(Dis)-Stressed Out

June 2nd, 2011 at 10:15 pm

The housing market is a mess.  There’s still much too much inventory, too many homeowners are underwater, prices have yet to hit bottom, and, like the first picture below shows, while foreclosures and delinquencies appear to have peaked, they’re still way high.

I’d also say this is the most important factor holding back economic growth.  Housing, and furnishing new homes, is an important way that low interest rates give the economy some real lift coming out of recessions.  But with this messy residue from the bursting housing bubble gumming up the works, that channel’s been effectively shut down.

But here’s some, well, if not “good” news, then at least another way to look at the bad news.  CoreLogic  tracks home prices, and usefully, does so looking at both overall and non-distressed sales.  Distressed sales are bank-owned properties and homes heading toward foreclosure; they’ve run as high as 50% of total sales over the past year but they’re coming down, maybe to around a third next year, according to economist Mark Zandi.

The table shows the change in prices over the past year in a number of our largest urban areas.   In every case, the price changes excluding distressed properties are less negative—and a bunch are positive—compared to the overall changes, which include the distressed sales.


This is what you’d expect.  There’s often more pressure to sell foreclosed properties; banks don’t want them on their books, and as you can see, they’re dragging down prices across the nation.

Here’s where the first chart above is again important.  The overall price change is a weighted average of the price change in the share of distressed homes and the price change in non-distressed homes.  If the share of distressed homes has peaked and is truly coming down, its weight in that price calculation will diminish and since they’ll be a smaller weight on the bigger negative, they’ll be less downward pressure on overall home prices.

Given the levels of distress in the first chart, we’re far from out the housing woods, but the combination of the apparent peak in foreclosures/delinquencies in tandem with the better price performance of non-distressed sales suggests a pinprick of light at the end of what’s been a terribly deep and dark tunnel.

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10 comments in reply to "(Dis)-Stressed Out"

  1. readerOfTeaLeaves says:

    Well, the reason there is a backlog of housing stock is because there was so much fraud and deception – not only by homeowners, but by Ameriquest, the big banks, Wall Street, and parties connected to mortgage processing. (Michael Hudson’s “The Monsters” about predatory lenders is must-read, in my view.)

    Am I supposed to be shocked (shocked!) that an economy based on lies, deceit, fraud, and service fees went off the rails?

    I respect the housing sector, but it was driving far too much of the economy: the FIRE sector was completely out of balance. And it was based on service jobs, in which far too many people were paid ‘per transaction’. That led to incentives for rampant mortgage fraud. That foundation of mortgage fraud then served as the framework for an even more elaborate layer of insurance fraud, in the form of CDO-CDS gambling.

    It was a fantasy economy, presided over by a cheerleader who was appointed POTUS by a one-vote SCOTUS margin. Then he told the bankster fox to guard the securities henhouse.

    So now we have an unfortunate situation, but what on earth did people expect? And at this point, is the economy supposed to absorb robosigning, CDS manipulation, fraudulent mortgage documents being put before judges, and other forms of fraud?
    Can the economy indefinitely absorb criminal conduct? I do not believe that is possible, nor pragmatic.

    I view economics as a **social** activity, and I view humans as critters who value fairness and reciprocity. It seems ludicrous to stipulate that the economy will recover (or that the housing markets will recover) while retaining layers of unfairness, deceit, theft, cheating, and lies hidden within the system. I simply don’t believe that social environments ‘recover’ until they work the rot out. They either turn into failed states and Mafia-controlled thugships, OR ELSE they find the guts to eradicate the rot, simplify their functions, and build new structures better able to ensure a modicum of social justice and reciprocity.

    Perhaps my view is too grounded in biology, but to fret about the housing market languishing, while failing to mention the layers of corruption, theft, greed, and swindling kind of takes my breath away.

    To me that is like positing that it’s too bad the patient has cancer, but we do hope that it will recover after a nice glass of orange juice and some buttered toast.
    Doesn’t happen.

