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Michael White is the CEO of The New Mortgage Company. He has seventeen years in real estate as lender, owner, and mortgage originator. He has purchased and sold more than 275 properties for his own account, made hundreds of real estate loans for his portfolio, and originated hundreds of mortgages as a broker.

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Inventory Explodes Past the Worst of the Housing Crash

Soft demand for existing homes pushed up inventory to a record 12.5 months of sales and easily broke the previous high of 11.3 months scored in April 2008. By this basic measure, the price of homes may reasonably be expected to fall at the most torrential pace seen during our four-year-old crash.

Yet you will see only the most tepid warnings of this risk as described by the mainstream media with results released today being worse than the most pessimistic forecast of economists surveyed by Bloomberg News. Please review the chart (above) and note that it is in record territory for the history of months-of-inventory for sale.

“I expect double digit months-of-supply for some time – and that will be a really bad sign for house prices,” said Bill McBride of Calculated Risk, commenting on the biggest one-month drop in sales ever.

Today’s stats are the first release of existing-home-sales data that gives us a view of buyer demand without the hugely popular down-payment prop from the federal government. Please note that inventory in units was comparatively benign with little change from June (Please see units for sale above.). We estimate the excess of units on the market as 1.1 million of the 4 million for sale.

Prices for residential real estate have been flat since August 2009, but they have fallen 34% from their peak in the summer of 2006 (based upon the 120-year series by Case Shiller). Not one commentator I reviewed on today’s stats explained that the perils of the American housing market have deepened dramatically since the killer crash let up and paused a year ago.

New risk factors now include a flood of negative equity. Foreclosures in progress are at a record level. Fourteen percent of mortgages are behind on payments — about 7.7 million borrowers or, more starkly, one in seven. Please note that inventory for-sale plus the 7.7 million delinquent borrowers is a number which is massively larger than the average unit sales of 480,000 a month (Please see “X” in the chart above towering over “Z” – monthly sales).

The risk doesn’t stop at one-of-seven behind on payments. The cure rate on delinquent mortgages is effectively zero once the loan goes to 60-days late. A record 4.63 percent of borrowers are in foreclosure. Intermingled among this mayhem are approximately 13 million homeowners who have no equity or negative equity. They would make nothing from the sale of their house if they could sell it. Or they would have to write a big check to sell. They are prime candidates for strategic default. One occasionally sees whispered warnings of a tipping point with default achieving a cache as was once given to hula hoops or pet rocks or station wagons.

“You end up in a home-price-depreciation death spiral,” Laurie Goodman told the Wall Street Journal. She is senior managing director at Amherst Securities Group LP and considered a guru on mortgages.

Other risks include massive imbalances between the exaggerated value of debt assets (mortgages) used to buy homes and the current huge fall in the value of property. Property values have fallen FIFTEEN TIMES further than the balances of mortgages. A recent report also called attention to the fact that even after a 34% fall, property values today are higher than they have ever been in any prior bubble excepting for the current one that we are in.

The huge number of late payers proves that home prices remain too high with our current unemployment of 9.5% even if affordability has skyrocketed and interest rates have plummeted.

Demand has held up surprisingly well given the awful scary facts just recounted (See chart above for actual unit sales released today.).

We are in a battle to the death and only fools rush in to this market. Wise men run for the hills. My suggestion? Rent. Don’t Buy. If you own, sell. Then wait out the storm. We live in interesting times. Don’t make yourself a statistic of them.


PRINT Inventory Explodes Past the Worst of the Housing Crash

Michael David White is a mortgage originator in 50 states.

There Is 1 Response So Far. »

  1. We agree wholeheartedly with what you are saying.

    What is interesting now is that foreclosures may be coming to a screeching halt as courts are increasingly requiring the plaintiff to prove they actually own the house they are foreclosing on. Proving ownership has become problematic because lenders took illegal administrative shortcuts, in their rush to securitize mortgages, and destroyed the financial paper trail in the process.

    This lays bare completely the banking sector’s real estate holdings as potentially being worthless since ownership of the underlying asset has become suspect. When the legal ownership of an asset becomes suspect, the intrinsic value of that asset is ZERO. Who would want to buy an asset from a bank that potentially had an impaired title? How will title agencies react and insure themselves against these shenanigans? How will the rating agencies fair that let these indiscretions pass unnoticed?

    This will keep an entire battalion of law firms in steady business for the next decade or two.

    The real estate market was bucking enough of a head wind based on general economic factors, along with baby boomers unloading their McMansions to pay for their prescription drugs, before adding in this little Ponzi scheme drama to the mix. Now is not the time to buy real estate and it may be way past time to sell if this ownership question is not resolved soon.

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