The truth is that millions of irrationally exuberant people bought houses they couldn't afford, using "creative" mortgage products, and then borrowed against the inflated value of these houses so they could live the good life. They rolled craps and now need to accept the consequences. These worthless government programs have cost taxpayers $100 billion and just postponed the ultimate bottom for housing.
Law of Supply and Demand
The Federal Reserve also did their part in the last year. They printed enough dollars to load their balance sheet with $1.25 trillion of mortgage-backed securities of highly questionable value. These purchases, which artificially reduced mortgage rates by at least 0.5%, concluded on March 31, 2010. Mortgage rates have already risen 0.25% in three weeks.
Considering the pile of tax dollars thrown at the housing market in the last year by our leaders, you would think new home sales would be above the level sold in 1963. New home sales in 1963 reached 600,000 when the U.S. population was 189 million. Today, new home sales are trending at 400,000 and the population is 310 million. At the peak in 2005, the total of existing and new home sales reached 9.2 million, with inventory for sale of 2.8 million homes. Total home sales are now trending at 5.4 million, a 40% decrease, while inventory for sale is 3.7 million, a 30% increase.
According to the Census Bureau, the real median price of homes in the U.S. peaked at $261,000 in the first quarter of 2006. The median price bottomed at $168,000 in the first quarter of 2009, a 36% drop. After throwing $100 billion at the problem and artificially depressing mortgage rates, the government has achieved an increase in prices to $173,000, a 3% surge. Based on this data, the market appears to have stabilized. An eight-month supply of inventory with prices up slightly sounds like a fledgling recovery. Nothing could be farther from the truth.
Foreclose This House
Believers in the fledgling recovery are ignoring some key facts. There are already 11 million homeowners underwater on their mortgages. 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. This "shadow inventory" was up 30% from a year earlier.
At the current rate of sales, it would take banks nine years to clear this inventory. They are likely to increase the rate of sales as inventory continues to pile up. This will compel prices to go lower. Prices would fall even if a tsunami of Option ARM and Alt-A resets weren't hurtling down the track but they are. Beginning in June, a surge in resets will begin and not subside until late 2012. These liar loans were riddled with fraud, and the vast majority of these mortgagees will default after the reset. A surge in foreclosures is just over the horizon.
Reversion to the mean cannot be circumvented. It can be delayed, but it will not be denied. The combination of expiring tax credits, the failure of HAMP, the conclusion of the Fed buying dodgy MBS, the growing shadow inventory of foreclosures, Option ARM and Alt-A resets, and rising interest rates will result in a further fall in home prices of at least 20% in the next two years. Mr. John Paulson will be wrong this time. Maybe we could even arrange a bet. If I'm right, I get to take my clan to one of his 19 mansions for a weekend of fun among the ruling elite. If he is right, he gets to spend a weekend at my underwater condo in Wildwood among the real people.
This article was originally published in the May edition of The Casey Report. To get 3 free months of this fantastic report click here.
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