We're Nowhere Near A Bottom in Housing

From the WSJ:

But prices are still much lower than they were a year ago. Home prices in 10 major metropolitan areas in June fell 17% from the year before, though the declines appear to be moderating. The broader 20-city index showed similar patterns. A separate gauge of home prices by the Office of Federal Housing Enterprise Oversight, which covers more of the country but only tracks mortgages backed by Fannie Mae and Freddie Mac, found home prices were unchanged in June from the month before.

.....

Sales of new homes rose by 2.4% in July to a seasonally adjusted annual rate of 515,000 units after falling to a revised, 17-year low in June, the Commerce Department said Tuesday. The inventory of unsold homes declined for the second month in a row, to 10.1 months' supply at the current sales pace. Still, the number of unsold homes remains at historically high levels.

"There's still a big overhang of homes on the market that need to clear," said Lehman Brothers economist Michelle Meyer.

.....

On Monday, the National Association of Realtors reported that there was an 11.2 months' supply of previously-owned homes for sale last month, compared to about a six-month supply that usually accompanies healthy housing markets. Sales of previously-owned homes make up about 85% of the market and have been hampered by a flood of foreclosed properties that's expected to continue through next year.

Let's take this in pieces.

First, year over year prices are dropping big. In fact, this is the largest year over year drop on record. The good news is prices are in fact dropping. For a long time, home prices were very sticky, meaning they were not moving in reaction to a market that was clearly in need of lower prices. Now prices are moving lower. But once prices start moving lower, there is no way to stop them from dropping until they hit the market clearing price. The rate of the drop indicates we're nowhere near a bottom yet. When we start to see a slowdown in the rate of year over year change, then we'll know a bottom is approaching.

Regarding existing homes, note the following:

The median national home price declined 7.1 percent from a year ago to $212,400 and the inventory of homes for sale rose to 4.67 million which would take 11.2 months to clear at the current sales pace. That matched a record set in April.

Although prices are dropping, inventory is still climbing to record levels. That means we're nowhere near the market clearing price. Therefore, the existing home market is still headed lower for the foreseeable future.

Regarding new homes, the good news is that inventory has been dropping for over a year now. However, the months of supply at current sales rates is still near historically high levels, indicating we have a ways to go on the possible bottom there as well.

And this is before we get into the whole banking thing (which we'll look at in the next post).

Housing is Nowhere Near a Bottom

From Bloomberg:

Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.

Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

Let's think about that for a minute, shall we? 1/3 of the all the mortgages originated in the last five years in the US are larger than the value of the homes they are tied to. According to the Federal Reserve's Flow of Funds Report total mortgage debt outstanding in the first quarter of 2008 was $10.6 trillion and total mortgage debt outstanding in the 1Q 2003 was $6.222 trillion. So over the last 5 years we've see an increase of $4.3 trillion in mortgage debt. Let's assume that 25% of that is home equity, leaving us with $3.321 trillion in first lien mortgages. That means $1.086 trillion of mortgages are more expensive than the properties they are tied to. That's also roughly 10% of all mortgages in the US financial system.

Let's add to the analysis.

Home foreclosure filings rose 14 percent in the second quarter, the eighth consecutive quarterly climb, and more than doubled from the same period a year-earlier, real estate data firm RealtyTrac said on Friday.

Home foreclosure filings during the second quarter were reported on 739,714 U.S. properties, up 121 percent from a year earlier, RealtyTrac, an online market of foreclosure properties, said in a report.

The figure is a total of default notices, auction sale notices and bank repossessions between April and June.

We've seen two straight years of increases in foreclosures and a doubling (as in times two) of the foreclosure rate from last year. That's a mammoth increase. Putting that together with the number of homeowners who are underwater we get a really scary picture.

As those foreclosures increase we'll see an increase in existing homes for sale inventory (chart from Calculated Risk):



And who is going to buy these houses with Credit getting tighter -- at least according to the Federal Reserve's latest survey of lenders:

Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 75 percent of domestic respondents—up from about 60 percent in the previous survey—indicated that they had tightened their lending standards on prime mortgages.2 Of the 32 respondents that originated nontraditional residential mortgage loans, about 85 percent—up from about 75 percent in the April survey—reported having tightened their lending standards on such loans.3 Finally, 6 of the 7 respondents that originated subprime mortgage loans—a somewhat higher proportion than in the April survey—indicated that they had tightened their lending standards on those loans over the past three months.4

Let's also note the US families are massively indebted. Total household debt outstanding is now $13.9 trillion.