    The causes of the economic crisis are rooted in fraud (see also: ‘control fraud’), as well as confusion and illusions.
    — Confusions: the domain of the estimable Elizabeth Warren.
    — Illusions: for the shrinks to solve.
    — Fraud: requires DoJ and state AG and FBI focus to address.

    Once the fraud is addressed, I see huge opportunities.

    I’m not convinced the tunnel is so very dark and horrible.
    This is a phenomenal opportunity to align sustainable, energy-sensible standards and better transportation criteria with mortgage and housing policies.

    So let’s pick up the pieces and try to get it right.
    And I honestly do mean every single word of this comment.
    The glass is at least half-full, and if we look at this mess from the right angle, a lot of good things could emerge.

    • WASanford says:

      TeaReader, I have to agree with your comment. I’ve been asking “Where are the perp-walks?” for some time now. If we, as a society accept the dishonesty that brought our economy down, then we have effectively created a new(?)norm for private sector conduct. That norm will prove to be damaging to the welfare of us all and should simply not be tolerated.

      Please, show us some perp-walks and punish the people who did this to us! They will not be difficult to find inasmuch as they are constantly bragging about their accomplishments(?)

    • Main Street Muse says:

      Reader of Tea Leaves hits it out of the park. Kudos!

      Today we have a record number of foreclosures; we have too many families dealing with “housing lock” – they owe more than their house is worth. For too many, the American dream of home ownership has become a nightmare.

      We seem to have forgotten that people – i.e. bankers – made large sums of money granting people mortgages they could never afford. Henry Paulson called it “lax lending standards” back in the early days of the crash. I call it fraud.

      But apparently such fraudulent lending practices are legal, as no one is in jail – or even charged with any wrongdoing – three years after we realized what a house of cards our financial sector had become.

      Who got bailed out? Certainly not the homeowners. The bankers – the ones who claim they’re so bright that they need bonuses no matter what their performance – got the bailout AND they got their bonuses. And the federal government got to pick up the astronomical losses of our “free market” financial sector, while guaranteeing that the profit would remain with the banks.

      And please don’t talk to me about the “profitablity” of TARP. We’ve seen small banks close by the hundreds and large banks consolidate so that they’re even bigger than the TBTF of 2008; we’ve seen unemployment at its highest since the Great Depression. The price we’ve paid for TARP is far higher than any “profits” made via the loans to the banks.

      We have a financial sector so flimsy that apparently one troubled bank will bring down the entire system (a fact we’ve known but not addressed since Continental Bank failed in the mid-1980s and was bailed out by Reagan’s administration – viva la free market!!) Until this is addressed, we’ll remain in that long, dark tunnel for a long time to come.

  2. Patrick says:

    The continuing collapse of the housing bubble is slowing economic growth, but hopefully there is light at the end of the tunnel as the non-distressed data seems to show. The question is, are there any ways to stabilize the housing market without moral hazard? Dean Baker has suggested a plan that seems to fit that bill. The plan that Baker proposes would give homeowners the “right to rental”. In other words, borrowers who took on loans that they could not afford (whether or not they were tricked into thinking they could afford them)would go through the foreclosure process and lose their home to the bank. This would punish the homeowner for the bad financial decision that they made. After they have lost their house, the (former) homeowner would be given the right to rent the house they used to own at the market rent. This could help stabilize the housing market by preventing a flood of foreclosed homes from hitting the market, and at the same time would not give a perceived free ride to those whom the tea party would call “deadbeat homeowners.” There is no doubt that this proposal would face harsh opposition from banks, who would definitely not want to become landlords, but perhaps there could be some carrots and sticks that could get them to warm up to this proposal.

  3. Virgil Bierschwale says:

    speaking as a realtor and a software person, as long as this continues to get worse, the housing market will get worse


    I know many do not yet realize this is the root of our problems, but trust me, as someone that has lived this nightmare, it is…

    Keep America At Work

  4. foosion says:

    It’s unusual to say the price of something people want to buy is too low. We usually like low prices. At lower prices, more people should be able to buy houses, stimulating demand. Given slack in the construction industry, it shouldn’t take much demand to stimulate more supply.

    Why wouldn’t this normal pattern apply?

