Australia's "Boom"
A Bloomberg headline caught my eye the other day regarding Australia. BIS Shrapnel apparently feels that "Australia’s economy will accelerate over the next two years before building 'into a boom' amid a surge in business investment."
Gross domestic product will rise 2.7 percent in the 12 months through June 2010, 3 percent in fiscal 2011 and 3.8 percent the following two years, the Sydney-based forecaster said today.
A surge in house construction and government investment in infrastructure such as schools and roads will help stoke economic growth, BIS Shrapnel predicts. Inflationary pressures, leading to higher interest rates, will increase in three to four years as a mining expansion intensifies.
I am no expert on Australia, but I am a regular reader of Steve Keen's blog, and happen to agree with his theory that Australia is in the middle of a massive credit bubble. Though Mr. Keen recently lost a bet with respect to Australia's housing market, I still believe he has the right idea longer term. Interested readers will want to check out his new site on the topic. From this site:
The first graph above shows the continuing housing bubble that I believe exists in Australia. While BIS Shrapnel suggests "A surge in house construction...will stoke economic growth," I happen to believe that Australia may run into the same problem plaguing the U.S with housing and construction right now -- Australia's bubble may even be bigger! The third graph shows Australias rising private debt to GDP, and the second graph shows where the debt is rising the quickest --mortgages.
Central Bank Signaling Weakness?
I have no idea when the housing bubble will actually burst, but all of these graphs provide strong evidence that there may be a bubble. These are not the only signs we have, however. On February 2nd, the Australian Central Bank failed to raise interest rates as was the overwhelming general consensus among economists.
“The rapid adjustment process is over and the rate hikes, when they do come, will be further apart,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “The overarching message from the Reserve Bank is that while things are better than we thought, we’re not out of the woods just yet.”
It appears that Australia's Central bank may be beginning to fear the future, and the bursting of this bubble. It may not be long before the Australian Central bank finds itself racing towards 0% interest rates as the US and other parts of the world were doing in 2008. Also, with regards to not being "out of the woods" yet, I would say this is probably very understated. Not only is Australia "not out of the woods just yet," but the worst is probably ahead of them rather than behind them. The article continues:
“Three consecutive hikes late last year coupled with out- of-cycle increases by commercial banks appeared to have stung,” said Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney. Today’s decision “reduces the serious risk of a policy blunder. A pause is welcome.”
Sorry Prasad, but a serious policy blunder has already been made. Interest rates were kept too low for too long, and a credit bubble has already been blown. It has to be unwound eventually, It's just a matter of how bad Australia's politicians are willing to make the problem before it blows up.
Politicians Haven't Helped
Australian Politicians have been extending, increasing, and extending its First time home buyer "grant" for nearly a decade. To think this hasnt been a huge factor in the housing bubble is simply ignorant.
On 1 October 2009 to the 31 December 2009, $7000 will be provided only to home owners buying new homes or building a new home on top of the regular $7000 once off payment. $3500 will be given to home owners buying established homes.
On January 2010, the scheme will default to $7000 for all first home owners.
Type Scheme Eligible Dates Benefit Established Homes First Home Owner Grant 1 July 2000 - present $7000 New Homes / Construction First Home Owner Grant 1 July 2000 - present $7000 Established Homes First Home Owner Boost 13 Oct 2008 - 30 Sept 2009 $7000 New Homes / Construction First Home Owner Boost 13 Oct 2008 - 30 Sept 2009 $14000 Established Homes First Home Owner Boost 1 Oct 2009 - 31 Dec 2010 $3500 New Homes / Construction First Home Owner Boost 1 Oct 2009 - 31 Dec 2010 $7000
We can see the politicians have been at it for a while, offering up to $14,000 dollars as recently as September 2009!
Boom or Bust?
Australia is in a bubble, and judging from what the housing bubble brought to America, it is likely to bring a period of economic hardship to Australia, and very likely a prolonged recession combined with a period of deflation. Credit is beginning to tighten in Australia, and people are burdened with too much debt that cannot be paid off.
BIS Shrapnel thinks that Australia is poised for a "boom," I think they are primed for a "bust."
