A New High In Negative Equity for Single Family Homes...

Recently, Zillow.com reported a new high in negative equity: 28.4% of single family homes with a mortgage (remember, 32% of all homeowners do not have a mortgage).

That's a national average, but the numbers are far worse in some of the nation's big metros. Atlanta, for example, has a 55.7% negative equity rate. Denver, 41%, Chicago nearly 46%.

"Higher rates of negative equity are creating a lot of latent vulnerability in the housing stock, where if the household then encounters some economic shock, like the loss of a job or divorce or death, then that household is much, much more likely to go into foreclosure," notes Zillow's Stan Humphries.

"So it just means that higher rates of negative equity, we’re going to see elevated rates of foreclosure for the next two to three years."

But higher rates of foreclosure put increasing pressure on home prices, causing them to fall further, which in turn puts even more borrowers underwater.

A vicious downward cycle where one begets the other, begets the other. 

"The best research that’s been done right now seems to suggest that negative equity impact on strategic defaults really kicks in at very high rates of value to loan ratio, so that means when people are more like 30-40% underwater does it start to create proactive behavior where they want to walk away from the mortgage. And even at those rates of loan to values, you’re still seeing strategic defaults be a relative…not a majority behavior," says Humphries.

"Home buyer confidence and demand are the only remedies right now for the housing/foreclosure crisis. Sadly, we have neither."

Housing Double Dip Has Officially Arrived...

Unfortunately, it is official.

Home prices have double dipped nationwide, now lower than their March 2009 trough, according to a new report from Clear Capital. It was inevitable that a surge in sales of foreclosed properties and a big push by banks to facilitate short sales would force home prices down dramatically.

Sales of bank-owned (REO) properties hit 34.5% of the market, according to the survey, resulting in a national price drop of -4.9% quarterly and -5% year-over-year. National home prices have fallen -11.5% in the past 9 months, a rate not seen since 2008.
Add short sales, where the bank allows the borrower to sell for less than the value of the mortgage, and prices have nowhere to go but down. 

"With more than one-third of national home sales being REO (bank owned), market prices are being weighed down as many markets have not regained enough footing to withstand the strain of the high proportion of REO sales," says Clear Capital's Alex Villacorta.

If prices continue to fall further, which they likely will in the short term, the number of so-called "underwater" borrowers, those with negative equity, will rise even higher, which could in turn result in more loan delinquencies.

Nationwide more than 25% of all homeowners with a mortgage are in a negative equity position, but in some markets, that number is far higher. 46% of Massachusetts borrowers are underwater, according to LendingTree. The last time home prices fell at this rate, 3 years ago, they were then boosted by government stimulus in the form of a home buyer tax credit. 

"A note of caution to those looking for a strong end to 2011: The last time no incentives were in place and distressed inventories were this high, home prices fell sharply," warns Villacorta."

Chart of The Day: Meredith Whitney's Perpetual Cycle Of Weakness...

Why is Meredith Whitney so bearish on  just about everything?

Maybe because she sees the economy looking basically like this: A Perpetual Cycle of Weakness.

You know how it works: job destruction ==> foreclosures ==> lower real estate values ==> lower tax revenue == > state budget gaps == > etc.

Read more: Chart of The Day: The Perpetual Cycle of Weakness

Sobering Stats Reflect The Magnitude Of Our Economic Malaise...

$23 billion of adjustable rate mortgages (ARMs) are expected to be reset from their initial interest rate in January 2011, the smallest monthly total that will be reset nationwide in 2011. The peak amount of resets this year will occur in August 2011 when $40 billion of ARMs will end their initial rate period, i.e., the length of time that the original ARM interest rate remains unchanged (source: Credit Suisse).


47 million Americans out of our population of 312 million (15%) are on Medicare today. An estimated 2.8 million additional Americans will turn age 65 during the 2011 calendar year and qualify for Medicare enrollment (source: Centers for Medicare and Medicaid Services).     


1.53 million Americans filed for personal bankruptcy (either Chapter 7, 11 or 13) in calendar year 2010, the 4th consecutive year of an increasing national total (source: American Bankruptcy Institute).


1,046,762 homes were seized by lenders in calendar year 2010 as a result of foreclosure, an average of 2,868 per day. There are 75 million homeowners in the USA, 24 million of which do not have any mortgage debt on their homes (source: RealtyTrac, Census Bureau).


50% of the 75 million homeowners in the USA have an outstanding mortgage balance on their primary residence that is more than 50% of their home's current fair market value (e.g., mortgage debt of more than $100,000 on a $200,000 home). (source: Census Bureau).


More than half of retirees surveyed (56%) were not debt-free when they retired (source: CESI Debt Solutions).

No Relief for Yet Housing Prices...

The S&P/Case-Shiller Index of Home Values in 20 cities fell -1.6% from November 2009, the biggest 12-month decrease since December 2009, according to the median forecast of 26 economists surveyed by Bloomberg News.