All of this activity -- homes underwater, increasing foreclosures, tightening credit -- is leading to an increasing rate of home price declines:

Prices of U.S. single-family homes plunged at a record pace in May from a year earlier, with each of the 20 regions monitored showing annual declines for a second month, according to the Standard & Poor's/Case Shiller home price indexes reported on Tuesday.

A lot of this is a chicken and egg situations -- are foreclosures leading to price declines, or are price declines leading to increasing foreclosures? At this point it doesn't matter. The bottom line is there are some serious problems in the housing market and there aren't any signs it is ending soon.

Today's Economic News ..... Stinks

First, home prices are still dropping:

Home prices in 20 U.S. metropolitan areas fell in April by the most on record, signaling the housing recession is far from over, a private survey showed today.

The S&P/Case-Shiller home-price index dropped 15.3 percent from a year earlier, less than forecast, after a 14.3 percent decline in March. The gauge has fallen every month since January 2007. The group began keeping year-over-year records in 2001.

Mortgage defaults and foreclosures are adding to the glut of properties on the market, while stricter loan rules are making it more difficult for prospective buyers to get financing. The prolonged real-estate slump, along with higher fuel prices and a shrinking job market, is taking a toll on consumers and the economy.

``There's such an excess of inventories that we certainly expect to see more price declines,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The economy is still weakening and housing still looks pretty weak.''

.....

All of the 20 cities in the index showed a year-over-year decrease in prices for April, led by a 27 percent drop in both Las Vegas and Miami. Charlotte, North Carolina, showed a decline for the first time.

One bright spot in the report was that more cities showed a gain in prices in April compared with the previous month. Houses in eight areas rose in value, compared with just two in March. Month-over-month gains were led by Cleveland and Dallas.

``There might be some regional pockets of improvement, but on an annual basis the overall numbers continue to decline,'' David Blitzer, chairman of the index committee at S&P, said in a statement.

This index has been dropping for a year and a half. That's called a trend. And it's not a good trend.

In addition, this isn't going to end anytime soon. Inventory is still sky high and consumer demand is still hampered by massive debt and low confidence.

Speaking of which...

Confidence among Americans dropped to the lowest level in 16 years and house prices fell the most on record, raising the risk that consumers will cut back on purchases after spending their tax rebates.

The Conference Board's confidence index fell to 50.4 in June, lower than forecast, from 57.2 in May. Home prices in 20 cities dropped 15.3 percent in April from a year earlier, according to S&P/Case-Shiller, the most since the group began collecting data.

Consumers, whose spending accounts for more than two thirds of gross domestic product, are being hurt by the housing slump, rising unemployment and higher food and fuel bills.

Short version: this is bad news all the way around. Period.

We're Nowhere Near A Bottom in Housing

From Dow Jones:

U.S. mortgage delinquencies and foreclosures continued to rise in the first quarter despite efforts to calm the nation's troubled housing market.

The Mortgage Bankers Association said Thursday 6.4% of mortgages were at least 30 days delinquent in the first quarter on a seasonally adjusted basis, up 53 basis points from the fourth quarter of 2007 and 151 basis points from the first quarter of 2007. The figure was the highest recorded in the association's survey since 1979.

The number of foreclosure starts and loans somewhere in the foreclosure process also rose in the quarter to the highest levels the association has seen since 1979.

The survey found 2.5% of loans were in foreclosure during the first quarter, an increase of 43 basis points from the fourth quarter of 2007 and 119 basis points from the first quarter last year.

This news indicates we'll see a swelling of inventory over the next 6-12 months. Inventory is already at sky high levels. That means prices are coming down.

Anatomy of Mortgage Fraud

From the WSJ:

Already burned by bad mortgages on their books, lenders now are feeling rising heat from loans they sold to investors.

