are low because the government is buying debt and creating money. This is de facto inflationary and must end at some point.
Things always go awry when the government meddles in the markets. And something is amiss in housing.
If housing prices are climbing and mortgage rates are low, then why are mortgage applications falling?
Yahoo News reports:
U.S. mortgage applications fell last week despite the lowest loan rates in four months, the Mortgage Bankers Association said on Wednesday, in another sign that housing will likely recover slowly from its three-year plunge.
Home loan applications fell a seasonally adjusted 2.8 percent in the September 25 week, driven down by a 6.2 percent drop in demand for purchase loans and a 0.8 percent decline in refinancing requests.
This is because, just like in the automobile industry, if you subsidize sales for a period, then the sales drop when the artificial price ends. And the $8,000 bribe to buy a house is ending.Shadow Inventory
J. Clinton Hill over at Seeking Alpha provided these nice bullets summarizing a Bloomberg interview with Laurie Goodman of Amherst Securities, who explains why the housing bust isn’t over.
- 7mm homeowners in the U.S. are currently not paying their mortgage
- Statistically once one is down 30 days, the probability for recovery shows a 25% chance if 1 payment is missed, a 5% chance if 2 payments are missed, and a 1% chance if 3 payments are missed
- Out of 56mm homes, the current situation exists where 13.5% of these have missed at least 1 payment which translates into a source of 7mm potential defaults
- Option ARMs (adjustable rate mortgages) are due to reset at the beginning of the year
- Bulk of subprime defaults have already occurred, but now the prime market is exposed to default risks
- Only actual listings of defaults are being accounted for, but missing from the puzzle are notices of default, bank owned REOs, and auction listings
- In the event that any of the above comes to fruition, the bottoming process for residential real estate could last longer than many economic cheerleaders are shouting
Why Prices Will Drop
The $8,000 for new homebuyers is going away. The Fed can’t keep interest rates low forever. (Ask yourself what happens to home prices when mortgage rates rise to 6, 8 or 10%.) And there is a four-year supply of overhang in the “shadow inventory.”
But the number-one reason housing prices will drop is that people still want to buy houses. The housing bubble was of epic proportions. Bubbles simply do not repeat themselves in a generation. Remember when Yahoo was at $1,000? Today it’s at $17.40 – and it’s one of the survivors…
The time to buy housing is when the common wisdom says that it is better to rent. The market must crush all optimism and wring out the bulls – that’s how markets work. This hasn’t happened yet. Heck, the vast majority of sellers are still trying to sell at 2005 prices!
Because of government delaying tactics, we are still in the late denial phase of the bear market.That said, every bear market has a sucker’s rally in housing. Sell into it.
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