Real Estate: No Bottom Yet?

John Mauldin is an investment adviser and president of Millennium Wave Investments. He sends out an interesting weekly newsletter, which most recently focusedon the current real estate market.  It seems like the bottom isn’t in sight yet:

Analyst contend that much of the bad news in the subprime-loan and housing market has been written off. And one would have to admit that a lot has been; and with the relaxation of mark-to-market, there may indeed be some truth to that suggestion. But there are still some issues that remain for housing. Take a look at the graph below. (Not sure where it is from, as it was sent to me, but I have seen the same data elsewhere.) Notice that monthly mortgage-rate resets declined markedly in 2009 from 2008, but are expected to rise again in 2010 and 2011. There is still some heartburn in the mortgage market.

Monthly Mortgage Rate Resets

The Shadow Inventory of Homes

And foreclosures keep climbing, though some point to that fact that they seem to be leveling off. However, a strange thing is happening. We are seeing what is being called a “shadow inventory” of foreclosed homes.

“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.” (San Francisco Chronicle)

A Realty Trac survey found that only 30% of foreclosures were listed for sale in real estate listings like the MLS (Multiple Listing Service). Add in homes that people would like to sell but simply can’t find buyers for, and must either hold or rent, and the unsold inventory numbers that are public are likely far below actual available homes.

Might some homes in foreclosure be held off the market because banks eventually want to negotiate with the homeowner? Possibly, but other surveys show that anywhere from 30-40% of homes in the foreclosure process in many areas are actually already vacant. There is no one with whom to negotiate.

Typically a foreclosed home sells within a few weeks, as banks take the first “reasonable” offer. But it normally takes about three months from foreclosure to when the home is put on the market — it takes a few months to get a home ready. But surveys show it is taking a lot longer now, and many homes have not made it onto the market, even as more homes are being foreclosed each month.

The Chronicle suggests several factors may be at work. First, there is the “pig-in-the-python” problem. There are just so many homes that it is hard to get them onto the market and sold. Normally there are about 160,000 homes a year in foreclosure sales. We are now seeing 80,000 a month, or six times normal levels, and rising.

Second, lenders could be deferring sales to put off having to acknowledge the actual extent of their losses. “With banks in the stress they’re in, I don’t think they’re anxious to show losses in assets on their balance sheets,” one observer said.

Finally, banks may not want to flood the market with foreclosures, driving prices down even more. They are simply managing their assets so as to recover the most capital they can.

Given that the graph above says there will be more mortgage misery as large numbers of mortgages reset in the next two years, and given the unknowable nature of the losses, it is somewhat optimistic to think financial profits will rise by 74% in the fourth quarter. But it gets worse.

Commercial Real Estate Starts a Long, Slow Slide

We are now starting to see some real deterioration in traditional bank lending. Delinquencies on home equity loans are rising rapidly. The American Banking Association released a composite index of eight different types of consumer loans, and the delinquency rate on this 35-year-old composite jumped to a record high of 3.22%.

The above reflects 4th-quarter data. As unemployment is up 2% since then and is rising, it is more than reasonable to assume that we will see another record rise in delinquencies this quarter. With unemployment headed to over 10% and maybe 11% from today’s 8.5%, delinquencies are likely to continue to rise for the entire year.

David Rosenberg reports that “The National Federation of Independent Business found in a poll that 28% of small firms said they had a line of credit or credit card limit cut back in the second half of last year; 69% stated they are facing worse terms. A new FICO study found that 11% of US consumers — 22 million people — have had their credit lines cut or accounts closed even though they have been paying their bills on time and retain a solid rating.” This is certainly not good news for those who expect a positive 4th quarter. Cutting credit to small business, the engine of job growth in the US, is hardly a prescription for a growing economy.

Commercial mortgages are in trouble. S&P has warned they may cut ratings on $97 billion in commercial-mortgage asset-backed debt. The country’s 10 biggest banks have $327.6 billion in commercial mortgages, according to regulatory filings. A projected tripling in the default rate would result in losses of about 7% of total unpaid balances, according to estimates from analysts at research firm Reis Inc.

Are 50% Discounts Becoming Common In Florida?

Looks like the housing market is bad in more than just Miami. I just got this email from a real estate agent based in Florida regarding a Short Sale.

We have several sellers ready to walk away from their property without a penny. We have begun negotiations with the sellers lender who has expressed a desire to sell quickly and accept far less than the loan balance. Now I am looking for the buyer (you) who wants to buy a property at a huge discount.

Here is an example: Seller paid $260,000 last year for a BRAND NEW, 2,300+ Square Feet, 3 Bedroom, 2 Bath, 2 Car Garage, Covered Porch Home in Palm Coast Florida. The best offer we have is $135,000. We are looking for the highest and best. I don’t know how low the bank will go. It is up to you to offer. If you don’t the guy may get it for $135,000.

We have a lot of these and we get more everyday. If you want to Buy or Sell, Call Now


A Short Sale is where an owner is upside down on his house (his mortgage is higher than the house is worth) and the bank is willing to take less than they owe on it. Why would the bank take less? Because the home owner is several months behind on his payments, and has probably tried to sell it for what he owes for a few months with no success. It usually costs the bank around $50,000 to get rid of a house once its been in foreclosure, so in order to speed up the process and avoid going through the hassle, they agree to a short sale.

The seller is benefited since he doesn’t have a foreclosure on his credit. However, the bank usually sends out a 1099 tax statement for the difference. Which means the seller is still stuck with a tax liability. But paying 30% on a $100,000 is much better than paying the $100,000 from your pocket and not getting to deduct it as a tax loss! (To be more specific, homeowners cannot deduct the loss while investors can). So the only person truly benefiting is the buyer of the property. So long as he can afford the payments and doesn’t need to sell it at a loss in another 2 years!