Housing Doom

If there’s a technical term for what we’re presently seeing in this story arc it’s The Fog of Battle.[1] One thing is becoming clearer, though. Brad has found [2] that foreign central banks are increasingly at the short end of treasuries. That means if the yellow line ever starts to reverse, they’re mostly poised to get out of Dodge quite rapidly. This week’s Reuters report [3] waxed strangely poetic over the fact that foreign central banks are still buying Treasury Debt at all. Never mind that this week’s figure was down by nearly 2/3rds from last week’s. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[4] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[5]

Central banks still did manage to buy a half-way respectable $7.940 billion in treasuries, but dumped a modest $3.504 billion in agencies. In the week, they were well below the billion-a-day+ uptake needed to support the US stimulus. Perhaps just a "breather" from the last couple of huge weekly buys.

The red line is getting silly. The net move so far this year for cenbank holdings of Agency Debt is the size of a typical Yonkers NY strip mall. Agencies are down a microscopic $8 million since Dec 31st. If somebody’s been contracted to offset the actual foreign selling of agencies, they’d better put some variance into their counter-buys. Five months of perfectly flat results aren’t going to fool anyone.

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Americans may not have equity any more, but they’ve still got plenty of mortgage debt:

Even though the amount of home mortgage debt outstanding declined in 2008 for the first time since the Federal Reserve started keeping track in 1945, mortgage debt levels remain distressingly high.

Home mortgage debt outstanding was 73% of gross domestic product last year, according to government data. That’s the third-highest reading on record, after the 75%-plus bubble years of 2006 and 2007.

Getting that ratio down to a more manageable number will mean more lean years ahead, as Americans further cut spending to rebuild their savings and banks struggle to boost their capital amid heavy loan losses.

How long this process might take is a key question for those trying to gauge the prospects for an economic recovery.

To get the mortgage debt-to-GDP ratio down to a more normal level such as the 46% average of the 1990s, Americans would have to cut their mortgage debt to $6.6 trillion from $10.5 trillion at the end of 2008. The last time the national mortgage debt count was below $7 trillion was 2003, according to Federal Reserve data.

We might call this mortgage overhang the $4 trillion elephant in the room for policymakers, who have spent the past year injecting liquidity into the economy - a course of action that will do little to solve the problem of too much debt.

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Here’s another lender that is looking at some big dollar defaults- the State of Arizona. [Thanks M!]

In 2005, the state of Arizona sold a land parcel for it’s highest price ever- $135 million.  Two years later 269 acres sold for $149.5 million- but it’s been downhill since then:

[B]oth of those record sales, along with roughly 20 others, have either defaulted or are teetering on the brink of collapse, propped up by multiple payment extensions granted by the land department to the developers who agreed to pay top dollar at public auctions over the last six years.

Almost $970 million worth of sales from the land department made since 2003 have been canceled or had at least one extension, according to an analysis of agency records by the Tribune. Some have already failed. Others have had default notices issued. Many remain viable only because the land department has agreed to delay the deadlines on principal and interest payments on sales it financed.

The land department has issued notices of default or canceled the deals on properties that sold for a total of about $554 million, according to an analysis of agency records.

The properties that have either failed or are in jeopardy represent more than half of the land sales made by the state in the last six years when figured on the basis of price.

The state of Arizona, like so many others, got greedy during the boom:

The land department went on an aggressive sales binge since 2003, during a time when Arizona ranked among the fastest growing states in the country. In the last six years, almost $1.84 billion in state trust land has been auctioned off to the highest bidder. In the prior 90 years since statehood, about $1 billion of state land had been sold.

And the result of the state’s greed?

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You really had to be in Phoenix in 2005 to understand how out of control the housing market was.  Homes were flipping several times in a month, open houses were mobbed, agents would go door to door asking people if they were even thinking about selling.  Prices skyrocketed by the week.

Phoenix is now paying the price for its "irrational exhuberance".  Home values have been plummeting, foreclosures have been escalating, and tumbleweeds now fill many of the subdivisions instead of houses.  After seeing how many people were financially devastated by the mania, people are bound to be more cautious today, right? Wrong. The frenzy continues: [Hat tip to John and L!]

