- The Big Picture - http://www.ritholtz.com/blog -

“Shadow” & “Ghost” Inventory / Negative & “Effective” Negative Equity…The Real Challenges for US Housing

Posted By Guest Author On August 16, 2012 @ 7:30 am In Real Estate,Really, really bad calls | Comments Disabled

“Shadow” and “ghost” inventory with respect to supply is only a part of the problem…a red herring really.  One has to look deeper than most “analysts”, reporters, or bloggers care to in order to see the true extent of the woes facing US housing going forward.

On “shadow” inventory we know most paid forecasters are “definitionally” challenged.  But everybody should agree that based on 110k average distressed resales per month — 1,3mm per year — for the last 2 years (based on NAR public figures) that this overhang will be with us for a long time.  That’s whether you look at the figures conservatively (1.6 to 3.2 million) or “realistically” like I did in yesterday’s post [1] (11.6mm shadow units — 5 million 60-day late + in foreclosure;  6 million mods that will re-default at a 75% pace over 3 years;  and 50k short sales per month — of which I conservatively estimate half will become “supply over the next 3 years).  Based on proven absorption of 1.3mm distressed unit per year, this still leaves an overhang of over 500k units per year unabsorbed;  a figure that few will agree with me on…but math is math. Whatever.

I actually think it’s quite funny and ironic that bulls continue to cite the lack or foreclosure and short sales — and downplay shadow supply — as a “positive” catalyst for housing.  That’s because it’s the very metering of foreclosures and short sales — that housing bulls think is great — that will force Existing Home Sales “volume” into a “triple-dip” that began last month…within 3 months NAR will be screaming for foreclosures and short sales.

I think what should be most closely analyzed is the demand…the “selective” demand that has driven the market the past 3 years…and where incremental demand will come from.   That’s because the new-era housing market closely resembles the macro economy;  it responds pretty much only when stimulus is aimed directly at it.  This is why in the first half 2010 the market went vertical in the last 6 months of the homebuyer tax credit and is again right now on the 1.5% plunge in rates last Sept  — that caused a serious pulled-forward effect — and foreclosures that were systematically abated for the election cycle.  The dead-cat-bounce in 2010 was followed by a hangover in 2011 (making this year look great even though fundamentally speaking it’s very weak).  And this year’s dead-cat-bounce will be followed by a hangover in 2013 (hangover is actually starting right now because of the pulled forward effect in the winter due to when rates plummeted and the lack of rain and snowfall).

For years I have proclaimed that “no housing recovery will ever occur — or no dead-cat-bounce will reach “escape velocity” or become “durable” — unless the repeat buyer is leading the way.  This is because investors and first-timers are thin, volatile cohorts who have been known over history to leave the market literally, overnight.

Case in point, July Phoenix area home sales were down a whopper 22% MoM and 15% YoY to multi-year lows for July…demand “recoveries” are not supposed to come with that type of volatility. However, stimulus-driven short squeezes and dead-cat-bounces are.

The problem is that the mortgaged homeowner has always been the primary demand cohort. It’s not investors, first-timers or those who own their homes free and clear.  Rather, the mortgage-levered homeowner who tends to move every 6 to 8 years who provides most of the historic underlying support for macro housing.

This is a problem. Put simply, there are more houses today then there were five years ago but a full HALF of the primary demand cohort — repeat buyers — died due to negative equity, “effective” negative equity, poor credit or legacy HELOCs, all of which prevent sellers (repeat buyers) from paying a Realtor 6%, putting 10% to 20% down on a new purchase, and getting a mortgage for the remainder.  Put even more simply, housing “supply” has grown in the past 5 years and ready and able buyers have been cut in half.

Bottom line,  WHERE IS THE “DURABLE”, INCREMENTAL DEMAND GOING TO COME FROM short of issuing instant citizenship to 15 million foreigners for a $500k+ capital investment in US resi real estate?

With nearly 50% of all mortgaged homeowners in the nation zombified (not including HELOCs), the housing market will continue to go through period of stimulus-driven demand spurts (when investors and first-timers are “activated”) followed by stimulus-hangovers (when investors and first-timers go away) until meaningful de-leveraging occurs, which will take another decade based on my math.

1)  HALF of the primary housing demand cohort is “Zombified” – unable to sell and rebuy a house.

No “escape velocity” or “durable” recovery will ever occur until the repeat buyer cohort is mobilized, which will take a combination of massive debt cram downs, credit easing, and housing inflation.

Note Arizona at 66%…this is why Arizona resales are crumbling right now.  July Phoenix region home sales were down 22% month-to-month and 15% year-to-year.  Demand “recoveries” are not supposed to come with that type of crash volatility…short squeezes and dead-cat-bounces are, however.

[2]

 2)  Percentage of first liens with legacy HELOC debt

When analyzing it this way new states enter the “zombie” mix not commonly thought of as being filled with trapped homeowners.

[3]

3)  Impaired Credit

Lastly, 40% of all US homeowners are either unqualified, or boderline, creditworthy meaning even if they could sell it is questionable whether they can rebuy.

[4]

Have a wonderful day!

 

Previously:
Millions More At-Risk of Default Than Most Think [5] (December 8th, 2009)

Most Common Things I Hear on Housing [6] (April 5th, 2012)

~~~

originally published at Mhanson.com [7]

Mark Hanson is a mortgage banking veteran specializing in wholesale and correspondent sales, operations management. His primary focus was upon residential mortgages working closely with most mortgage and Wall Street investors. Since 2006 his primary focus has been upon his work as an independent real estate and finance sector analyst, consultant, and risk enlightener to the financial services sector. His years of on-the-ground experience, extensive research, and access to proprietary data few have available has led him to make an extraordinarily large number of early and accurate predictions about the great mortgage and housing meltdown and company-specific events.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/08/shadow-ghost-inventory-negative-effective-negative-equitythe-real-challenges-for-us-housing/

URLs in this post:

[1] yesterday’s post: http://mhanson.com/archives/953

[2] Image: http://Mhanson.com/archives/991/eff-neg-equity-all-states-2-2

[3] Image: http://Mhanson.com/archives/991/helocs-by-state

[4] Image: http://Mhanson.com/archives/991/impaire-credit-by-state

[5] Millions More At-Risk of Default Than Most Think: http://www.ritholtz.com/blog/2009/12/millions-more-at-risk-of-default-than-most-think/

[6] Most Common Things I Hear on Housing: http://www.ritholtz.com/blog/2012/04/mark-hanson-most-common-things-i-hear-on-housing/

[7] Mhanson.com: http://mhanson.com/archives/980

Copyright © 2008 The Big Picture. All rights reserved.