September 18th 2010
US house prices
keep on going down
“The slide in U.S. home prices may have another three years to go,”
reported Bloomberg just yesterday, “as sellers add as many as 12
million more properties to the market.”
The problem is what is called the shadow inventory. That's the list of
homes in foreclosure that the banks are sitting on, but are too afraid
to release onto the market for fear of precipitating an even bigger
drop in prices.
“The issue is there’s more supply than demand. Once you reach a bottom,
it will take three or four years for prices to begin to rise 1 or 2% a
year.”
Coming onto the market soon -- 95,364 more bank repossessions that took
place during August. That’s a record high, according to RealtyTrac.
"There is a buildup in delinquent loans that are not in foreclosure,”
says RealtyTrac’s Rick Sharga. “It’s a managed slowdown more than
anything else.”
In 36 states prices outright fell -- the highest number since last
November.
Last weekend, the San Francisco Chronicle profiled a couple who
qualified in 2006 for a $625,000 mortgage… yet was priced out of the
market.
Fast-forward four years and prices are down… but now the couple
qualifies for a mortgage of only $280,000. “Our incomes haven't
changed, but the rules have changed,” the husband says, “so we don't
really talk about buying houses anymore. We've shelved it.” We suspect
they’re not alone.
“The level of home equity is the leading predictor of mortgage defaults
and foreclosures. With housing prices set to weaken once again, we
could see several months of self-feeding downward spiral: In an
environment of weak housing demand, selling adds pressure to prices,
which begets more selling... There's still more room to the downside
for prices to return to pre-housing bubble levels.
“With a renewed downturn in housing prices, we could see a rush to
liquidate the ‘real estate owned’ that's been sitting on bank and GSE
balance sheets waiting for a rebound.” So the trickle of shadow
inventory hitting the market now could soon become a flood.
“I spoke with my Private Banker today at Wells Fargo,” another writes,
“to inquire about refinancing my $2.4 million mortgage, which is at
6.375%… and replacing it with a new loan that they are currently
quoting at 4.625%. This would be a 70% LTV. The savings to me would be
$3,518 per month.
“He informed me that they would not be able to just do a loan
modification to my existing loan and set it to the new interest
rate…but that I would have to apply and qualify for a new loan under
the new more stringent guidelines dictated by the Feds.
“In speaking with him, I determined that I would not be able to qualify
for this new loan, given that my income has decreased significantly
over the past two years (I am not a Wall Street banker, but
self-employed) and because they no longer look to assets or reserves
under the new guidelines.
“So even though it is obvious that it would be less of a burden on me
to make a mortgage payment $3,500 less than what I am currently paying
(on time and never missed)… thus making the risk of a default
substantially less… they will not make the adjustment.
“He said they do not have any loan modification programs for people who
make their payment on time every month and who are not facing
foreclosure.
“At the same time, he tells me that 14% of all jumbo loans now at Wells
Fargo are 90 days past due. There is a very high likelihood these will
go into foreclosure, become shadow inventory and depress home prices
even further… which will increase the possibility of strategic defaults
which he says they are bracing for at Wells.”
Which all goes to show just how stupid banks are. They make life worse
for those who could weather the storm, but help the no-hopers.
The message is clear. Leave the US property market well alone. You dont
ever buy a falling market, however attractive it looks. Put it this
way: would you get on a train going the wrong way because you'd get
more miles for your ticket?
Oh, and just for fun, do remember that chart produced by Credit Suisse
a couple of years ago, showing the mortgage resets. That's the number
of mortgages that were sold with teaser low interest rates that reset
to higher rates a few years later. Guess what will happen when those
higher rates kick in. Well, here is the chart that shows when the next
burst of new rates do kick in.
Hang on to your hats!
John
(Most of this article has been pinched from an Agora Financial
newsletter which I receive regularly. You might like to subscribe to it
yourself.
www.agorafinancial.com/
)
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