Why Housing Markets Are Set To Tank Again

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In mid-September, a CNN Money headline reassured investors: Our Long National Foreclosure Nightmare Is Over. Sounds great! Now we can finally relax and be glad that Henry Paulson, the Fed and the Big Bankers saved us from the apocalypse.

Wait a second. Not so fast. Before you breathe a sigh of relief, why don't we take another good look at the real state of housing markets now. Let's examine some important charts, graphs and tables that the media does not cover.

Inventory of Homes for Sale: What It Tells Us

In numerous articles over the last two years, I have emphasized the importance of the huge decline in the number of homes for sale. Let me explain.

Since early 2010, servicing banks around the country have been sharply cutting back on foreclosing seriously delinquent homes and placing foreclosed properties on the market. Lately, they have also reduced the number of short sales which they approve.

In nearly all major markets, this has caused a tremendous plunge in the number of homes for sale. The following table -- using statistics from the online brokerage firm, Redfin - shows just how dramatic the drop in listings has been.

Take a good look at the collapse in active listings in Los Angeles and San Francisco. With such a huge decline, it is easy to see why buyers have bid up prices in those markets which have had the largest drop in homes for sale. In numerous articles written over the past two years, I have tried to show that this does not mean those markets have returned to a healthy state. Far from it.

In the metro markets described by the media as "hot," the decline in foreclosed homes (REOs) placed on the market has been the greatest.

For example, the percentage of home sales which were REOs in Phoenix plunged from over 66% in the spring of 2009 to less than 6% in August 2013. Since foreclosed homes are normally the least expensive in any market, the median sale price had nowhere to go but up. This artificial constriction of the supply of homes for sale does not indicate that a normal market has returned.

Go back and take another look at the redfin.com table on homes for sale. You can see that the number of listings has risen rather dramatically in three of these hot markets since January - much more so than the seasonal norm.

The sharp rise in interest rates since late May has slowed sales in these metros. For the 19 major metros covered by Redfin, the number of homes whose owners have had to lower their asking price has climbed from 34,000 in February to 61,000 in August. That is 26.4% of all active listings - higher than at any time in the last 3 ½ years. That is a very ominous sign and portends a weakening of prices.

Another example of soaring listings can be observed in these figures for three states here in the northeast. You can see that the number of homes for sale is up sharply from a year ago throughout Connecticut and New Hampshire.

For nearly two years, I have been posting these statistics for states in the northeast to show the continued decline in sale price per square foot in Connecticut where I live. Over the last year, the price decline has temporarily stopped in some towns because of the drop in homes for sale. But as you can see, listings are now rising rapidly which spells trouble ahead for Connecticut home prices.

You can also see that the great exception to the increase in MLS listings is Massachusetts, especially Boston. This continued decline in homes for sale is the main reason why Massachusetts prices continue to rise.

Mainstream Media's Obsession With the Case-Shiller Index

It is very puzzling why the mainstream media is so obsessed with the importance of the Case-Shiller Index. They do not seem to care about how the index is derived.

The pundits need to understand that different home sales are weighted very differently by this index and that this distorts everything. Why should one home sale be given half the weight of another sale? A sale is a sale, isn't it? Other sales are simply excluded to "smooth out" the figures." Do you think that improves the accuracy of this index? Not at all.

For more than two years, I've been posting articles showing the decline in average price-per-square-foot for homes sold in Connecticut where I live. These are real, raw numbers showing all single-family home sales. They are not poured through the distorting lens of an index. These statistics make it clear that there has been no housing recovery whatsoever throughout Connecticut.

The Looming Shadow Inventory

At some point, the pundits will have to recognize the existence of the shadow inventory. It is very real, enormous, and still growing.

Let me give you the most important example. Through the end of the second quarter, servicing banks have sent 307,800 pre-foreclosure notices to delinquent owner-occupants in NYC since early 2010. How many of these properties were foreclosed and taken into REO by the banks in 2012? A total of 162. Check out this chart from the Furman Center at NYU if you don't believe me.

You can imagine how many delinquent owners in NYC may be sitting in their homes laughing and waiting for the banks to finally take action against them.

When the banks finally begin to foreclose on these seriously delinquent properties in earnest, or even complete a short sale, the kick-the-can-down-the-road housing recovery will come to an ugly end.

Ignore my warnings at your own peril.


Keith Jurow is a longtime housing analyst.  His new real estate newsletter - Capital Preservation Real Estate Report - launched on June 1. 

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