Standard & Poor's on Shadow Housing Inventory; Mortgage Delinquency Rates at All Time High
Standard & Poor's released a good report yesterday on the state of the housing market and the shadow housing inventory.
The current "shadow inventory" (including all delinquent loans, not only those that are real estate owned [REO]) of troubled mortgages will likely take about 33 months?or nearly three years?to clear at the current rate of liquidations. Moreover, we believe this estimate is conservative, as we do not assume any loans that have yet to show any serious signs of distress to date will default in the future and further increase the overhang of homes. Nonetheless, we believe that in reality additional loans will default in the near future due to the weak economic environment, distressed residential home values, and the resulting contraction in the supply of mortgage finance.
We believe that the recent reversal in housing prices is the result of a temporary constriction in the supply of foreclosed homes on the market. This temporary constriction ensued because servicers have completed fewer foreclosures due to court delays, servicing backlogs, and political pressure to keep borrowers in their homes. However, there is a rapidly growing shadow inventory of properties where borrowers are delinquent but foreclosure has not been completed. Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market.
I don't think housing is turning around anytime soon, and S&P seems to agree. The article is chock-full of interesting charts and graphs, interested readers should definitely check out the entire thing.
S&P Concludes:
We believe that the recent constriction in the supply of foreclosed homes on the market is a temporary one. Loan modifications and the observed extension of time distressed loans remained as such may simply have delayed the inevitable, creating the demonstrated shadow inventory of troubled loans. Ultimately, the majority of the properties these distressed loans represent will likely have to be liquidated.
Our estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75 million individual properties. This number represents almost 50% of the existing homes available for sale as of December 2009, and moreover, only accounts for expected defaults for mortgages outstanding in the private securitization market which makes up less than a third of the total securitization market and less than 5% of the total mortgage market. While we do not expect all of these distressed properties to liquidate at the same time, the significant percentage of the current supply that these distressed loans represent does reveal the potential future increase in housing supply. An influx of liquidated properties is likely to prompt a decline in prices if unaccompanied by a comparable increase in demand (see chart 15).
I couldn't agree more that loan modifications and other measures have only "delayed the inevitable." The current inventory level of homes will take quite some time to clear, and even once it does clear, lack of demand (as well as availability!) for credit will likely lessen the demand for housing further.
Additionally, once mortgage rates do start to rise, this will slowly lessen the prices that new buyers will be able to afford, thus keeping downward pressure on house prices for some time after that. The Fed is set to exit its mortgage buying program soon, and if they exit and stay out (still not guaranteed) it will definitely cause mortgage rates to rise, probably by around 0.3-0.5% in my estimation.
Mortgage Delinquency Rates at All Time High
Transunion also has a report stating that mortgage loan delinquencies are reaching all time highs.
TransUnion's quarterly analysis of trends in the mortgage industry found that mortgage loan delinquency (the ratio of borrowers 60 or more days past due) increased for the 12th straight quarter, hitting an all-time national average high of 6.89 percent for the fourth quarter of 2009. This quarter marks the first time the mortgage delinquency rate increase did not decelerate after doing so for three consecutive periods.
This statistic, which is traditionally seen as a precursor to foreclosure, increased 10.24 percent from the previous quarter's 6.25 percent average. Year-over-year, mortgage borrower delinquency is up approximately 50 percent (from 4.58 percent).
To recap, we have a massive shadow housing inventory that won't be cleared for likely 3 years or more, we have a lessening supply of credit as well as a lowered demand for credit, we have the Fed exiting its mortgage buying program, and we have mortgage delinquencies hitting all time highs. All this data translates to an extremely prolonged rut in housing. I think the best case scenario for housing over the next 3 years or so is probably flat, with decent risk to the downside.
Everyone ready to invest in home builders?
Home Prices Climb for Third Consecutive Month
Bloomberg is reporting today that Home Prices in 20 U.S. Cities Climb for Third Consecutive Month
Oct. 27 (Bloomberg) -- Home prices in 20 U.S. cities rose in August for a third consecutive month, bolstering the case that an economic recovery is at hand.
