Can we truly expect our economy to return to LONG-TERM health if the housing market remains under severe pressure? I think not. While Wall Street rebounds, Main Street continues to lose value. How so? Home foreclosures continue to run at breakneck speed.
Bloomberg reports, U.S. Foreclosure Filings Set Third Record-High in Five Months:
Foreclosure filings in the U.S. climbed to a record for the third time in five months in July as falling home prices and the recession left more homeowners unable to keep up payments or refinance.
A total of 360,149 properties received a default or auction notice or were seized last month, according to data seller RealtyTrac Inc. One in 355 households got a filing, the highest monthly rate in RealtyTrac records dating to January 2005, the Irvine, California-based company said in a statement.
“We’re in a deep hole,” Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., said in an interview. “There is a whole new wave of foreclosures tied to the cyclical dynamics of the economy.”
What is this ongoing foreclosure activity doing to home prices? It’s not good.
The median price of an existing single-family house dropped 15.6 percent to $174,100 in the second quarter, the most in records dating to 1979, the National Association of Realtors said yesterday. Almost one-quarter of U.S. mortgage holders are underwater, property data firm Zillow.com said Aug. 11.
What about the mortgage modification programs which were designed to stem this tide of foreclosures? In speaking with our friends at 12th Street Capital, who have canvassed a number of the large mortgage servicing operations, we have learned that successful mortgage modifications are typically only occurring with mortgages that are delinquent 30 days or less. After that, homeowners are increasingly inclined to ‘walk away’ from homes which are further underwater (mortgage balance exceeds home value). In fact, Bloomberg highlights:
“It has been more profitable to put a home in foreclosure than restructure the loan,” Swonk said. “The only thing that helps is forgiveness of principal, and there is little willingness to do that.”
The greatest surge in foreclosure activity remains in those states which have already experienced enormous problems. The top 5 being Nevada, California, Arizona, Florida, and Utah. That said, our entire economy is intricately linked and these markets (especially California) cover a large percentage of our population.
What are the implications for this ongoing foreclosure activity?
1. Banks will continue to keep credit standards very tight.
2. The new issue securitization markets for these assets will remain virtually non-existent.
3. State tax revenues will remain under pressure as property taxes received continue to decline. As a result, look for continued cuts in services and likely tax increases.
4. Retail sales will not have a meaningful rebound as the consumer wealth effect tied to home values remains under pressure. This morning Wal-Mart reported flat profit on lower sales. Additionally, overall retail sales were just reported to decline .1 (ex-auto sales, retail sales declined .6) versus a projected gain of .8. This is an UGLY number!! As a result, do not look for a big rebound in inventories which would drive GDP.
5. Unless and until banks fully acknowledge the true value of the assets tied to these home mortgages, the financial system is kidding itself (and doing a very good job of it) to think that our economy will have a true robust recovery.