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Housingdammerung: The story behind the fake numbers

By       Message Mike Whitney       (Page 1 of 2 pages)     Permalink

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Has the Wall Street Journal had a come-to-Jesus moment?

Then why are they suddenly telling the truth about housing prices?

Up to now we've heard nothing but rubbish about pent up demand, shrinking inventory and a bottom in prices, but nothing even remotely resembling the truth.

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And, what is the truth?

The truth is that the recent uptick in prices is the result of the banks manipulating their mountainous stockpile of delinquent homes. Sure, investor groups have moved into the market and are scarfing up the cheap low-end homes. And, sure, historic low interest rates have (slightly) stimulated demand. (in a manner similar to the Obama's "First-Time Homebuyer Credit) But what's really pushing prices higher is manipulation, the deliberate withholding of distressed inventory from the market. This is central planning writ large by the Wall Street Banking Politburo with Washington's implicit blessing. Now get a load of this clip from an article in the WSJ:

"Prices have risen this summer for a simple reason: more buyers have chased fewer properties. But the drop in supply and the boost in demand isn't the only reason that Case-Shiller is now turning positive. Another related factor is that the share of non-distressed home sales is rising and the share of distressed sales -- foreclosures and short sales, mostly -- is falling....

"The decline in the distressed share is important for the housing market, and especially for home-price indexes like Case-Shiller. Because banks are faster to cut prices to unload inventory than are mom-and-pop sellers, home values can fall further as the share of distressed sales rises." ("Why Home Prices Are Rising: The 'Distressed Share'," Wall Street Journal)

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Are we supposed to believe that WSJ journalist Nick Timiraos just figured this out in the last day or so? Give me a break! There's at least a half dozen bloggers who've been writing about this for months, inluding Mark Hanson, Michael Olenick, Lawrence Roberts, Dr. Housing Bubble and even CNBC's Diana Olick. None of these analysts had the wool pulled over their eyes. Here's more from the WSJ:

"The share of distressed sales is still high by any historical comparison. But importantly, it is falling when compared with one year ago, which is a big reason why home prices, as measured by the Case-Shiller index, are rising again. In June, the share of non-distressed sales, meanwhile, was at its highest level since August 2008, according to CoreLogic Inc."

Wrong again. It's not a "big reason" why home prices are rising. It is the "main reason" why prices are rising. If it wasn't, then the banks would just dump their distressed inventory onto the market today and be done with it. But they're not going to do that because the millions of delinquent homes in the pipeline would flood the market sending prices down another 20 or 30 percent like they did in Ireland. That would blow up the balance sheets of the nation's biggest banks, forcing them to grovel back to the Fed for another handout. None of the big boys want that to happen, which is why they're fiddling their inventory.

Here's more from the WSJ: "Home prices have risen most sharply in Phoenix, where foreclosures accounted for 27% of home re-sales in May, down from 50% one year ago and 66% three years earlier."

Naturally, if there's half as many discounted homes on the market, then prices go up, right? How long did it take the geniuses at the WSJ to figure that one out? And do you really think the banks are running out of distressed homes in Phoenix? Not bloody likely. This whole inventory scam is being engineered.

Look, the sale of distressed properties (foreclosures, short sales, etc) dramatically pushes down prices. Why? Because bank-owned properties are usually discounted by 30 or 40 percent which drags down the average. For example, let's say you have five houses in the Seattle area all going for $1,000 each. So, the average price is $1,000. Now imagine that two of those homes are foreclosures discounted by 40%. ($600 each) That would pull the average price down to $840. So, what happens to prices if you remove one of those distressed homes from the market? Viola! The average magically rises to $900.

While this analysis may sound absurdly simple, it helps to explain what's actually going on in the housing market. Prices are not going up as much as distressed properties are being removed from the listings. That creates the illusion of rising prices.

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So, what's really going on -- is housing getting better or worse?

It's impossible to answer that question without accurate data on the basics. (The number of homes in the shadow inventory is hotly contested) We know that demand has returned to pre-bubble trend, which means that the only way that sales can pick up is if the banks manage to lure people back into the market with lax lending standards and more low-interest inducements. But what about supply?

Ahhh, supply; now there's the rub, because -- while existing inventory is below normal -- shadow inventory is a matter of ferocious debate. The WSJ uses Barclay's estimates of shadow inventory -- "The total number of properties that could be repossessed and resold by banks at around 3.25 million mortgages" -- but that's way too low. Amherst Securities analyst, Laurie Goodman, for example, puts the number "between 8.2 million to 10.3 million loans." That's a pretty significant difference, don't you think? Whatever the number, there are enough distressed homes to put the banks back in ICU, pronto. So, inventory is a gigantic problem that will continue to be a headwind for housing for the foreseeable future. That much is certain.

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Mike is a freelance writer living in Washington state.

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