Unhappy buyers of subprime mortgages, home-equity loans and other real-estate loans are trying to force banks and mortgage companies to repurchase a growing pile of troubled loans. The pressure is the result of provisions in many loan sales that require lenders to take back loans that default unusually fast or contained mistakes or fraud.

These are standard securitization provisions. What they essentially say is "if the loan I purchase goes bad really quickly, you'll buy it back." The fact that no one has thought to aggressively use these provisions before is interesting. I guess loan purchasers thought that securitization would parse the risk into so many tranches that it would go away. Oops.

Repurchase demands are coming from a wide variety of loan buyers. In a recent conference call with analysts, Fannie Mae said it is reviewing every loan that defaults -- and seeking to force lenders to buy back loans that failed to meet promised quality standards. Freddie Mac also has seen an increase in such claims, a spokeswoman says, adding that most are resolved easily.

When Freddie and Fannie start doing this, everyone will. Freddie and Fannie are responsible for the largest portion of the mortgage market, so they set the "industry standard." Again -- shouldn't they have been doing this before to save the taxpayers money?

Additional pressure is coming from bond insurers such as Ambac Financial Group Inc. and MBIA Inc., which guaranteed investment-grade securities backed by pools of home-equity loans and lines of credit. In January, Armonk, N.Y.-based MBIA began working with forensic experts to scrutinize pools it insured that contained home-equity loans and credit lines to borrowers with good credit. "There are a significant number of loans that should not have been in these pools to begin with," says Mitch Sonkin, MBIA's head of insured portfolio management.

I've been really critical of the rating agencies throughout this scandal. In fact, my disdain has only grown. It's obvious from the above statement that the ratings agencies haven't done anything remotely close to meaningful due diligence on anything they've rated during the last cycle.

And on a related noted, the ratings agencies are now looking for internal sacrificial lambs:

Moody's Corp. employees may be fired if the firm finds that errors in calculating credit ratings for certain products were covered up, people familiar with the matter said, marking a turn away from the firm's more-defensive stance for months.

Moody's had been saying it did nothing wrong in its rating business during the last few years, despite dramatically lowering many of the ratings on the securities it tracked.

The firm's heightening internal investigation, which may conclude by next month, comes as the Securities and Exchange Commission widens its own probe into rating-firm conduct. The SEC is focused chiefly on how Moody's Investors Service, McGraw-Hill Cos.' Standard & Poor's unit and Fimalac SA's Fitch Ratings rated billions of dollars in mortgage-related securities.

Expect a bunch of middle-level managers who were only following orders from senior executives to get fired for this. I also wouldn't be surprised if a few of them left some really incriminating paper trails like emails stating, "what you're asking me to do is wrong."

And here's a surprise -- the biggest problems appear to be coming from .... Countrywide Financial:

Countrywide Financial Corp., the largest mortgage lender in the U.S., said in a securities filing this month that its estimated liability for such claims climbed to $935 million as of March 31 from $365 million a year earlier. Countrywide also took a first-quarter charge of $133 million for claims that already have been paid.

Maybe that's why there's a criminal investigation of Countrywide going on:

The Federal Bureau of Investigation and the criminal division of the Internal Revenue Service have formed a task force to examine mortgages that were made with little or no proof of the earnings or assets of borrowers, a government official who had been briefed on the matter said Sunday.

.....

In March, the Justice Department and the F.B.I. began investigating whether the Countrywide Financial Corporation, the troubled mortgage giant, misrepresented its financial condition and loans in filings with the Securities and Exchange Commission.

Countrywide is also under scrutiny by California and Illinois; federal prosecutors in Sacramento; and the United States Trustee, the federal agency that monitors bankruptcy courts. The S.E.C., meanwhile, is examining stock sales by certain Countrywide executives.

When we look back on this entire event we're going to see a glaring problem: when no one is enforcing the rules they get broken.

We're Nowhere Near A Bottom in Housing

From IBD:

What should prospective real estate investors be watching to catch the inevitable upturn?

Sales and home construction have to stop falling, but that's only a first step, analysts say. The glut of unsold housing has to come down sharply before prices can bottom. And like the stock market, price is often your best indicator about real estate's direction.

Real estate slumps are usually local affairs, reflecting natural disasters or regional economic troubles. But the subprime lending crisis has resulted in the first nationwide home-price decline since the Depression by some measures.

