The Housing Market

As you can see from the following information, the housing market has not stabilized. There is still a glut of houses to come on to the market. Many will be short sales and even more will be foreclosures which will not be in good shape. Opportunities will continue to present themselves to buyers who have credit, cash and income. Now is the time to get your finances in order to take advantage of the depressed market. Remember, buy low sell high is always good advice. The next 2 years will be a great time to buy real estate and houses at the low end of the spectrum.

Some analysts and commentators have argued about whether it even exists. Let’s take an in-depth look at this shadow inventory and see whether it really is a threat to housing markets around the country.

Shadow Inventory Defined
Rather than joining the dispute about what the term actually means, I will simply define it in this way: The “Shadow Inventory” is comprised of all those distressed residential properties (other than MLS listings) which we know will almost certainly be coming onto the market in the not-to-distant future.

MLS Foreclosures – Only the Tip of the Iceberg
The starting point in discussing the shadow inventory has to be homes actually on MLS listings around the country. With the plunge in home sales starting in July, the number of listings has risen substantially since the spring. For example, California listings are up 25% since April.

The percentage of total listings that are bank-owned properties has declined over the last year, while the percentage which are short-sale listings has risen tremendously during the same period. For example, short sales comprised 40% of all active listings in Sacramento County in August.

Because of the sharp climb in short-sale listings, roughly 30% of all July home sales in California, Arizona and Nevada were short sales according to Inside Mortgage Finance. It also reported that nationwide, closed short sales have climbed from roughly 45,000 in January 2010 to nearly 100,000 in June.

With regard to shadow inventory, the key question is how many foreclosed and repossessed properties are now either in the inventory of banks or held on behalf of residential mortgage-backed securities (RMBS) investors whose loans they service. Estimates start at about 500,000 and go up from there. One highly reputable data provider with a huge database of first mortgage liens has been reporting an REO inventory in excess of one million since last summer. Whatever the number is, it seems clear that the vast majority of these properties are not currently on the market.

Defaulted Properties Heading for the Resale Market
In addition to repossessed properties held off the market, the shadow inventory includes all the homes which have been placed into default – the first stage of foreclosure proceedings. According to Lender Processing Services’ July Mortgage Monitor report, there are now 2.02 million properties in default. This number has not declined in the past year in spite of more than one million trial mortgage modifications.

In many of the worst bubble metros, the number of homes in default has been climbing in the last year. Take a look at the soaring number of defaults in the Las Vegas metro area in this graph from ForeclosureRadar.




In spite of the huge number of foreclosed homes that have been sold by the banks in the Las Vegas area, the volume of new foreclosure actions continues to rise.
While many of these defaulted properties throughout the nation will escape foreclosure by means of a short sale, the rest will move on to foreclosure proceedings and eventual trustee sale to a third party or repossession by the lender.
Overwhelmed by the number of defaulted properties, banks have stretched out the time between the beginning of mortgage delinquency and formal foreclosure to an incredible average of 469 days – more than 15 months. Since these homeowners in default are living in their house without making mortgage payments, that is a way to build up a sizeable pile of cash.

Delinquent Homeowners – The Number Just Keeps Growing
You could argue that the shadow inventory is the total of repossessed homes not yet on the market and defaulted homes that will move into foreclosure. However, there is also the matter of homes which are seriously delinquent in mortgage payments. Why? you may ask. The homeowner can cure the delinquency by paying the arrears before the home goes into default.

The problem is that the cure rate for these seriously delinquent mortgages is almost zero. Let’s take a look at the following chart.



If this were early 2005, one could claim that 40% of homeowners who were delinquent 90 days or longer would eventually bring the mortgage current. But the cure rate has plunged along with home prices. As early as one year ago, the cure rate had dropped to almost zero. A delinquency of 90+ days now means almost certain foreclosure or short sale.
How many homeowners are now seriously delinquent by 90 days or more? To answer that, we turn to Lender Processing Services and its massive database of roughly 34 million first mortgages. Their monthly Mortgage Monitor provides a detailed table of non-performing first liens. Here is what the July non-performing loan count looks like.



At the end of July, the number of residential first mortgages that were delinquent by 90 days or more stood at 2.47 million. While the figure has declined from a record 3.06 million in January of this year, this is due almost entirely to the mortgages which were placed in trial modification by the banks. While in modification, they are no longer considered delinquent. We know from the cure rate chart shown earlier that nearly all of these seriously delinquent mortgages are headed for the resale market either through a short sale or foreclosure.

