Monday, October 25, 2010

American housing resumes its crash

Those who believe that the danger of a double-dip recession has passed should take pause today to register an American housing market plunging with renewed vigor. As Calculated Risk reported over the weekend:
Clear Capital™ Reports Sudden and Dramatic Drop in U.S. Home Prices

“Clear Capital’s latest data through October 22 shows even more pronounced price declines than our most recent HDI market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”

This special Clear Capital Home Data Index (HDI) alert shows that national home prices have declined 5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the expiration of the recent federal homebuyer tax credit. This significant drop in prices, in advance of the typical winter housing market slowdowns, paints an ominous picture that will likely show up in other home data indices in the coming months.

... if previous correlations between the Clear Capital and S&P/Case-Shiller indices continue as expected, the next two months will show a similar downward trend in S&P/Case Shiller numbers.

And here's Clear Capital's original release.

This was foreseen by many analysts including yours truly because of the removal of government subsidies and an ongoing huge inventory overhang. In that sense this is not unexpected and American authorities have already positioned its banks to absorb further losses by giving the investment banks access to the Fed discount window, as well as engineering a steep yield curve for easy earnings.

There are, however, two surprises here. One is the swiftness of the slide. These losses are faster than anything experienced during the first round crash.

The second is the effect ForeclosureGate will have on this trend. The FT has a very important article in this regard:
A particular worry is whether the tales of shoddy documentation completed by so-called “robo-signers” at mortgage lenders and growing foreclosure delays will affect people’s behaviour. It could for three reasons.

First, a longer gap between stopping payments and being evicted from the property allows people to build up a nest-egg. In many states, homeowners do not owe the bank anything more than the keys to their home if they default on a mortgage.

Second, a slowdown in foreclosures creates an ever-growing backlog of unsold homes, which will at some point be sold, pushing house prices lower. If people think home prices will not recover, they are more likely to throw in the towel.

Third, it further damages the reputation of the banks who made the mortgages, and this could make borrowers more unwilling to pay. “More bad news and uncertainty creates more anger against the banks and frustration with the system,” says Chris Mayer, Professor at Columbia Business School. “That’s not helpful.”

... Jon Maddux, who runs, which advises people on the foreclosure process, says calls about foreclosures have increased recently. “The banks are cutting corners in the foreclosure process and in some cases breaking the law and that sends the message to homeowners that, if the banks are not honouring their promises, why should the homeowners?” he says.

In short, the Wall St banks' rape of the social contract has given Americans the moral cover to walk away from their mortgages.

As prices begin to fall again, there is the real prospect of a new negative feedback loop forming. In the below video, Gary Shilling predicts this toxic mix will push down housing values another 20%, almost as much as they've fallen already. He also predicts this will nearly double the number of impaired loans.

The banks may be set up to absorb losses but this is beyond the pale. It will require massive new capital raisings and kill equity prices. Not to mention MBS coming under pressure from both falling values on one hand and litigation on the other.

You can rely on the Fed to continue its quantitive easing ad infintum.

1 comment:

The Lorax said...

The Wall St banks' rape of the social contract has given Americans the moral cover to walk away from their mortgages.

Quote of the month!