States where sales, construction and prices rose most during the lax lending era will take longest to recover, analysts say. Many are located in the West, such as Arizona, Nevada and California.

The last time Western states suffered a real estate slump was in the late '80s and early '90s after the savings and loan crisis and Federal Reserve rate hikes choked off credit.

In the West, existing-home sales peaked in late 1988 and bottomed in December 1990, with a sluggish, uneven recovery. New housing starts peaked in January 1990 and bottomed in March 1991.

.....

Builders have slashed housing starts by 55% from their January 2006 top. Total unsold new properties have fallen. But that's been overwhelmed by weaker sales and foreclosed homes flooding the market.

Unsold existing homes soared to 11.2 months' worth at the April sales pace, NAR said. The inventory ratio for single-family homes was the highest since 1985.

"You need to get that down to a five-month range for prices to stabilize," Wheaton said.

Economics is not rocket science; it's actually a very simple, common-sense affair after you cut through all the damn noise and spin. Too much of something means the price of that something will go down. That means we've got a huge problem for home prices (graph is from Calculated Risk):



In addition, the months of available supply number is spiking as well (graph is from Calculated Risk):



And as a result of all that inventory, prices are dropping (from the Big Picture):



Also consider this news from today:

Prices of single-family homes plunged a record 14.1 percent in the first quarter from a year earlier, marking a pace five times faster than the last housing recession, according to the Standard & Poor's/Case Shiller national home price index reported on Tuesday.

The S&P/Case Shiller composite index of 20 metropolitan areas fell 2.2 percent in March from February and plummeted a record 14.4 percent from March 2007.

Economists expected prices for the 20-city index to fall 2.0 percent on month and 14.0 percent from a year earlier, according to the median forecast in a Reuters survey.

"There are very few silver linings that one can see in the data," David Blitzer, chairman of S&P's index committee, said in a statement.

And new home sales aren't doing much better:

Sales of newly constructed single-family homes rose 3.3 percent in April to a 526,000 annual rate but they were down 42 percent from a year ago, which was the largest year-over-year drop in nearly 27 years, government data on Tuesday showed.

And who is going to buy these homes?



Consumer confidence is low, as is



Consumer sentiment





And consumers have already taken on as much debt as they can handle.

So -- anyone calling a bottom in housing is completely ignoring the fundamentals.

-- Inventory is still surging and will be for the foreseeable future with foreclosures spiking

-- Consumers already have a ton of mortgage debt on their books, leading to

-- price declines.

We're Nowhere Near the Bottom In Housing, pt II

From Bloomberg:

The number of previously owned unsold homes on the market at the end of April jumped to 4.55 million, up from 4.12 million in March. The total represented 11.2 months' supply at the current sales pace, the highest on record and up from 10 months at the end of the prior month.

This is a super-glut. Combine this with the price news from earlier today and you have big problems. Still.

We're Nowhere Near the Bottom In Housing

From the WSJ:

Home prices are falling faster as the economy slows and turmoil in the mortgage markets continues.

Prices fell an average of 1.7% nationwide in the first quarter from the final three months of 2007, according to the Office of Federal Housing Enterprise Oversight. The decline was the largest in the index's 17-year history. The government index, which is seasonally adjusted and based on data for home purchases, had dropped 1.4% in the prior quarter. Compared with a year earlier, home prices dropped 3.1% in the first quarter.

.....

Other nationwide indexes show steeper declines. The S&P/Case-Shiller index, which includes a broader variety of mortgages and which showed a nationwide drop of 8.9% in the fourth quarter from a year earlier, is set to release first-quarter figures next week.

"The OFHEO report shows the weakness in the housing market, but does not, in our view, fully portray the dire state of the market," Lehman Brothers economist Michelle Meyer said in a note to clients.

Let's review the basic issues in the housing market.

1.) Inventory of existing homes is sky-high.

2.) Foreclosures are increasing, which is adding to a bloated inventory total.

3.) The US consumer's confidence is dropping, which is lowering the possibility of more home purchases.

4.) The US consumer is already in debt up to his eyeballs, meaning the possibility of him taking on more mortgage debt is pretty low.

