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Bullish Hoopla in Housing Is Driven by Bogus Inventory Reports

I have written about the housing quagmire from different angles, and there hasn't been a heck of a lot of good news. However, there have been spurts in home prices propagated by the media with enormous hoopla that later turned out to have been sucker rallies, with prices hitting new multi-year lows after each one—the last new low, as measured by the Case-Shiller Home Price Index, was set earlier this year. Here are some of my articles: Construction Spending and the Housing Quagmire, Immigration and the Housing Quagmire, or The Big Lie.

Recently, there has been another wave of media hoopla about housing being on the upturn, including reports of bidding wars! Just like the good ol’ times. Alas, this "bullish" news on housing, ballyhooed with such passion, sounds much like the "bullish" news during the prior sucker rallies—because something is off key. For an excellent analysis of this issue, read Yves Smith’s article:

RealtyTrac, CoreLogic Confirm Housing Bear Thesis: 85-90% of REO Being Held Off Market, Meaning “Tight” Inventories Are Bogus


We’ve been mystified with the housing bull argument that things really are getting better. While real estate is always and ever local, and some markets may indeed be on the upswing, there are ample reasons to doubt the idea that an overall housing recovery is in. For instance, the recent FHFA inspector general report stated:

Further, general distress in the housing sector will likely continue to result in elevated REO inventories. For example, the Enterprises’ financial data indicate that, as of the end of 2011, more than 1.1 million mortgages held or guaranteed by the Enterprises were “seriously delinquent,” i.e., were 90 or more days past due. At that time, the volume of seriously delinquent mortgages was more than six times the size of the Enterprises’ REO inventories

Reader MBS Guy noted:

My rough calculation of their REO and delinquency numbers would indicate that they will have about 300,000 new REOs (acquisitions, in their parlance) per year for the next three years, assuming their isn’t a surge in new defaulters from their portfolio (ie – just using the loans currently seriously delinquent). They also report 179,000 properties currently in REO (end of 2011).

If they maintain their 2011 rate of REO dispositions at 353,000, the pipeline would be largely cleared in about 3 years. If they are able to increase the pace a bit, perhaps the inventory clears in 2-2.5 years.

Either way, it is very likely that about 1 million REO properties will be disposed of by the GSEs over the next 2-3 years. Over the last 3 years, they have disposed of about 833,216 REOs.

What will the impact on home prices be in the rate of REO disposition in the next 3 years matches or exceeds the rate of disposition of the last 3 years? I’d expect that it will be pretty negative.

Remember, that’s ONLY Fannie and Freddie mortgages. Recall that 1.1 million figure, serious delinquencies in their portfolios. Top housing analyst Laurie Goodman puts the total across the market at 2.8 million.

So why are we seeing so much housing cheerleading? One big “proof” is that housing inventories are supposedly shrinking. If you recall the classic supply/demand chart, if a price is higher than the market price, you expect to see big inventories somewhere. Conversely, if inventories are falling below a “normal” level (there are always some buffers in a system), that’s a sign of strengthening demand. Read the rest....


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