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?