As a result of all these factors, we get price decline headlines like the one from today. And it's not going to end anytime soon because of the 4 above mentioned data points. The best we can hope for right now is that by the end of the year we'll actually have an idea about when the market will stabilize. Maybe.

Son of We're Nowhere Near the Bottom in Housing

From the AP

Housing prices dropped in February at the fastest rate ever, a widely watched index showed on Tuesday, reflecting that the housing slump is gaining momentum and showing no signs of letting up.

The Standard & Poor's/Case-Shiller home price index of 20 cities fell by 12.7 percent in February versus last year, the largest decline since its inception in 2001. Seventeen of the 20 metro areas reported record annual declines.

Here's the short version to how I am reading the housing market right now. There is already a ton of supply. With foreclosures increasing at incredibly high rates supply will obviously increase. At the same time, US consumers are faced with record levels of household debt and payments on that debt, a tanking job market and declining income. In other words, supply and demand of the housing market is seriously out of whack which will lead to declining home prices for the foreseeable future. (here's a link with tons of charts)

As a result of all this, home prices will have to drop in a big way -- which they already are.

Here's a link to the Case Chiller Press Release.

We're Nowhere Near the Bottom In Housing

From CNBC:

U.S. home foreclosure filings jumped 23 percent in the first quarter from the prior quarter, and more than doubled from a year earlier, as more overextended borrowers failed to make timely payments, real estate data firm RealtyTrac said Tuesday.

....

"I'm more convinced that we haven't seen the peak of foreclosure activity yet, and the wave probably won't crest until late third or fourth quarter of 2008," he added.

Now consider these inventory charts from Calculated Risk and ask yourself, "is housing getting better or worse?"





Need I say anything more?

Housing Is Nowhere Near the Bottom

From Bloomberg:

A record 18.6 million U.S. homes stood empty in the first quarter as lenders took possession of a growing number of properties in foreclosure.

The figure is 5.7 percent higher than a year ago, when 17.6 million properties were vacant, the U.S. Census Bureau said in a report today. The vacancy rate, the share of homes empty and for sale, rose to 2.9 percent, the highest in a series that goes back to 1956. About 2.3 million empty homes were for sale, compared with 2.2 million a year earlier, the report said.

The worst U.S. housing slump in more than a quarter century is deepening as falling values encourage buyers to delay purchases in hopes of getting a better deal. The median U.S. home sale price may drop 5.8 percent in 2008, the most on record, followed by another 4.7 percent decline next year, Fannie Mae, the world's largest mortgage buyer, said April 7.

I wonder how the NAR is spinning this news?

All You Need to Know About New Home Sales

From the WSJ:

The bottom of the market doesn't appear in sight, given that the supply of homes for sale soared to 11 months, the highest in almost three decades. The average price and median price for a new home fell at double-digit rates from a year ago.

Short version: supply and demand are still horribly mismatched. That means prices:



Are coming down further.

Consider this quote from the same article:

While the sales data are subject to monthly volatility, "this is just gruesome and leaves no other conclusion than that the downturn in the U.S. housing market is still in full swing," ING Bank economist Dimitry Fleming wrote in a research note.

We're nowhere near the end of the mess in housing.

Case Shiller Index Drops Record Amount

From the AP

Home prices in many cities continued to plunge by record levels in January as sellers cut their asking bids and rising foreclosures took their toll, new data showed Tuesday.

While the spring selling season usually gives the market a bounce, some analysts say any notable improvement may not come until well into the summer. U.S. home prices fell 10.7 percent in January, and the Standard & Poor's/Case-Shiller home price index of 20 cities saw the steepest decline in the index's two-decade history.

Here's a chart of the price gains/losses for the index in the big cities:



Let's take a look at the chart for the US:



Notice the following:

-- During the 1990s the national price level really didn't move that significantly. Now, the stock market was our preferred bubble at the time so that might have taken some of the speculative excess out of the real estate market.

-- Notice the huge price increase during this expansion. Compare that increase to the increase during the last expansion. In comparison it looks like the latest price increase is unhealthy.

-- Notice we're just turning the corner on the downward move.

In other words, we have a long way to go.

Housing Nowhere Near a Bottom

From today's WSJ:

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.



The ability of America's lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps -- and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.



On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July.



