Wednesday, October 28, 2009

Scary things lurking in the dark.

The "shadow inventory" of homes are those houses that have either not yet been foreclosed by banks even though the owners are no longer making payments, and homes that have been foreclosed but have not yet been put up for sale by the banks. They don't want too many houses to flood the market, so they hold back - never quite acknowledging the extent of the unborn problem lurking in those shadows.

Of two
Housing: Round Trip to Pre-Bubble Prices Underway
October 26, 2009
Charles Hugh Smith

...regardless of the fundamental reasons offered (they're not making any more land, inventory is drying up, foreclosure rates are dropping, etc.), markets tend to fully revert to pre-bubble prices.

Here is a chart of the national median prices which have already reverted to 2002 levels. The future full retrace has been added as a projection:

..."Only" $100,000 more to drop for a full reversion to the starting point of $180,000 [in California - most likely the pre-bubble median price in YOUR state is way LESS than this].

...The consequences of a further retrace in valuations to 1998 levels are clearly dire for household wealth. If the median price of housing nationally falls another $40 -$50,000, as will occur in a full reversion, then all that decline will come straight out of remaining equity. In California, the same can be said of the expected $100,000 decline in median valuations.

Some analysts have already gone on record that they expect fully 50% of all homeowners with mortgages to be underwater by 2011--that is, owing more than their equity...

...If we ponder these charts, it's difficult to conclude the consumer can recover his/her free-spending ways and thus difficult to expect the economy to grow on the backs of renewed consumer spending.

Which brings us to the next ugly monster hiding in the darkness - the nearly completely unacknowledged (by your everyday media) pending crash in CRE (Commercial Real Estate).

Fortune Magazine Investor Daily (Online via CNN Money)
3 signs of the next real estate collapse
The latest bubble is about to burst, but this time it's in the commercial market. Here's how to see it coming.
By Katie Benner, writer-reporter
October 22, 2009: 10:16 AM ET

...Refinancing the $2 trillion in commercial mortgages will be tough, as property values decline. And in this new age of cautious lending, few banks are willing to refinance loans.

"There is a lack of new debt," says Michael Haas, a real estate attorney at Jones Day. "There is a hesitancy to extend credit when there is a real possibility that the real estate may be worth less than it was a few years ago."

Now, in a situation eerily similar to the subprime crisis, the result is likely to be a wave of foreclosures and loan defaults that could, in turn, trigger a collapse in the market of the structured bonds backed by commercial real estate and construction debt...

..."Medium and small banks have a lot of exposure to local building projects," says Chris Whalen, a bank analyst and co-founder of Institutional Risk Analytics. "They're forbearing or getting involved in their customers' business rather than taking losses. They're hoping they can hold out until values come back."

And the odds of that are what, class?

If consumers have no discretionary income - and they don't - then any business that is not involved with something people will absolutely avoid living without (say, electricity or water), that business is seeing declines in revenues that will make it difficult, if not impossible, to stay in business. For a while, of course, just as they do for residential mortgages, banks will sit around and try not to foreclose businesses and try not to put too much commercial real estate on the market - giving the business owners a temporary reprieve.

But is that really going to help? They will have to lay off workers, which will mean less money floating around out there to come back to them in the form of sales, which will mean more layoffs... You see how it goes. Without living wage jobs for employees, businesses cannot stay afloat forever. At some point, owners can no longer roll over their debts and they certainly don't have enough sales to pay off their debts and still cover the rest of their bills. When no more room to fudge exists the debts will have to be paid, and the business goes under.

The smartest business plan was to eschew debt, but few heeded that sage advice. And soon the fallout will begin - on top of and worsening the residential real estate collapse. The monsters will be out in the daylight for everyone to see - and it won't be pretty.

No comments: