Busted Piggy Banks

Last Friday, the Dow Jones Industrial Average tacked on 13 points, boosting its gains for the week to 145 points…and its gains for the last three weeks to more than 600 points.

This modest rebound is a welcome relief, but we Americans are going to need a lot more weeks like these – a LOT more – if we are to recover the trillions of dollars we lost during the crisis of 2008-9.

According to calculations from the Federal Reserve, household wealth tumbled a whopping $17 trillion during the crisis – or about 27%. Since the depths of the crisis, however, Americans have recovered about $5 trillion of household wealth. Only $12 trillion to go!

For perspective, $12 trillion is nearly equal to one year’s US GDP. It’s not easy recovering that much wealth…especially not when the recovery operation relies heavily upon the housing market. Residential real estate accounts for 32 percent of household net worth; stocks account for a much smaller percentage. So household wealth can’t do a whole lot of recovering without a recovery in housing…and that’s not happening yet.

To the contrary, lenders repossessed a record 95,000 homes in August and issued 339,000 notices of default or other foreclosure-related warning. More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to RealtyTrac, while more than one million American households are likely to lose their homes to foreclosure this year.

Despite these daunting – and tragic – numbers, the folks who sip from the glass-half-full (of dreams and delusions) point out that notices of foreclosures “dipped” last month compared to one year earlier. This dip, they say is promising because it signals a drop in future foreclosures.

The only problem with this perspective is that it is false. The “dip” in foreclosure filings was no dip at all. Although filings declined year-over-year, they jumped 4% from July to August. That month-over-month increase is much more timely and relevant than the year-over-year decrease. The month-over-month number is the one that tells us about the trends that are now unfolding in the housing market.

Furthermore, it is important to remember that notices of default are like a five-course meal. They arrive in stages. Very few lending institutions possess the balance sheet strength to choke down their bad loans all at once. So instead, most banks take a few nibbles from their heaping plate of bad loans, pause to digest the losses, then they nibble again.

“It appears that lenders are allowing delinquencies to go on longer before they issue notices of default,” says RealtyTrac spokesman, Rick Sharga.

But these “delay and pray” tactics won’t make the future delinquencies go away. To the contrary, the foreclosure “kitchen” has many more courses to prepare before arriving out of ingredients.

“An incredible 14% of the nearly 54 million first liens in the country are now either delinquent or in default” the Real Estate Channel’s Keith Jurow, observes. “To come up with a total for the shadow inventory, let’s first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale. That comes to 4.5 million properties. Based on the cure rate for loans delinquent at least 60 days, we will add 95% of those 60-day delinquencies. That is an additional 723,000 residences. For the same reason, we will add 70% of those delinquent for at least 30 days – 1.25 million properties.

“And, of course, let’s not forget the REOs that have not yet been placed on MLS listings by the bank servicers,” Jurow continues. “We’ll be conservative and estimate them at 500,000.

“Adding all of these together, we come up with a total of roughly 6.97 million residences which are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk.”

Apparently, the “stimulus” measures coming out of the Obama Administration and the Federal Reserve aren’t doing as much stimulating as hoped. Apparently, if we may volunteer a simplistic deduction, sustainable economic growth derive from the private sector’s investment and production, not from the public sector’s bailouts and “make work” programs.

In other words, we Americans should not expect to recover our lost $12 trillion anytime soon, much less to increase our wealth beyond that figure.

By Eric Fry

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