MarketNeutral
26th April 2010, 05:21 AM
103: The number of months it would take to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales.
How much should we worry about a new leg down in the housing market? If the number of foreclosed homes piling up at banks is any indication, there’s ample reason for concern.
As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates from LPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory†was up 30% from a year earlier.
Based on the rate at which banks have been selling those foreclosed homes over the past few months, all that inventory, real and shadow, would take 103 months to unload. That’s nearly nine years… Read more here.>>
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Pat says not so fast. Here are his reasons why the 103 month estimate is too low.
There are problems with the numbers that the article uses to arrive at the 103 months.
■The HAMP modifications will have a failure rate of at least 75%. That is due to the Debt Ratios that the mods are approved at. In Feb, the mean ratio was 59.8%. In Mar, it was 62.7%, which to increase that much, most every Mar approval was far above the 62.7 number.
■FHA, Fannie and Freddie are 95% of all new loans and purchases. Debt Ratios on these loans are up to 50%. FHA is considered the new subprime, and these loans are already beginning to default.
■50% Debt Ratios were what subprime used, and we saw those default rates already.
■The Home Sales occurring have approximately 25% "flippers", who buy and then in 2-3 months resale. So the Home Sales are artificially "inflated" by the flippers.
■The 4.8m homes delinquent are only a small part of the 12m homes that are expected to default from 2010 to 2012.
■There is no indication of how many strategic defaults will occur over the next three years.
So, it is readily apparent that the actual number of months to clear inventory is far greater than the 103 months, when these factors are considered.
Are you ready for the next part of the equation?
4.8 million homes delinquent. That means these people are not paying their mortgage. Yet, from what I see, most are not saving that money either. They are spending the money, which is artificially increasing consumer spending and GDP.
Now, for each home in foreclosure, it takes 12-18 months on average to foreclose, thanks to the backlog, the government programs and such. So, for the government, it makes sense to extend the foreclosure process, because it "helps" the economy.
The truth is that to straighten out this mess, government needs to get out of the way, let the foreclosures happen, let prices fall, and eliminate Fannie Mae and Freddie Mac. Furthermore, stop government spending.
Of course, I only see that happening in my dreams.
How much should we worry about a new leg down in the housing market? If the number of foreclosed homes piling up at banks is any indication, there’s ample reason for concern.
As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates from LPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory†was up 30% from a year earlier.
Based on the rate at which banks have been selling those foreclosed homes over the past few months, all that inventory, real and shadow, would take 103 months to unload. That’s nearly nine years… Read more here.>>
****
Pat says not so fast. Here are his reasons why the 103 month estimate is too low.
There are problems with the numbers that the article uses to arrive at the 103 months.
■The HAMP modifications will have a failure rate of at least 75%. That is due to the Debt Ratios that the mods are approved at. In Feb, the mean ratio was 59.8%. In Mar, it was 62.7%, which to increase that much, most every Mar approval was far above the 62.7 number.
■FHA, Fannie and Freddie are 95% of all new loans and purchases. Debt Ratios on these loans are up to 50%. FHA is considered the new subprime, and these loans are already beginning to default.
■50% Debt Ratios were what subprime used, and we saw those default rates already.
■The Home Sales occurring have approximately 25% "flippers", who buy and then in 2-3 months resale. So the Home Sales are artificially "inflated" by the flippers.
■The 4.8m homes delinquent are only a small part of the 12m homes that are expected to default from 2010 to 2012.
■There is no indication of how many strategic defaults will occur over the next three years.
So, it is readily apparent that the actual number of months to clear inventory is far greater than the 103 months, when these factors are considered.
Are you ready for the next part of the equation?
4.8 million homes delinquent. That means these people are not paying their mortgage. Yet, from what I see, most are not saving that money either. They are spending the money, which is artificially increasing consumer spending and GDP.
Now, for each home in foreclosure, it takes 12-18 months on average to foreclose, thanks to the backlog, the government programs and such. So, for the government, it makes sense to extend the foreclosure process, because it "helps" the economy.
The truth is that to straighten out this mess, government needs to get out of the way, let the foreclosures happen, let prices fall, and eliminate Fannie Mae and Freddie Mac. Furthermore, stop government spending.
Of course, I only see that happening in my dreams.