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WHAT'S TO BE DONE about America's housing rot? The problem has defied solution, be it in record-low mortgage rates, government tax schemes or slashed pricing, in part because it keeps growing.
New housing starts already have been slashed to close to the slowest pace on record, an 11% drop in October to an annual rate of just over a half-million units. Yet, the inventory of available housing units continues to mount.
The number of homes on the market is readily apparent from all the brokers' signs on your neighbors' lawns. But that doesn't tell the whole story.
The so-called shadow inventory of residential properties on the market jumped 10% in August, the most recent month for which data are available, to 2.1 million units, CoreLogic reported Monday. That's roughly equal to the number of dreadful McMansions and condos with rotten Chinese drywall that builders were churning out annually at the peak of the boom. It's also equal to about eight months' of supply at the current pace of total sales.
CoreLogic, a provider of consumer and financial data and services, defines the shadow inventory as properties that are seriously delinquent (90 days or more), in foreclosure, and real estate owned by lenders that are not being offered through multiple-listing services. The latest month's data represented an increase from 1.9 million units a year earlier, equal to five months' supply.
The visible supply of properties listed was flat, at 4.2 million units, in August but because the slower pace of sales, this represented 15 months' supply, up from 11 months' a year earlier. All told, the visible and shadow supply totaled 6.3 million units, or 23 months' supply at the current sales pace, up from 6.1 million a year earlier, or 17 months' supply back then. In other words, we're falling farther behind.
There is little reason to expect this excess supply to be cleared away any time soon. Steve Blitz, senior economist at ITG Investment Research, thinks existing-home sales ran at a 4.35 million annual rate in October (the data likely will have been reported by the time you read this), less than the 4.50 million consensus estimate. He looks for new-home sales bottoming at a 290,000 annual pace, versus a consensus forecast of 310,000.
Part of the problem in the housing market was the irrational exuberance of the youngest homebuyers, Blitz finds. "Demand in the past decade was fueled by too many who were too young to buy," he writes, with the homeownership rate among 25-29-year olds jumping to over 40% at the peak in 2005 from 34% in the early 1990s.
Not until 2012 will the 25-34-year-old cohort -- which is when people settle down, start families and buy a house -- be big enough to start absorbing that supply. Of course, their empty-nester Boomer parents will want to dump their houses to cash out, in part to augment their diminished retirement accounts.
Yet, this likely dreary state of affairs -- with the large visible and shadow supplies hanging over the property market, depressing values and swelling the foreclosure rolls -- suits one sector quite nicely, mortgage servicers.
According to an article in the American Banker ("Servicers' Fees Worsen Loan Losses," Nov. 19), the fees that loan servicers collect mount up during the time from the delinquency starts until the house is sold. Defaulted borrowers squat in their houses an average of 18 months before foreclosure, after which they join the army of the unsold inventories.
"Servicers generate significant servicing and late fees throughout the delinquency and foreclosure process," as Chris Katopis, executive director of the Association of Mortgage Investors, a trade group representing institutional investors, was quoted in the article. Indeed, Federal Reserve Gov. Sarah Raskin said in a speech "a foreclosure almost always costs the investor money, but may actually earn money for the servicer in the form of fees."
And, of course, the robo-signing scandal of foreclosures in which due process was flouted is further clogging the pipeline and slowing the process. There don't appear to be any shortcuts in clearing away the excess supply of houses.
After every credit bubble, there is an inevitable bust in the malinvestments financed by the bubble. The more quickly these assets can be liquidated and bought at prices reflecting their actual utility, the more quickly the new cycle can begin.
Instead, the visible and shadow inventories hang over the market, discouraging buyers who see this supply continuing to depress prices into the future. And so, the backlog of sellers grows, with only the servicers profiting as the process drags on.
Comments? E-mail: randall.forsyth@barrons.com
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