Blog on the Run: Reloaded

Monday, June 24, 2013 6:12 pm

“This is a uniquely bad time to buy a house.”

I’m not in the market, and if Mike Whitney’s reporting is accurate, you shouldn’t be, either:

… nearly 5 million homes are either seriously delinquent or in some stage of foreclosure. This unseen backlog of distressed homes makes up the so called “shadow inventory” which is still big enough to send prices plunging if even a small portion was released onto the market.   In other words, supply vastly exceeds demand in real terms. Now check this out from Zillow:

“13 million homeowners with a mortgage remain underwater. Moreover, the effective negative equity rate nationally —where the loan-to-value ratio is more than 80%, making it difficult for a homeowner to afford the down payment on another home — is 43.6% of homeowners with a mortgage.” (Zillow)

This might sound a bit confusing, but it’s crucial to understanding what’s really going on. While many people know that 13 million homeowners are underwater on their mortgages,  they probably don’t know that nearly half (43.6%) of the potential “move up” buyers (who represent the bulk of organic sales) don’t have enough equity in their homes to buy another house.  Think about that. Like we said,  housing sales depend almost entirely on two groups of buyers; firsttime homebuyers and move up buyers. Unfortunately, the number of potential move up buyers has been effectively cut in half.  It’s simply impossible for prices to keep rising with so many move up buyers on the ropes.

So, if “repeat” buyers cannot support current prices, then what about the other “demand cohort”,  that is, first-time home buyers?

It looks like demand is weak there, too. According to housing analyst Mark Hanson: “First-timer home volume hit a fresh 4-year lows last month and distressed sales 6-year lows”.

So, no help there either. First-time homebuyers are vanishing due to a number of factors, the biggest of which is the $1 trillion in student loans which is preventing debt-hobbled young people from filling the ranks of the first-time homebuyers. Given the onerous nature of these loans, which cannot be discharged through bankruptcy, many of these people will never own a home which, of course, means that demand will continue to weaken, sales will drop and prices will fall.

Now, despite these appalling numbers, he notes, foreclosures are down by a third from this time last year. Is it because the housing market is really any better? Nope. It’s because the fewer foreclosures the banks follow through on, the fewer losses they have to report, the more profitable they seem and the bigger the bonuses their executives can then claim. The technical term for this behavior is “securities fraud,” and it looks as if every major bank is involved to a greater or lesser degree.

But by all means, let’s reduce enforcement on banks and mortgage companies. Free markets! Murca, hail yeah! Who cares if millions of homeowners and would-be homeowners get hurt?


  1. One of the more disturbing articles I’ve read lately.

    Comment by Fec — Monday, June 24, 2013 8:44 pm @ 8:44 pm

  2. And interest rates just popped.

    What do rising interest rates mean?

    Comment by George Hartzman — Monday, June 24, 2013 10:09 pm @ 10:09 pm

  3. True, George. They’re still pretty low by historical standards — 2.5% on 10-year t-bills — but they bear watching. That said, the deficit as a % of GDP is coming down right now at one of the fastest rates since WWII, so inflation is unlikely to be a problem in the near- to medium-term future.

    Comment by Lex — Tuesday, June 25, 2013 10:32 am @ 10:32 am

  4. You did not touch on the vast number of cash heavy investors who are flooding the market, driving prices up. With so little available inventory, nearly every home receives multiple offers well above asking price. Your theory is seriously flawed.

    Comment by Brenda — Tuesday, June 25, 2013 1:47 pm @ 1:47 pm

  5. Brenda, I don’t have a theory, I have statistics. What is your source for the claim that there is a “vast number of cash-heavy investors who are flooding the market, driving prices up”? How many, exactly? How does that number compare to the number of houses currently on the market? And how has that ratio changed over time? Also, if there were all these investors out there, wouldn’t banks release foreclosed homes and get them off their books?

    (Also, for the record, I think that student-loan debt is overstated as a danger here: In most cases, student loan debt will DELAY, but not eliminate, first-time home buying. Although the AVERAGE student loan debt is in excess of $25,000, that figure is driven by a relatively small number of high-end borrowers for law or medical school and the like. The MEDIAN — that is, half owe more, half owe less — is more in the neighborhood of $13,000, or the cost of a not-particularly-fancy new or slightly used car. Student loans in most cases are repayable over 10 years, and most of the loans now outstanding were made at 3.8% APR, so those loans ARE repayable if you’re employed. And once you’re done, you can start saving for a down payment even if you couldn’t before.)

    Comment by Lex — Tuesday, June 25, 2013 2:16 pm @ 2:16 pm

  6. No doubt people with a balloon payment mortgage had a lot to do with this as well. The blame can go back and forth between “the banks shouldn’t have those types of loans” to “the people should know what they’re getting themselves into.” Fact is it doesn’t seem anyone is winning. Best thing people can do out there is pay off their mortgage as fast as possible so they don’t have to worry about it anymore. There are ways that don’t require huge lifestyle sacrifice that allow to pay down the mortgage rapidly. However for those that have a balloon payment mortgage or other sub prime type that it seems they will never recover from you would think the banks would work with them so the bad loans don’t hit the books and they can take in at least some incremental income rather than none.

    Comment by Financial Relief Alliance — Friday, July 12, 2013 7:01 pm @ 7:01 pm

  7. There were a lot of factors that fed this housing bubble, but fraud was chief among them. And the reason why banks don’t work with borrowers is that Congress considered and rejected a condition of the bailouts that would have required just that. Indeed, that was supposedly the whole REASON for the bailouts. Instead, the banks got free taxpayer money and homeowners got screwed.

    Comment by Lex — Friday, July 12, 2013 7:06 pm @ 7:06 pm

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