Mounting foreclosures will probably throw more properties on the market this year, further depressing prices, homeowners’s equity and construction.

The lack of a sustained housing rebound and unemployment above 9% are among reasons the Federal Reserve may refrain from raising interest rates and complete a 2nd round of stimulus that could pump $600 billion into the economy by June. 

“The large overhang of unsold houses will weigh on prices,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Housing is lagging the economic recovery. It is one factor encouraging the Fed to remain on the sidelines.”

Job Woes & Housing Distress Inextricably Linked...

Although U.S. employers hired a net 39,000 workers in November 2010, the nation's unemployment rate rose to 9.8%, equal to 15.1 million out-of-work Americans.


Through the first 10 months of calendar year 2010, 909,487 homes have been seized by lenders as a result of foreclosure, an average of 2,992 per day.  At that pace, 1.1 million homes will be repossessed during calendar year 2010.


Sources: Department of Labor and RealtyTrac

Home Price & Foreclosure Outlook Remains Bleak...

Home prices continue to fall because sales aren't taking off. Without buyers, the market can't bottom out. 

New home sales continue to languish around historic lows, barely exceeding an annual rate of 307,000. Existing home sales did rise to a 4.53 million annualized rate in September, up +10% compared with a month earlier, but are still well below the boom years.

Of course, nobody is buying homes when they can't find jobs. And still more people can't hang on to their homes because they're out of work. 

Nearly 1 million homes are expected to be repossessed this year, and analysts seem to be competing to issue the most dire forecast for future foreclosure numbers.

- Morgan Stanley reported that about 3.1 million borrowers are seriously delinquent with many expected to lose their homes.

- Mark Zandi, chief economist with Moody's Analytics, says more than 4 million homes are in trouble with half of those expected to go to foreclosure.

- And Laurie Goodman, of Amherst Securities, estimates the number of homes in danger of foreclosure at a whopping 11 million!

- Real estate analyst Kyle Lundstedt, of LPS Applied Analytics, said serious delinquencies will continue to spike and will not return even to the current rates -- which are already at peak levels -- until late 2012 or early 2013.

Existing Home Sales Plunge -27%

The latest report from the National Association of Realtors (NAR) shows that purchases of existing homes plunged -27.2% to a 3.83 million annual rate. The pace compares with the median forecast of a 4.65 million rate, according to a Bloomberg News survey. 

The number of previously owned homes on the market rose +2.5% to 3.98 million. At the current sales pace, it would take 12.5 months to sell those houses, the highest since at least 1999 and compared with 8.9 months in June. The months’ supply of single-family homes at 11.9 months was the highest since 1983, NAR said.  Sales last month fell in all 4 U.S. regions.  Foreclosures are boosting the so-called shadow inventory, and competing with owners trying to sell properties.

Home seizures increased almost +4% in July from the previous month, with 325,229 properties last month getting a notice of default, auction or bank repossession, RealtyTrac Inc. said August 12. 

Residential real estate may keep struggling for the rest of this year, while into “2011 and beyond, it is difficult to determine,” Richard Dugas, chief executive officer at Pulte Group Inc., said in an August 20 interview with Bloomberg Television. Pulte is the largest U.S. homebuilder by revenue. 

“Demand is low across the country,” Dugas said. “You have record-low interest rates and excellent pricing, but consumer confidence eased. We really need the economy to improve and job creation to take hold before people feel comfortable stepping into a home.”

20 Million Underwater Mortgages by 2012?

More than 14 million borrowers were underwater as of Q1 2010, and with a further 10.8% decline in house prices expected relative to Q4 2009 levels, another 6 million borrowers are likely fall into negative equity by the end of 2011, according to commentary by Deutsche Bank.

The presence of negative equity goes hand-in-hand with an increased likelihood of strategic default, as borrowers may sometimes not be willing to pay the mortgage when the house has lost substantial amounts of value.
  
The firm noted that, even when strategic default makes economic sense, many borrowers resist on moral and social grounds, as well as from fear of legal consequences.  The existence of recourse — when a lender is able to pursue a borrower's other assets — also acts as a disincentive against strategic default.  

Deutsche Bank noted 11 states are considered non-recourse — though not all explicitly forbid deficiency judgments on homes or on purchase loans. Underwater borrowers are more likely to default in non-recourse states. The greater the negative equity, the higher the cumulative default rate.

"Walk away or strategic default from a house with negative equity makes economic sense, especially in locations that have less expensive rentals," Deutsche Bank researchers said.

Many existing academic studies model homeowners' default decision based on the theoretical hypothesis that a borrower would exercise a default when it is in-the-money, i.e., when the borrower's house has negative equity.

Therefore, a homeowner with negative equity would default even though they can still afford to make their mortgage payments.

Foreclosures to Persist

According to authors at the Federal Reserve Bank of Cleveland, the nation’s high foreclosure rate is likely to persist.

The Fed article looks at the changes in foreclosure and unemployment rates across states, noting the differences in the timing of the movements.

