Why the Housing Crash is Far From Over

The Status of the Ongoing Housing Market Crash in Ten Revealing Graphics

Written by Keith Jurow, Minyanville Housing Market Report

Introduction

Almost daily, the pundits are smugly proclaiming that the worst is over and housing markets around the country are bottoming.  I am really the only housing market analyst in the country who continues to assert emphatically that this is pure rubbish.

What follows are ten very important charts, graphs and tables which show why the housing collapse which began in mid-2006 is far from over.  The explanation which follows each graphic explains its significance so you can begin to see the big picture.  I suggest that you review these graphics carefully and prepare to take action to protect your client’s assets as well as your own.

Speculative Madness During the Bubble Years

The housing bubble was caused by an incredible speculative mania during 2004-2006.  This chart clearly shows the extent of speculative buying in three of the craziest markets in the country.  This speculative madness was facilitated by a total collapse in traditional underwriting standards.

Refinancing During the Bubble Years of 2004-2006

As I explained in my latest BUSINESS INSIDER article, nearly 27 million mortgages were refinanced during these three insane years.  Millions of these properties were refinanced more than once, especially in California.  Many of the loans were “cash-out refis” where the owner pulled cash out of the house’s growing equity.  Because of this, nearly all properties with either first or second liens refinanced during 2004-2006 are now underwater.  The total amount of mortgage debt on the property exceeds the value of the property.  This does not include the millions of mortgages that were refinanced in 2007 – 2009.  A growing number of these mortgages are becoming delinquent.  Sooner or later, the banks will have to move against these delinquent owners.  This spells real trouble for all major metros.

Home Equity Line of Credit (HELOC) Disaster

During those three crazy bubble years — 2004-2006 — millions of homeowners took out these second mortgages to tap the equity in their home.  Some refinanced them one or more times to pull still more cash out of their property.  In California, it was not uncommon for banks to provide HELOCs of $200,000 and up.  This graph from Equifax shows that while the number of outstanding HELOCs has declined, there are still more than 11 million of them.  It is safe to estimate that at least 95% of properties with HELOCs are now underwater.  Growing numbers of these underwater homeowners are walking away from their mortgages.  The banks cannot indefinitely put off taking some kind of action against them.  This will also put tremendous downward pressure on home prices.

15 Worst Major Metro Housing Markets – Serious Delinquency Percentage (through March 2012)

This table shows the extent of the shadow inventory in the worst 15 major metros.  It includes both first liens in default and those delinquent more than 90 days but not yet in formal default.  For the full picture, you need to add roughly an additional 5% for those mortgages delinquent less than 90 days.  There is good historical data which shows that — except for modifications — very few of these seriously delinquent loans will become current again.  That spells major trouble down the road for all of these metros.

90-Day Pre-foreclosure Notices Filed with NYS Dept. of Financial Services  (February 13, 2010 – June 30, 2012)

This shocking table shows the number of seriously delinquent owner-occupied properties in all of NY City and Long Island.  These are confirmed numbers from the NYS Division of Banking.  They reveal that roughly 24% of all first liens in New York City and nearly 30% of those in Nassau and Suffolk Counties on Long Island are seriously delinquent.  Exceptionally few have been foreclosed.  Keep in mind that these figures do not include investor-owned properties.  When the banks finally begin to take action against the owners (in the not-too-distant future), prices will really plunge.

California – The Current Option ARM Delinquency Rate

These were the most dangerous of all the nonprime mortgages issued during the bubble years.  They enabled those living in bubble areas to afford the soaring home prices.  More than 40% of all these mortgages were originated in California.  This map shows the high very delinquency rate in nearly all California counties.  The delinquency rates would be much higher if the banks had not put nearly 30% into mortgage modifications.  Together with interest only mortgages, they became known as Alt A loans.  There are still nearly $300 billion of these mortgages outstanding.  When the banks finally act on these delinquent loans — either foreclosing them or allowing a short sale — this is very bad news for the California housing market.

Re-Default Rate for Modified Mortgages

Nearly 17 million mortgage modifications and other so-called workout plans have been put in place since the end of 2007.  Because they become “current” loans and are no longer considered delinquent, this has caused the delinquency rate to be much lower than what they would have been.  This chart shows how more than half of all modified loans in non-Agency mortgage-backed securities (MBS) have re-defaulted.  The banks will have to either foreclose on them or put them up for a short sale.

Growth of All-Cash Home Purchasing

This graph from Morgan Stanley shows all-cash purchases in 10 major metros as a percentage of the three main types of sales – REOs, short sales, and non-distressed sales.  The percentage was fairly flat until the collapse of the housing bubble in 2007.  Then the percentage of purchases that were all-cash sales began to rise sharply.  You can see that the greatest percentage increase in all-cash transactions was for REO sales.  But the percentage of cash buying for non-distressed sales rose sharply also.  Declining home prices have decimated the trade-up market and buying with a mortgage as well.  This trend continues and the trade-up market will not return.

Phoenix – Percentage of Home Sales That Are REOs

Pundits point to Phoenix to support their case that the housing market has bottomed.  This chart shows the plunge in the percentage of homes sold in the Phoenix metro since the spring of 2009 which were repossessed homes.  Early in 2009, in the midst of the credit crisis, 2/3 of all properties sold there were repossessed homes.  Then the banks sharply curtailed their sale of REOs.  Yet even a year ago, nearly 40% of all homes sold were foreclosures.  Since then, banks have slowed the number of REOs on the active MLS to a mere trickle.  This has artificially pushed up the median price and fooled analysts into believing that the worst is over.  It’s not.

Continued Decline of Home Prices Throughout New England

This table is very important.  It shows the year-over-year decline in average price-per-square-foot for single-family homes sold in four New England states.  This is the best way to compare home prices over time.  These are actual, raw figures, not an index like Case-Shiller.  Prices are still dropping in just about every town/city in Connecticut.  This is the real housing market.  The pundits can’t spin these figures.

In future writings, I will show how this is occurring in other major metros around the country.

© 2012 Keith Jurow

Related Articles

• All Articles on Housing

• All Analysis posts by Keith Jurow

• All Investing posts by Keith Jurow

• All Opinion posts by Keith Jurow

About the Author

Keith Jurow is one of the leading experts on the major metro real estate markets in the U.S. For much more from Keith, see his Housing Market Report. Keith provides actionable data, charts, in-depth analysis and specific advice to help investors make better property decisions. Learn more.