Housing’s Huge Supply and Demand Imbalance

“Pent-up demand.” That is the rallying cry of the housing bulls, as they forecast the great recovery of 2012.

“Pent-up demand.” That is the rallying cry of the housing bulls, as they forecast the great recovery of 2012. So many potential buyers are doubled up with family, stuck in undesirable rentals or just plain afraid to put their current home on the market, but that’s about to change, say these optimistic prognosticators.

“Inventories [of unsold homes] have been coming down, showing very healthy declines,” Ivy Zelman, CEO of Zelman and Associates told the Wall Street Journal. And Zelman is new to the bull ring, as she is famous for predicting the housing bubble in the first place.

Pent-up demand exists, no question, but it has nowhere to go right now for the vast majority of organic home buyers. When I say organic, I’m excluding investors from the mix, because that demand is high and building up cash like mad. I mean regular lower to upper middle-class Americans still struggling in today’s rough economy.

“There are relatively few borrowers that can qualify for a mortgage given today's tight lending standards,” says Laurie Goodman, Senior Managing Director at Amherst Securities. “Aside from FHA and VA mortgage, you need 20 percent down, and that's very, very difficult for most borrowers.”

Goodman, one of the best number crunchers I’ve come across in this field, claims there is far more distress in the housing market than some of the leading mortgage data providers portray. She counts eight to ten million more foreclosures over the next six years, because she adds borrowers currently in mortgage modifications.

“That includes borrowers who have never missed a payment before, but are deeply underwater and are apt to default because borrowers just like them are defaulting on a regular basis,” Goodman contends.

She notes that household formation has been running very low of late, just 5-800,000 a year. A normal level is 1.1 to 1.2 million units a year.

“Even if we go back to 1.2 million units a year, and even if 50 percent of those are home buyers, which I think is a very, very high number [the rest being renters], that won't be sufficient to clean up the huge overhang of supply we're going to have over the next four to six years,” she calculates.

Why is 50 percent high? She calculates on:

“The homeownership rate for the U.S. as a whole is 66 percent. If you take out the borrowers who haven’t made a mortgage payment in a year it is 62 percent. The Center for Joint Studies at Harvard estimates that out of the 1.2 million units per annum household formation over the next decade, 70 percent will be minorities, who have lower home ownership rates. In this context, 50 percent seems generous.”

Her conclusion, and the one I’ve been promoting for over a year now, is that the only way to re-balance supply and demand is to get investors into the market in force to buy up these properties and meet the huge rental the demand that will continue for several years. As we reported last week, hedge funds are busy working on deals, but government needs to help. Fannie Mae and Freddie Mac are currently sitting on a huge supply of foreclosed properties and facing even more down the pike.

The Federal Housing Finance Agency (Fannie and Freddie’s conservator), along with the U.S. Treasury Department, need to get moving on their so-far inchoate plan to sell these REOs in bulk to investors, and in doing so, make sure said investors are provided with financial incentives to make it worth their while. As Goodman notes, these investors will be buying single family homes, not multi-family apartment buildings (which have identical units), so they need to build out property management organizations to handle repairs, manage tenants and keep the properties rented.

“I fully expect that they will end up implementing something at some point this year,” adds Goodman, “because there is simply no choice.”

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Housing's Double Dip Part II: Rising Foreclosures

Justin Sullivan | Getty ImagesIs there a double dip in foreclosures on the horizon?

Just as we saw a double dip in home prices, we may be seeing another surge in foreclosures.

And just as the home price scenario was caused by artificial government stimulus, in the form of the home buyer tax credit juicing home sales only briefly, the foreclosure scenario was caused by real negligence, in the form of the "robo-signing" paperwork scandal.

Banks and servicers stopped foreclosures entirely for a time after the malpractice was discovered, and courts delayed the process, picking through papers as foreclosures were resubmitted; that is now turning around.

The system is ramping up again, and foreclosure starts are up dramatically, more than 10 percent in June from the previous month, according to Lender Processing Services (LPS). The good news of the past few months has been that while the end game is quickening, as stalled foreclosures are making their way through the system at a faster pace, new delinquencies were decreasing, leading us all to believe that the crisis is abating.

Well think again.

New delinquencies rose 2.4 percent in June, which isn't a lot, but it is still the wrong direction. This as the pipeline is still so clogged that foreclosure timelines continue to rise. The average loan in foreclosure in June was delinquent a record 587 days, and more than 40 percent of 90+-day delinquencies have not made a payment in more than a year. For loans in foreclosure, 35 percent have been delinquent for more than two years, according to LPS.

Today's surprisingly good jobs report for July did not do much to impress economists, who cited still fewer people working in July than June and far fewer job creations on average in the past three months than in three months before that. Bottom line, we need surging jobs to shore up consumer finances and consumer confidence, both of which are vital to housing's recovery.

Even as Fannie Mae reported a second quarter drop in mortgage delinquencies in its portfolio, chief economist Doug Duncan had this to say about the future:

"Economic growth at the current pace is insufficient to spur sustained, robust job creation, which is required to boost sentiment, spending and housing demand. Our July Fannie Mae National Housing Survey, to be released next Monday, continues to indicate a high level of caution among consumers regarding additional financial commitments. In addition, 70 percent of Americans believe that the economy is moving in the wrong direction, according to our quarterly survey that will be released . The impact of recent financial market volatility on household wealth is an additional setback to confidence and the outlook for the housing market."

If the foreclosure numbers are not improving significantly, which the latest data would indicate, and the weak economy is in fact getting weaker, the Obama administration will have to reverse its course of removing itself from housing and figure out new and better ways to jump back in.

I am constantly amazed, and have been for years, at how little the President speaks of our housing disaster, especially of late. It's what got us into this mess in the first place, and without its strong recovery, the economy cannot walk out of this recession on anything but a crippled foot.

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