The conjecture that the high foreclosure rate will persist is based in part on the observation that states that experienced boom-bust housing cycles in the past (Texas, Oklahoma, Massachusetts and California) had elevated foreclosure starts for years after the peak in foreclosure starts and inventory.

These previous boom-bust cycles “were small in comparison to the current cycle,” the article said.  

While the recession has left deep scars in the housing and labor markets — with the unemployment rate doubling and the foreclosure start rate roughly tripling — the timing of the movements differs over the cycle, according to the abstract, written by Timothy Dunne, a vice president at the Federal Reserve Bank of Cleveland, and Kyle Fee, a research assistant.

U.S. Foreclosures Fall, Bank Repossessions (REOs) Hit Record High

The national foreclosure rate continued to fall in May from the previous month, according to a new report released Thursday.

The national foreclosure rate fell by 3.27% in May from the previous month.

However, bank repossessions reached a record high during the same month, a sign that lenders are focusing on their backlog of foreclosure inventory before tackling new distressed loans, according to foreclosure database website RealtyTrac, which released the report.

“What it looks like is that the lenders are focusing on processing the delinquent loans they already have rather than initiating new foreclosures,” said Rick Sharga, senior vice president of RealtyTrac.

Foreclosure activity dropped 3.27% in May from the previous month, and was up +0.45% from May 2009. In all, 322,920 properties generated a foreclosure notice.

1 in every 400 homes in America received a foreclosure notice in May. Bank repossessions (known as real estate owned properties or REOs) hit a record high in May for the second month in a row.

All 50 states reported a year-over-year increases in REOs, according to RealtyTrac. It is projected that over 3 million homes will receive a foreclosure notice over the course of this year, said Sharga.

1 in 7 U.S. Homeowners Paying Late Or In Foreclosure

NEW YORK, May 19 (Reuters) - One in every 7 U.S. households with a mortgage ended the first quarter behind on payments or in foreclosure, although a peak in unemployment could mean repayment stress is easing, according to the Mortgage Bankers Association.

While the rate of new foreclosure actions has slowed, the stockpile of loans that are seriously delinquent or in foreclosure means a long path to recovery for the U.S. housing market.

"It's like shutting off the oil leak, but you still have a lot of oil in the Gulf to deal with," Jay Brinkmann, the MBA's chief economist, said in an interview.

Loans that are 90 days or more past due or in foreclosure represent a historically high 68% of all problem mortgages.

High unemployment is overwhelming efforts by lenders to alter loan terms to borrowers.

Goldman Sachs: "13 Million Foreclosures in the Next 5 Years"

Foreclosure Stat Snapshots

1) More than 1.5 million homes have been lost to foreclosure already, according to the Center for Responsible Lending.

2) Goldman Sachs is projecting 13 million foreclosures of ALL types during the next 5 years.

3) One in 10 homeowners are late with mortgage payments, according to the Mortgage Bankers Association.

4) Owners owe more than the home is worth in nearly 1 in 5 homes, according to First American Core Logic.

5) Banks are braced for record debt defaults in the 2010 New Year.

6) 7.5 million foreclosure sales will have taken place between 2006 and 2011.

7) The majority of those 7.5 million foreclosure sales, however, have not been completed yet, with 4.8 million foreclosure sales expected between 2009 and 2011.

8) In Florida, about 2 million of 4.6 million home mortgages were underwater, a rate of 45%. 

9) Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. 

10) If 1 in 5 of those 21 million households default, the losses to banks and investors could exceed -$400 billion.

As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.

 
 

Next Wave of Foreclosures Coming?

According to a new report released this week by Standard & Poors (S&P), 93% of option-ARM buyers selected the worst, most irresponsible, option.

Given a choice of which to pay: interest and principal, interest only, or a minimum amount less than the interest due; almost everyone paid the minimum -- presumably in hopes that the value would keep going up.

Nearly all of the 350,000 option-ARM borrowers owe more than when they first bought their homes thanks to the unpaid interest accumulating, and many loans written during the first big wave, which started in 2004, are getting ready for their five-year reset when they become standard amortizing loans. Some newer loans will even reset early if the accumulated interest has pushed the loan-to-value ratio above 110% to 125%.

That will change things -- in one scenario outlined in the S&P report, the payment on a $400,000 mortgage jumps from $1,287 to $2,593.

Some industry pessimists say the looming default problem could have the power to derail the nascent housing market recovery. "The crux of the matter is that as soon as these mortgages recast, the history is that they will default," said Brian Grow, one of the S&P report's coauthors.

The last year that any option-ARMs were issued was 2007. In the first 20 months after issuance, this vintage of option-ARMs had an average default rate of just over 22%.

But if you calculate only default rates for 2007 option-ARM borrowers who are now underwater, the default rate jumps to 25% after just 20 months, according to S&P.

So, regardless of how many of these kinds of loans there are out there, their high default rates will have an outsized influence on housing markets, adding to already bloated foreclosure inventories and driving prices down further.