The median price dropped 8.2% from a year earlier to $195,900, the biggest drop recorded by the Realtors in the current slump.



In some beaten-down markets, the price cuts have been stark. The Detroit Board of Realtors recently found that home sales in the city (excluding suburbs) in the first two months of this year jumped 48% from a year earlier, to 1,540. The average home price there sank 54% to about $22,000.



'Got to Move Things'



Banks and others holding foreclosed property have concluded "we've got to move things" and are finally willing to slash prices, says Thomas Lawler, a housing economist in Leesburg, Va.



The supply is piling up fast. Overall, the total number of lender-owned homes doubled last year but sales grew only 4.4%.

This is the first set of positive data we've seen. Don't expect this to be a rapidly improving situation. For the following reasons.



First, note the amount of raw inventory (graphs from Calculated Risk):







This translates into a huge months of supply:







Vacancy rates are at their highest levels since 1960.



This vacancy rate is already causing huge problems. From Reuters:

Like many cities in the United States where the home vacancy rate has scaled its highest since records began in 1956, the former textile mill city of Worcester in Massachusetts is turning to the courts to fight back.



Their target: banks who abandon properties and who leave behind a glut of empty, dilapidated houses that draw crime, cut tax revenue and depress nearby property values in a market already in a tailspin.



......



The city of 175,898 people, a munitions depot during the U.S. Revolutionary War, offers a window into how U.S. cities are grappling with a wave of foreclosures that has pushed the U.S. homeowner vacancy rate to a record 2.8 percent in the fourth quarter of 2007 -- or about 1 million homes.



Like many U.S. mayors and city officials, O'Brien blames "predatory" lending practices prevalent in the U.S. property boom for the lion's share of about 4,220 mortgages in his city that are either in, or at risk of, foreclosure.



.....



In western New York, the city of Buffalo filed a lawsuit on February 21 against 36 lenders -- including big names like JPMorgan Chase & Co Inc and Countrywide Financial Corp -- who were involved in 57 foreclosures that led to properties being abandoned and ultimately demolished by authorities.



The struggling Rust Belt city, plagued by about 10,000 vacant homes and commercial buildings, estimated the 57 foreclosures cost Buffalo $1 million in demolition work and another $1 million in nuisance costs -- from police patrols to boarding up buildings, to the social toll on communities.



.....



Further east, Syracuse, New York, began selling vacant homes last year for $1 each to non-profit groups who promise to tear them down or renovate them. Last month, Syracuse Mayor Matthew Driscoll extended the deal to private companies.

In other words, the raw amount of supply out there is huge.



Prices still have a long way to go before we're at the end of price drops.







There's an old economic maxim: prices have a way of reverting to the mean (or sometime like that). It simply means there is a historical/average/median price that we can find from simple math. Notice on the above chart we're way outside of that norm.



Finally -- who is going to buy these houses? The US consumer is already in debt up to his eyeballs:











Debt service payments are at all time highs







Household equity is at all time lows.



And high commodity prices are taking their toll as well:

By the end of 2007, 36 percent of consumers' disposable income went to food, energy and medical care, a bigger chunk of income than at any time since records were first kept in 1960, according to Merrill Lynch.

And this is before any discussion about who is going to lend the money to consumers? The financial sector is still reeling from tons of writedowns. And this is before we consider information from the latest Quarterly Banking Survey:

Housing Is Nowhere Near the Bottom

The housing correction continues unabated. And given the current evidence, there is no doubt in my mind that the correction is far from over. Consider the latest data:

The S&P/Case-Shiller national home-price index for the fourth quarter fell 8.9% from a year earlier, the largest drop in its 20 years of data. And the Office of Federal Housing Enterprise Oversight's index -- which tracks only homes purchased with mortgages guaranteed by home-loan giants Fannie Mae or Freddie Mac -- was down 0.3%, the first year-to-year decline in the measure's 16 years.

In case you missed it, let's review what we just read. The Case Shiller index had its largest drop in 20 years. And the OFHEO had its first ever year over year decline in 16 years. Those numbers should stick out like sore thumbs because they are. Here's a graph from the same article which shows the severity of the declines:



Prices aren't just correcting -- they're plummeting hard right now.