The S&P/Case-Shiller home-price index climbed 1 percent from the prior month on a seasonally adjusted basis after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge was down 11.3 percent, less than forecast.
Rising home sales, due in part to government programs including the first-time buyer credit and efforts to lower borrowing costs, have helped stem the slump in property values that precipitated the worst recession since the 1930s. Sustained gains in household spending, the biggest part of the economy, may be harder to come by as joblessness mounts.
I believe that rising home sales are very much "due in part to government programs including the first-time buyer credit and efforts to lower borrowing costs," but I do not agree that these thintgs have "helped stem the slump in property values." I would say that they have more delayed the inevitable slump, and prolonged the misery of the economy.
But interested readers may want to ask just how big of a role the government programs such as the first-time buyer credit and other market distortions such as Fannie Mae, Freddie Mac, and Ginnie Mae have on the recent rise in house prices.
I came across this article from the Federal Reserve Bank of San Francisco titled Recent Developments in Mortgage Finance. Below is an interesting chart from the article:
This graph shows the market share of different groups of loan originations. We can see that since early 2007, the amount of Bank portfolio loan originations has been declining drastically, to a mere 2% or so of the entire loan origination market. On the other hand, we see that Ginnie Mae has had an incredible rise in loan originations, and Fannie and Freddie have also had substantial rises. In aggregate, the GSE's (Fannie, Freddie, and Ginne) now make up 95% of the U.S. new loan originations. I would argue that the rise in house prices recently has been due to government intervention and policies more than just "in part," in fact it is likely that it is the vast majority of the reason. John Krainer of the San Francisco Fed, and author of the article, seems to agree:
The most noticeable feature of Figure 3 is the abrupt change in financing patterns beginning in the middle of 2007. This period, of course, marks the onset of the financial crisis and the contraction of nonconforming loan originations. Figure 3 shows dramatic declines during this time in both non-agency securitization and originations of loans retained in the lending institution's portfolio. In the present day, when Ginnie Mae's activities are included, the three GSEs are providing unprecedented support to the housing market—owning or guaranteeing almost 95% of the new residential mortgage lending.
....
With the vast majority of current mortgage lending now intermediated in some form by the GSEs, it will be difficult for the housing market to return to normal.
(Emphasis added)
Continuing with the Bloomberg article mentioned first:
“Home prices are coming around,” John Herrmann, president of Herrmann Forecasting in Summit, New Jersey, said before the report. “Demand is picking up. Step by step, the housing recovery will contribute to growth.”
In light of what we have seen above, does it really look like home prices are coming around? Is demand for housing picking up amidst a soaring savings rate and a sinking willingness to take on debt? How many of the millions of unemployed will be looking to buy houses any time soon?
Shadow Housing Inventory
Even with all of the evidence above that shows good evidence for further declines in housing, we have still ignored the elusive shadow housing inventory. For information on this, readers may want to tune into Doctor Housing Bubble, a very interesting blog with lots of good information. He mostly follows California, as that is where he is, but I think a lot of his ideas and conclusions are applicable, and true, across the country. Let's see how he defines shadow inventory:
What is shadow inventory? First, shadow inventory is housing units that are not making it onto the public market for one reason or another. There is speculation surrounding why this is happening. Lenders are overwhelmed and simply do not have the human capital to handle the glut so goes one theory. Others speculate that lenders are simply too incompetent to have a system in place to handle the mess they created.
CalculatedRisk points out several categories of shadow inventory:
There are several categories of shadow inventory:
- REOs. There are bank owned properties that have not been put on the market yet. Several sources have told me the number is growing - no one knows why except possibly for accounting reasons (the banks might have to take an addition write down when they sell the property).
- Foreclosures in process. The delinquency rate has continued to rise, and this will probably lead to many more foreclosures later this year. The number of foreclosures depends somewhat on the success of the modification programs. Last year many delinquent homeowners listed their homes as "short sales" - so those homes were not shadow inventory, however fewer delinquent homeowners are listing their homes now as they try to work with their lenders on a modification. Some percentage of these homes are shadow inventory.
