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Housing prices will keep falling. Here's why.

By   Follow Me on Twitter     Message Richard Clark     Permalink
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If the number of foreclosed homes piling up at banks is any indication, there's ample reason for concern re: home prices. As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier....

Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That "shadow inventory" was up 30% from a year earlier. Based on the rate at which banks have been selling those foreclosed homes over the past few months, all that inventory, real and shadow, would take 103 months to unload. That's nearly nine years. Of course, banks could pick up the pace of sales, but the added supply of distressed homes would weigh heavily on prices -- and thus boost their losses." ("Number of the Week: 103 Months to Clear Housing Inventory," by Mark Whitehouse, Wall Street Journal http://blogs.wsj.com/economics/2010/04/24/number-of-the-week-103-months-to-clear-housing-inventory/)

Got that? There's a 9-year backlog of distressed homes. The banks are deliberately fudging the numbers to hide how bad things really are. The number of homes in late-stage foreclosure is not 1.1 million, but nearly 6 million 5 times more than the banks are admitting. Housing will be in the doldrums for a decade or more. It's shameful that people can't get basic information like this to help them make their investment decisions. The banks couldn't pull off this type of information warfare without the help of government officials pulling strings from inside. Bernanke and Geithner must be involved.

So, what's the objective?

The banks are trying to keep prices artificially high to avoid writing-down millions of mortgages that would force them into bankruptcy. It's called "extend and pretend" and its poisonous for the broader economy because it distorts prices and keeps a broken banking system in place that can't perform its social purpose.

WSJ housing editor James R. Hagerty verifies Whitehouse's claims and fills in some of the blanks. Here's a clip from his article:

"To get a sense of how many more households will lose their homes to foreclosures or related actions, Barclays tallies what it calls a shadow inventory, consisting of homeowners 90 days or more overdue on mortgage payments or already in the foreclosure process. At the end of February, 4.6 million households were in that category.

Barclays expects 1.6 million "distressed sales" of homes--mainly foreclosures or sales of homes for less than the mortgage balance due--both this year and in 2011, then a slight decline to 1.5 million in 2012. Last year, Barclays estimates, such sales totaled 1.5 million. About 30% of all home sales this year and next will be foreclosure-related, forecasts Robert Tayon, a mortgage analyst at Barclays, who says that would be only about 6% in a normal housing market." ("ForeclosureEstimateFalls", James R. Hagerty, Wall Street Journal http://inside-real-estate.com/williamkedersha/2010/04/29/foreclosure-estimate-falls-banks-may-possess-fewer-homes-but-figure-likely-to-rise/)

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Why would Barclays think that only 1.6 million "distressed" homes would be sold in 2010, when they openly admit that there's 4.6 million homes already in the foreclosure pipeline? What does Barclays know that the public is not supposed to know?

http://www.informationclearinghouse.info/article25402.htm

http://www.alternet.org/story/146824/a_%22lost_decade%22_ahead_for_home_owners--just_so_banks_won%27t_take_a_bigger_hit_on_their_garbage_mortgages/?page=entire

Clearly, the banks have worked out a deal with Geithner and Bernanke to sell distressed inventory in dribs and drabs rather than all at once. That keeps prices high and makes their losses more manageable. But isn't that collusion or, at the very least, price fixing? The government definitely HAS a role to play in helping people keep their homes or providing assistance when they lose them, but they have no right to scam the public by stealthily manipulating the market to save underwater financial institutions.

The problem is not housing. The problem is the banks.

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The banks do not have sufficient capital to fund the mortgage market, nor do they provide the bulk of the financing for auto loans, student loans, small business loans or credit card debt which is gathered into pools and chopped up into tranches for securities that are sold to investors. (Securitization generates wholesale funding for the credit markets) Not only are the banks unable to fulfill their primary social purpose -- which is extending credit -- they're also increasingly dependent on revenue from high-risk speculation. A recent article in the Financial Times exposed the fraud behind the 12-month surge in equities pointing out that retail investors have largely stayed on the sidelines.

Falling home prices stir fears of new bottom. But how far below the 'old' bottom?

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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