Let's take a closer look at the Case Shiller Index:



Notice the following:

-- Prices barely increased for the first half of the 1990s expansion. They did increase by 25% over the last three years of the expansion.

-- Prices continued to increase during the slow growth of the early 2000s.

-- Prices exploded higher from 2003 onward.

Notice the difference between the two expansions. The 1990s and 2000s both saw economic growth. Yet home prices really accelerated in the 2000s for a variety of reasons.

Let's ask an important demand side question: was there a big difference from a demographic perspective between the 1990s and 2000? Did the US population explode higher? Did the US accept a whole lot more immigrants? The answer to both is no.

What the chart shows is prices rose far above their historical norm. That means we have a long way to go before prices correct to their historical norm. And it's important to remember a basic economic fact at this point: prices have a strong tendency to revert to their mean/median historical price.

Here is a chart of total inventory of existing homes available for sale (thanks to Calculated Risk)



The total number of existing homes available for sale has nearly doubled since 2001. There is simply no way that US demand for housing also doubled in the last 8 years. As a result, we have a ton of inventory to work off.

And the number of months of inventory as a percentage of the current sales rate is still incredibly high:



But the final problem is who's going to buy it? Even if there was a commensurate increase in demand, the US consumer is already in debt up to his eyeballs:





Let's review the basic points above:

1.) House prices are historically out of whack in a big way. They are far too high and need to come down.

2.) There is a boatload of inventory on the market.

3.) The sales pace is slowing.

4.) The US consumer is already in debt up to his eyeballs, indicating his ability to take out more mortgage debt is severely compromised.

Put in econ terms we have

Increasing supply and

Decreasing demand

which equals

Lower prices.

How Much of A Correction Can We Expect in Home Prices?

Let me start with this: I don't believe in long-term economic predictions. The possibility of being wrong is so incredibly high that the idea is be definition self-defeating. However, here is a chart of the Case-Schiller home price index



Let's make some observations.

-- During a robust economic expansion in the 1990s home prices weren't that impacted. Of course, the US economy was busy creating another bubble at that time, so maybe the speculative money was entirely invested in stocks. However, there is no reason to think people didn't need houses at that time, or that the population stopped growing or that people didn't get better jobs and therefore wanted a newer or larger home. In other words, there were still fundamental reasons for home prices to increase, yet they didn't do so in an outrageous manner.

-- From January 2000 to January 2005, home prices doubled at the national level. Let's think about that for a minute and let it sink in. Now -- let's ask ourselves a question: was there a fundamental difference in demand that would warrant that increase in price compared to the previous expansion? Did the population growth rate increase exponentially? Were paychecks that much larger? The answer is -- no. In other words, there was no fundamental demand reason for home prices doubling. It was primarily the result of ultra-cheap money. The reason why this answer is so important is this: a fundamental change would create a cushion for prices, providing a price floor of sorts. But that really doesn't exist. To back up that assertion, consider this point: vacancy rates are now the highest since 1960. And vacancies didn't meaningfully increase until 2005 -- and they really moved higher at the end of 2006.

So -- are there strong fundamental reasons for home prices to remains at current levels? Not at all.

Now for the big question: how much of a decline can we expect? Well, let's eyeball the chart and say home prices are about 210 on the scale. Assuming a 15% correction, that would prices at 178.5 and assuming a 20% correction prices would drop to 168. Here is where those levels are approximately (remember, I'm eyeballing the chart)



Notice how we really haven't done that much meaningful damage to the price increases from the early 2000s? The point is that a large correction -- 20% or so -- wouldn't be that hard to see given there was little reason for the price increase save for record low interest rates.

Foreclosures Down Month to Month, Up Year Over Year

From the WSJ:

Foreclosure filings for November surged 68% from a year ago but dropped 10% from October, another sign that foreclosure activity overall may have peaked for the year, a foreclosure-listing service said.

RealtyTrac Inc. Chief Executive James J. Saccacio said that November's 10% drop from October was the first double-digit monthly decrease observed since April 2006.

The sequential decline "could indicate that foreclosure activity has topped out for the year, but the true test of whether this ceiling will hold will come at the beginning of next year -- when we anticipate that a seasonal surge in foreclosure filings and another possible wave of resetting mortgages could place further pressure on the housing market," Mr. Saccacio said.