- New high rise condos. These properties are not included in the new home inventory report from the Census Bureau, and do not show up anywhere unless they are listed.
- Homeowners waiting for a better market. This was the group mentioned in the Reuters story (the article also mentioned foreclosures). These are homeowners waiting for better market conditions to sell.
This should be very interesting to anyone interested in the housing market. Many banks are holding houses that have been foreclosed on off of the market for numerous reasons. Many individuals are also waiting for a better market to sell their homes -- a market that may not come for quite some time. As Doctor Housing Bubble shows us below, many banks are waiting up to 6 months befare sending a notice of default on non-paying borrowers:
Timothy Ward who is the deputy director of the Office of Thrift and Supervision even acknowledged the shady practices currently going on at banks:
“(OTS Letter) The following practices are
considered weak and do not appear to be in accordance with GAAP and/or supervisory guidance.1) Institutions charge-off losses only at foreclosure or when deemed uncollectible. A sound practice is to establish charge-off policies in accordance with the Uniform Retail Credit Classification and Account Management Policy (CEO Memo #128, July 27, 2000). Institutions should assess the current value of the collateral and selling costs when a loan is no more than 180 days past due. Any loan balance in excess of that assessment should be classified Loss.”
180 days past due? You mean 6 months? Well we just found out the foreclosure process is taking 18 months to 2 years (assuming banks even start the process which we now know in many cases they are not). What we need is a heavy crack down but with suspension to mark to market, banks are playing fast and loose with their data.
So banks are allowing borrowers to stop paying their mortgages for potentially up to 6 months before sending a notice of default. This means the actual foreclosure process could take 18 months to 2 years. With all this inventory building up, and default rates still rising, how long will it take to sell all of these homes?
Let us look at another prime location to see some more shadow inventory if you still have some doubts. Many are itching to buy in Culver City so we’ll use that as an example:
Culver City MLS listings: 101
2 listed as a foreclosure and 12 listed as short sales
Now let us look at properties in distress:
How many properties are we looking at above?
170 properties. Keep in mind that only 14 of these are on the MLS. Take out the 2 foreclosed homes and 11 short sales and you have 157 properties not viewable by the public. Given there are only 101 properties on the MLS, there are more properties in the shadows than in the public view. 22 homes sold in Culver City last month. This is the difference between 4.5 months of inventory (low) and 12 months of inventory (high). Big difference and the shadow inventory does exist. I know it was painful to hear as a child that there was no Santa Clause but you can feel comforted that shadow inventory is the real deal.
Here Doctor Housing Bubble is looking at one small area in California, but the numbers are still telling. There are more houses in the shadow inventory than there are actually being sold. The fact that there seems to already be an extra 4.5-12 months of shadow inventory is astonishing.
As defaults and foreclosures continue, these numbers will continually be extended, and the shadow inventory will probably grow. Since the foreclosure process can be seen taking 18 months to 2 years, and defaults are still occuring, I think it is not unreasonable to expect a severely depressed housing market for years to come. And this is considering that no new houses are built! Does anyone think the homebuilders are going to close up shop anytime soon? Maybe they should, but I doubt they will.
In the coming years it seems there will be no shortage of houses to be thrown onto the market, and this is not good for prices.
Where to from here?
So the question that really needs to be asked is where to from here? Can house prices continue to rise with unemployment still increasing by hundreds of thousands per month? How much more of the loan origination market is there for the government to take over? Will this market for loans be expanding or shrinking in the face of a rising savings rate and millions of consumers without jobs? Does the vast decline in loan originations from Bank portfolios tell us something about the inherent risks of lending in the current environment? I think the answer to this last question is obviously a yes. Risk of default is high, and, in fact, defaults are still rising, if not soaring. Anyone should be able to reason that this is bad for house prices in aggregate. How much longer can the government and the FED continue to print money and prop up the illusion that the markets are returning to normal? How long will banks be allowed to suspend mark to market accounting and hold houses on their books while keeping them off of the market?
Time will tell, but as of right now it seems clear that the housing bottom is not in.