To these 90-day delinquencies we need to add first mortgages which are delinquent for at least 60 days. The chart above reports 761,000 of these 60 day delinquencies. The cure chart shows us that the vast majority of these delinquent properties will also end up on the resale market.

Finally, we must also include those mortgages which are newly delinquent for 30 days. That number has been stuck at roughly 1.8 million for the last three months. Now you may question the inclusion of these newly delinquent loans. Keep in mind, though, that the vast majority of those homeowners who become 30 days delinquent have been delinquent before according to Lender Processing Services figures. The cure rate chart shows us that only 30% of those borrowers who go into arrears by at least 30 days will cure the loan without lapsing into delinquency again and eventually falling into default.

Concentration of the Shadow Inventory in 25 Major Metros
It is very important to understand that this enormous shadow inventory of distressed properties that will eventually be thrown onto the resale market is heavily concentrated in a limited number of metros. According to data provided by Lender Processing Services, 52% of the nationwide 90 day delinquencies and 58% of the defaults are concentrated in 25 major metros.

If you look carefully at the distressed property figures for the top four metros, you’ll see that the number of residences which will be pouring onto their housing markets in the next 1-2 years is enormous. Anyone who thinks that prices have bottomed in the Miami, New York, Los Angeles or Chicago metro areas had better take a good, hard look at these statistics.

Tallying Up the Shadow Inventory
An incredible 14% of the nearly 54 million first liens in the country are now either delinquent or in default. This chart from the Calculated Risk blog shows the steady growth since 2005.



To come up with a total for the shadow inventory, let’s first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale. That comes to 4.5 million properties. Based on the cure rate for loans delinquent at least 60 days, we will add 95% of those 60-day delinquencies. That is an additional 723,000 residences. For the same reason, we will add 70% of those delinquent for at least 30 days – 1.25 million properties.

And, of course, let’s not forget the REOs that have not yet been placed on MLS listings by the bank servicers. We’ll be conservative and estimate them at 500,000.
Adding all of these together, we come up with a total of roughly 6.97 million residences which are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk.

Economics: Hyperinflation

For the first 6 months of 2010 I was extremely worried that HYPERINFLATION was just around the corner. Interest rates have managed to remain low. The following article gives much detailed information as to why my fears are justified.

To put it simply, we are sitting on a stack of dry kindling wood and each day that we keep interest rates at artificially low levels it is like pouring gasoline on the wood. There will be a time in the near future (12 months) that something sparks the fire and when it does interest rates will go up like the dry kindling wood that is lit on fire; quickly and uncontrollably.

My advice, get into as much fixed rate loans that you can and avoid debt as much as possible. Cash will be king in the very near future.

John Williams, one of the best trackers of real, unmanipulated government data via his Shadow Stats blog, has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today. With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the Fed doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams' argument?

SUMMARY OUTLOOK

Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable. Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years. Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt. When that land mine explodes — probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background. The general outlook is not changed.

U.S. Economy. Already the longest and deepest economic contraction of the post-World War II era, the current downturn in the U.S. economy is re-intensifying, with no near-term stability or recovery on the forecast horizon. After an initial plunge, broad-based business activity bottom-bounced at a low-level plateau for more than year. Shy of short-lived bumps in activity from stimulus measures, there has been no recovery. Reflecting an intense real (inflation-adjusted) annual contraction in broad systemic liquidity (SGS-Ongoing M3 estimate), the economy has started to contract anew. In the popular media, where the hype of a recovery-at-hand readily was accepted, the renewed downturn already is being called a "double-dip," but underlying reality is that of an extremely protracted, deep and ongoing contraction. If there is a double-dip, it is in the combination of the two major economic downturns of the last decade.

Structural problems tied to lack of real consumer income growth — and worsened now by a credit-intensified contraction in consumer liquidity — pushed the economy into recession by early 2007, almost a year before the officially-clocked onset of December 2007. Such helped to trigger the credit collapse, which exacerbated the unfolding downtown and threatened systemic collapse. Despite extraordinary efforts to prevent a failure of the banking system, the structural consumer liquidity issues have not been addressed. Until they are, sustainable growth in U.S. business activity will be lacking.

The current contraction likely will meet my definition of depression (a greater than 10% real decline in peak-to-trough activity). In response to a likely hyperinflation, the current circumstance would evolve into a great depression (a greater than 25% real decline in peak-to-trough activity). Ongoing contractions in the world’s largest economy have sharply negative implications for global economic growth, but the hyperinflation risk for the United States likely will not spread to the more-stable major U.S. trading partners.