The low end of the real estate market here — and in some equally hard-hit places like inland California and coastal Florida — is becoming as wild as anything during the boom.

One real estate agent was showing a foreclosed house to a prospective client when a passer-by saw the open door, came in and snapped up the property. Another agent says she was having the lock changed on a bank-owned home when a man happened by, found out from the locksmith that it was available, and immediately bought it. Bidding wars are routine.

Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.

Once again, just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses.

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Twist is traveling, but just before the taxi came she passed along this Freedom’s Phoenix find.

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Here’s the Reader’s Digest version …

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We posted a video last month where a lender bulldozed some homes it had taken back from a homebuilder.  Now we’ve got a homebuilder doing it: [Hat tip M.R.!]

KB Home has torn down its three model homes at its abandoned Saguaro Springs project in Marana. Liability concerns led to the demolition last week, a company spokesman said. Back in 2005, plans for Saguaro Springs called for 2,400 homes near Rattlesnake Pass just west of the Tucson Mountains.

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It’s Friday, and foreclosures are hitting the New York City area, just like everywhere else:

[T]he foreclosure storm swept through the New York area at an explosive speed in just two years, wrecking billions in housing wealth as per a NY Times study of foreclosures filed since 2005 as well as federal mortgage data. It seems we put one black family in the White House and thousands more into Nowhereville. This affects white families as well, even in hoi polloi estates on the Connecticut Gold Coast and suburban tracts of Long Island. Here 6 percent of all mortgage payments languish at least 90 days late, the point foreclosure mayhem begins.

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If this were a fireworks display, I’d sure be suspecting we’re near the climax. This week’s Reuters report [1] delivered a second consecutive Top Ten weekly rise in foreign central bank Treasury Debt holdings. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[2] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[3]

Central banks bought a significant $21.581 billion dollars worth of Treasury Debt which, combined with last week’s huge move, puts the consecutive two-week total over $50 billion dollars, an unprecedented result. However, Agency Debt holdings increased by a meager $0.493 billion.

The graph of treasuries continues to streak upward, with the red agencies line starting to struggle up marginally.

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Yesterday Obama announced yet another mortgage rescue plan, in his words it expands on the success of the Making Home Affordable Program  first announced in February. [There's no where to go but up, I guess.] He makes this claim about the program: [Thanks M.R.!]

In brief, here’s what the program will do-

First, the plan is to bring the payment down to where it is 31% of a borrower’s income by lowering the interest to as low as 2%.  If that will not bring the payment to below 31%, the servicer will:

• First try to extend your payment term. At the servicer’s option your payments could be extended out to 40 years.
  
• If that is still not sufficient your servicer may defer repayment on a portion of the amount you owe until a later time. This is called a principal forbearance.
  
• A portion of the debt could be also be forgiven. This is optional on the part of the investor. There is no requirement for principal forgiveness.

Here’s what the president says the program will achieve:

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I thought I’d try and trample another supposed green shoot- moderating price drops.  From Monday’s Arizona Republic: [Thanks to everyone who forwarded this to me!]

A new Arizona State University study shows home prices in the Phoenix area have dropped by a record 37 percent since February 2008, and they’re expected to drop even further.

But ASU professor of real estate Karl Guntermann said that’s good news for those looking to sell their homes, too. Although prices are dropping, he said the latest figures show they’re falling at a slower rate.

Guntermann estimates that homes in the Phoenix area sold for a median price of $117,500 in April, down from a $119,000 March estimate, $121,000 in February and $130,000 in January. Not long ago, prices were dropping by $10,000 to $12,000 a month, he said.

As we’ve often discussed here- real estate is seasonal.  Not only are sales seasonal, but price movements as well. [See the discussion here.]

Here’s the graph of the average MOM change of Case-Shiller’s 10 city data:

It seems likely to me that if average appreciation is greater during a boom time that price decreases would probably moderate during the summer months of a bust. Dr. Jay Butler of ASU Realty Studies stated in his April report:

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