    One major problem is too much mortgage debt compared to market value. Much of this is caused by origination fraud and by problems with mortgage servicers, whose incentives are contrary to those of both homeowners and mortgage holders.

    A second is that people consider equity in their homes as part of their wealth and typically spend a few percent of this wealth. This is balanced by those who could buy cheaper, freeing up more of their income for consumption, but reinforced because there are more owners than new buyers at any one time.

    Many view housing as an investment good (or mixed investment and consumption) rather than a consumption good. This has been a mistake for much of history. Other than the recent bubble, prices have largely tracked inflation rather than providing a large return. Apparent returns have been increased by money illusion (not noticing that higher prices are due to inflation) and leverage.

    In any event, the common statement that housing prices are too low seems overly simplistic.

    • WASanford says:

      I’m sorry, but where have you been during the last decade? Anyone who’s selling his/her home in this market will sell at a loss. Your description of debt to market value is usually summed up as “being an upside down mortgage.” It has also been described as having a “deleveraged mortgage.” Under that circumstance, equity has simply evaporated and there is nothing that can be done about it. As housing values continue to fall, anyone who buys a house is taking a very real risk of losing his/her investment.

      I’ve been renting since the fall of 2000. The rapid rise of housing prices (I refuse to refer to that as “value.”) was all the signal I needed to make my decision. As it was, I made a profit of 50% on the sale of my house.

      I think prices will continue to fall for at least a few more years and I don’t expect them to rebound but to instead stabilize when they finally reach the bottom.

      There’s just too much against housing right now. The inventory is just huge and will continue to grow. No one seems to be addressing the problem and there may be no way to solve it. The high unemployment of American workers doesn’t help. Our government standoff has left the citizens of this country hugely disadvantaged and that will continue until we all come to our senses and throw the do-nothings out of office.

  5. comma1 says:

    The numbers on non-distressed sales aren’t necessarily a good thing. Homeowners who are selling their homes are overpricing them, banks aren’t (or are at least not as much). What you have here is two markets, not one.

    If Dean Baker is correct that Real Estate should be returning to its 100 year tend (and I have my doubts or doubts that it needs to happen today), and thus, needs to fall another 10% to be inline with that trend — then there is a disconnect with these non-distressed prices. (Not to mention, logic suggests that we should be below trend given the horrible state of our affairs).

    Homeowners don’t want lower prices, even if they can afford to accept them, which many can’t afford to do. They would rather have inflation eat at the real value of the house — too bad we are flirting with the lower bound. This is understandable since people have strong emotional attachment to their homes, but it isn’t a good sign for the economy. Unless you are suggesting that home prices reflect an improved economic outlook, which today’s jobs numbers obviously don’t warrant (Or that the generation that is graduating without job prospects and highly indebted to colleges are somehow going to also be able to now afford to buy half-a-million dollar ranches 3 hour commutes from dc while gas is 5$ a gallon, working without vacations and probably 55 hours a week, all while trying to take care of grandma and her medicaid bills — unlikely).

    But maybe I’m wrong Instead, increased prices may be a flight from suburbia to cities for better jobs and shorter commutes, and thus, non-distressed sales in large metro areas are being over-valued. I believe that would be bad news since it is a distorting symptom of how bad the economy is that people feel required to move to the city to support themselves, and that some high-distressed neighborhoods are off limits in those metro areas. And further, who is now going to be able to afford the half-a-million dollar ranch I mentioned above?

    We should just be honest, the cost of housing was a leading indicator of inflation, we need to raise prices (and wages) outside of housing sector to combat this issue. Greenspan was wrong.

  6. christian says:

    The post seems to have the inputs confused foreclosures VS foreclosed sales. Your post refers to the sale of foreclosures sales and the pressure they put on house prices. It then, in the graph shows houses in foreclosure and delinquency. With out knowing how those two items relate conclusions are hard to form. How do they relate? Are they selling every foreclosed house in one mouth, two mouths, one year what?

  7. charmaine says:

    Foreclosures that lead to REO sales will continue to weigh on home prices.