No -- foreclosures aren't going to decrease. Why can I say that with near certainty? Because we have a slew of resets next year.



There is no way we're going to see a decrease in foreclosures anytime soon.

But Bonddad! The Bush plan is in effect! That will save us!

No it won't. The most liberal estimate I have seen about the number of homeowners it would help is about 400,000. However, the most conservative estimate I have seen about foreclosures next year is 1.2 million. So, assuming the best outcome of the Bush plan and the best outcome on the foreclosure front, we're still looking at 800,000 foreclosures next year.

Now, let's add that information to the existing home inventory figures.



And the months of supply:



Short version: assuming the best of all the estimates, we're still looking at a world of hurt.

Existing Home Sales Drop

From Bloomberg:

Purchases of existing homes dropped 1.2 percent to an annual rate of 4.97 million, the fewest since the National Association of Realtors began keeping the records in 1999. Orders for items made to last several years fell 0.4 percent, the Commerce Department said today in Washington.

There are only two numbers that are important in this report: inventory and months of supply.



Inventory is still sky high.



And months of inventory available is still increasing.

And this isn't including any of the projected foreclosures for next year.

Simply put, this is called a "super-glut".

Housing Is Nowhere Near the Bottom, pt. II

Just when you thought it wasn't going to get any worse:

NEW YORK (Reuters) - Prices of existing U.S. single-family homes slumped 4.5 percent in the third quarter from a year earlier, matching a record decline from the previous period as the housing downturn deepened, according to a national home price index on Tuesday.

The S&P/Case-Shiller National Home Price Index fell 1.7 percent since June, marking the largest quarterly decline in the index's 21-year history, S&P said in a statement.

The composite month-over-month index of 20 metropolitan areas fell 0.9 percent to 195.62 in September from August, bringing the measure down 4.9 percent from a year earlier.

As I pointed out two posts below, inventory is already at sky high levels, foreclosures are at highs which will add to an already sky-high inventory, we have a ton of resets to go through still:



Lending standards are tightening and consumers aren't feeling that good about things as a whole.

There is no news in here that is good. None. Zip. Nada.

Housing Is Nowhere Near the Bottom

From the WSJ:

The property value of U.S. homes will fall by $1.2 trillion, and "at least" 1.4 million homeowners will lose their properties to foreclosure in 2008, according to a study released Tuesday by the U.S. Conference of Mayors and the Council for the New American City.

The study, prepared by forecasting firm Global Insight Inc., predicts a widespread and deep economic impact from ongoing housing market problems, which many expect to stretch through next year.

.....

There have already been a record number of homeowners entering the foreclosure process this year, and many have warned the problems will continue through 2008. One major reason for this is subprime adjustable-rate mortgages, many of which began with low teaser rates but grow into much higher monthly requirements after several years. A high concentration of these loans are expected to become more expensive next year, and both the banking industry and government leaders are trying to find ways to address it.

The phrase "record number of foreclosures" should catch everyone's attention in a big way. As the housing crisis has progressed there have been a few people trying to predict a bottom along the way. Of course, the market has made fools of these people.

Inventory is the first real estate number that caught my eye and it continues to cause me great concern. Here is a chart of total inventory available for sale from the National Association of Realtors:



At the current sales pace, that's a 10.5 month supply of homes on the market. That's a glut no matter how you slice it. Also notice that over the last year we haven't seen any meaningful decrease in the inventory available for sale. That means the current sales pace is insufficient to dent this number. In other words, either a lot more buyers will have to emerge and/or sellers will have to start to really lower their prices. Considering lenders are tightening their standards, it seems far more likely that sellers will have to lower their prices.

Now we have a report that:

1.) Foreclosures are already at an all-time high, and

2.) We're going to have more foreclosures.

I've been trying to find an economic word for the amount of inventory that is higher than the word "glut" and can't think of it. I guess "super-glut" will have to do.

There is no reason to think lending standards will loosen anytime soon. Lenders are already bleeding from their lax lending policies.

That means this super-glut of inventory will be the standard for the foreseeable future. With decreased demand from tightening lending standards, the only way for the market to arrive at a market clearing price level is lower prices.