U.S. Inflation. Risk remains exceptionally high in the next six-to-nine months for a combination of massive U.S. dollar selling and heavy Federal Reserve monetization of Treasury debt to boost inflation, and to open the early stages of a U.S. hyperinflation. As discussed in the Hyperinflation Special Report, runaway inflation is a virtual certainty by mid-decade.

Defining inflation (deflation) in terms of annual change in the prices of consumer goods and services, consumer prices currently are about as contained as they have been since before the financial crises began to break in 2007, even as measured by the SGS-Alternate CPI measures. Tied to wild swings in oil and related gasoline prices, the CPI began to pick-up sharply in 2008, as oil prices soared, but prices then retreated to a period of short-lived official deflation in 2009, as oil prices collapsed. The current "contained" circumstance will not last, and the problem ahead very likely is not going to be deflation, partially because the Fed has indicated that it will act to prevent deflation, and it has the ability to do so.

First, though, again, as point of clarification, I define inflation in terms of changes in consumer prices, not in terms limited purely to changes in money supply growth (annual broad nominal growth is negative), nor in terms of asset inflation or deflation (a stock market crash does not necessarily lead to contracting consumer prices).

A sharp annual contraction in money supply, as seen at present in annual M3 (the SGS-Ongoing M3 estimate) legitimately can and has raised fears of deflation. Federal Reserve Chairman Bernanke has noted (see his 2002 comments in the Hyperinflation Special Report) and effectively confirmed in his recent Jackson Hole, Wyoming speech that a central bank in conjunction with its central government always can debase its currency (create inflation) in order to prevent deflation.

A central bank indeed can do that, if it so desires. The quantitative easing undertaken by Japan never was designed to debase the yen. Similarly, Mr. Bernanke’s quasi-effort at dollar debasement in the trillion-dollar-plus expansion of excess bank reserves was aimed specifically at banking system stability, not at creating inflation, per se. The deflation fight, though, is at hand and will be discussed further in the Systemic Stability section.

Current projections on the federal budget deficit, U.S. Treasury funding needs, banking industry solvency stress tests, etc. all have been predicated on some form of economic recovery. There is and will be no recovery for the foreseeable future; and the negative implications of that for U.S. funding needs and for systemic stability should act as eventual triggers for massive dumping of the U.S. dollar. Those circumstances also should lead to funding difficulties for the U.S. Treasury, putting the Federal Reserve in the position as lender of last resort to the Treasury. Such lending would be direct monetization of U.S. Treasury debt, which would feed directly into the money supply.

Actions already taken by the Fed and the U.S. Government in the ongoing crises have pushed major U.S. lenders to the brink of abandoning the U.S. dollar as the world’s reserve currency, and to the brink of dumping dollar-denominated assets. Keep in mind that a weak U.S. dollar can be extremely inflationary, particularly when dollar-denominated oil prices rise in response to such weakness, as has been seen in the last several years.

Systemic Stability. Threatened with systemic collapse at the time of the 1987 stock crash, then-Federal Reserve Chairman Alan Greenspan began serious efforts to forestall an eventual day-of-reckoning for the economy and financial system, through encouraging massive debt expansion, with leverage built upon leverage. As the economy faltered in early 2007, the system began to fall apart. The financial system did face collapse, and the Fed and the U.S. government did all in their powers — spent whatever money they thought they had to — to prevent it. A systemic collapse would have represented a complete functional failure of the U.S. government and the Federal Reserve. Such had to be, and still has to be, avoided at all costs, as far as the government and Fed are concerned. The big problem is there are no viable solutions.

The federal government effectively is bankrupt, unable to meet its long-range obligations or even to cover physically its annual shortfall in operations (see the Hyperinflation Special Report). Accordingly, the efforts at fiscal stimulus rapidly are approaching their practical limits, the point at which the U.S. Treasury will have difficulty raising needed funds. There are three options open to the government for meeting its impossible fiscal needs: balancing its books, reneging on its obligations or printing the money it cannot possibly raise through taxation.

The option for balancing the books would mean the U.S. government reversing its ever-evolving social-system policies of the last 75-plus years, abandoning the concept of federal government social programs supporting the income, retirement and health needs of the broad public. The economy cannot expand enough, taxes cannot be raised enough and other expenses cannot be cut enough otherwise to balance the books.

Specifically needed are slashing of the Social Security, Medicare and Medicaid programs, as well as the nascent fiscal shortfalls already building up as a result of the healthcare system control recently seized by the federal government. Such change is an extremely unlikely political possibility in the current system and circumstance, which leaves open the general options of government default on its obligations or government printing of money to meet its obligations. The latter option is the usual and likely one to be taken.

With no easy or politically-practical solutions, the available options all are bad; the choices being made and likely to continue being made are aimed at delaying systemic turmoil as long as possible. Ironically, it likely will be the efforts at saving the system that push the system into its ultimate day-of-reckoning in a hyperinflationary great depression. The general background material provided in the Hyperinflation Special Report again is referenced here, as I do not want to get overly repetitive with key points of the broad picture.

Consider, though that the "quantitative easing" entered into by the Fed had minimal impact on the money supply, as it involved mostly the purchase of mortgage-backed securities, with the created excess bank reserves being deposited with Fed, earning interest. As result, bank lending into the normal flow of commerce has been in contraction, and the broad money supply has followed. Now the Fed is considering the possibility of inducing banks to lend, by cutting the interest rate it pays on reserve balances.

The Fed’s primary function — as a private corporation owned by commercial banks — is to protect the banking system. Supporting economic growth and containing inflation are secondary concerns, but the renewed economic threat now also can shatter the fragile appearance of banking-system stability. Indeed, the banking system is far from stable, which is one reason lending is down.

Separately, a number of states will need financial bailouts, insolvent pension funds will seek government backing, the unemployed will be looking for greater support, etc., and all these pressures will be on top of a renewed decline in federal tax revenues. The most likely course of action here remains ongoing efforts to spend or create whatever money is needed to keep the system from collapsing. Where the options are for devil’s choices, the one that buys the most time and is least politically painful usually is the one chosen.

Greenspan abandoned the U.S. dollar for a while following the 1987 stock crash. The dollar and foreign investment likely will become secondary concerns for political Washington against a U.S. populace looking to kick out the political miscreants — both sides of the aisle — who have lead the U.S. system into this crisis over decades. The ultimate cost in domestic inflation will be horrendous.

What does this mean for US financial markets?
In these circumstances, the financial markets likely will be highly unstable and volatile. Looking at the longer term, strategies aimed at preserving wealth and assets continue to make sense. For those who have their assets denominated in U.S. dollars, physical gold and silver remain primary hedges, as do stronger currencies such as the Canadian and Australian dollars and the Swiss franc. Holding assets outside the U.S. also may have some benefits.

5 Keys to Avoid Greenwashing

Do you know what Greenwashing is? Read the article below from one of my professional contacts, Kevin and Amy O'Brian of Agape Construction Company. If you have any questions about the article or want to talk more about Greenwashing please contact Kevin or Amy at 314-909-9050 or amy@buildagape.com

5 Keys to Avoid Greenwashing

Sadly, going "green" isn't always about the environment or conserving energy. Companies in and out of the remodeling industry make claims that their products offer environmental benefits -- such as fewer toxins, recycled content, or resource efficiencies -- but fail to back them up with independent testing, quantified results, or other forms of verification.

In many cases, such claims are simply misstated or overstated in an effort to grab your attention and sell products. Words and terms such as "eco-friendly" or "environmentally sensitive," while catchy and conveying a certain benefit, have no true basis in fact.

In fewer cases, the claims are intended to deceive you; the company is simply jumping on the green bandwagon without the proper documentation and worse, little sincere concern for the environmental impact of its products. The goal is to cash in on the green movement, not contribute to it.

In both cases, the effect is called "greenwashing." It's something we as professional remodelers confront all the time with our suppliers. And while it's our job to ferret out true and impactful environmental claims from those that are greenwashed before we offer those benefits to you, we encourage our clients to take the initiative and protect themselves, as well.

Here are some tactics we find helpful in our efforts to avoid greenwashing:

Ask questions! With a little digging online or perhaps on the phone with the manufacturer, you can discover the details of how a product is made and quantify its green claims. If there is recycled content, for instance, you should be able to find out how much and from what sources; if the product claims to save water, the amount of anticipated savings based on a baseline of use should be accessible.

Look for a label. Not all sincerely green products are certified by a reputable third-party, such as the EPA's WaterSense or the federal Energy Star programs (among several), but such labeling is a good (and easy) piece of the puzzle. These programs verify quantifiable claims made by the manufacturer regarding their environmental impact. If you see a label you don't recognize, look it up online for more details and likely a list of certified products.

Beware of hidden tradeoffs. Many products tout a narrow definition of an environmental benefit but with a tradeoff somewhere else, such as a product that uses recycled content but also contains or uses formaldehyde or adhesives that emit volatile organic compounds (VOCs). We also look at things like packaging, distance from the source (the closer the better), and manufacturing processes that ideally reduce the environmental impact of the product beyond a single green claim.

Realize relevance. The use of bad stuff like lead (in paints), chlorofluorocarbons (CFCs, in refrigerants), asbestos (in insulation and roofing products), and arsenic (used to preserve wood products) has been banned for decades. Still, some manufacturers now tout them as a "green" benefit. Something that's "lead-free" should be a given, not a sales pitch -- and certainly not considered green.

Trust your gut. Common sense is always a good gauge; if something sounds too good to be true, or at least overstated or exaggerated, check it out. If you get the runaround or the company can't qualify its claims, find an alternative that satisfies your needs and goals.

As your remodeler, we consider it our responsibility to provide you with products and systems that perform as promised. Greenwashing gets in the way of that goal, while avoiding such claims helps deliver the environmental and resource efficiencies you expect and desire.

40% of subprime mortgages stand delinquent, can prime be next?

Subprime delinquencies are steadily trending downward. Additionally, the performance of prime mortgages may be a growing concern, especially considering economic hardship can suddenly hit any American family, regardless of the types of housing debt they hold.

CoreLogic reports 2,376,120 American subprime mortgages are still active in the market in June, down 12.5% from a year ago.
Overall, the numbers show that despite the decrease in volume, subprime mortgages still account for the grand percent of current delinquent loans and foreclosures across the board.

As of June, 39.6% of the subprime loan market is 60 days delinquent, 35% of that is 90 days delinquent, 13% of that are now in foreclosure and 3.8% of mortgages are real estate owned.

But that's comparable to the nearly 6.5 million prime mortgages that fit into the same delinquency categories, where 60+ day delinquencies are not showing a significant decline and foreclosures continue to steadily inch upward, now passing the 2% mark.

As made clear by the charts, there seems to be an inverse relationship between the total number of loans (which decreased 12.5% year-over-year) and the percentage of subprime loans that became 60 and 90 days delinquent in the same time period.
CoreLogic recorded that in June 2010, 39.6% of all subprime loans were 60 days delinquent, up from 39.2% a year previous. The firm also reported that 34.8% of subprime loans were 90 days delinquent, up from 33.8% in June 2009.

Senior economist at CoreLogic Mark Fleming said during the housing boom, subprime mortgages were the most vulnerable to delinquency and foreclosure because of the unfit models used to originate them. A borrower chose a mortgage based on the plan to refinance after two or three years when the value of their home appreciated. Home prices, however, did not go up and borrowers did not have the continued resources to pay their original mortgages. The loans originated in 2006 and 2007 that did made it through, are newer, less risky and survived prepayment shock.



The volume of these loans is depleting and the subprime universe now makes up roughly 5.4% of the total active loan market. Prime loans on the other hand, dominate the market in terms of loan type.

Prime loans, however, made it pass the housing bubble without much default or trouble because or they were not susceptible to price fluctuations. Fleming warned that the impact percentage of delinquent loans in the prime space have been masked because the volume is so huge. Compared to the less than 3.5 million subprime, there are about 40 million prime loans in the marketplace, 6.2% of which were 60 days delinquent in June 2010 and 3% of which were 90 days delinquent.

"If you're looking at delinquencies and foreclosures by data type you're comparing 16% versus 40%," said Fleming in an interview. "But that's 16% of 40 million loans (prime) versus 40% of only 2 million loans (subprime)," which equals 6,355,506 delinquent prime mortgages versus 950,448 delinquent subprime mortgages.

Fleming also mentioned that delinquency and foreclosure are "product agnostic" occurrences, meaning economic factors such as job loss don't choose a person based on their mortgage. A borrower who losses his job and has a subprime mortgage is more likely to have trouble paying it than does a borrower with a prime mortgage who losses his job.

"Maybe we need policy to look at what kind of loans people have," Fleming said with regard to decreasing delinquency. "If I were a policy maker I would be focusing law toward the prime space."

Congratulations On Your New Home!!

Brian Adair and Andrea Young just purchased a new home. Listen to their comments on their experience with Cornerstone Mortgage.