As the collapse of the U.S. housing sector worsened in 2008, and the precise nature of this supply-driven bubble became apparent, I laid out a very specific “blueprint” for putting a genuine “bottom” in this market.
The U.S. government needed to commit $1 - $2 trillion paying-down the mortgage balances of U.S. homeowners, in order to restore some badly-needed equity for these homeowners, which in turn, would provide some stability to the U.S. housing market – by eliminating most/all “underwater” mortgages, and thus ending the incentive to “walk away” from these mortgages.
By 2009, with the U.S. government having done nothing to mitigate this collapse and U.S. homeowners having lost much more equity, I raised the necessary government ante to $3 trillion: enough to pay-down mortgage balances by roughly 20% (only a small fraction of the $10 trillion used to bail-out Wall Street). But there was a second structural problem in the U.S. housing market which I identified: a supply-glut which could only be “fixed” by bulldozing vast numbers of homes.
Not only was there a gross excess of total housing inventory, but the bubble-driven insanity had resulted in the construction of vast numbers of homes in totally impractical locations: the “exurbs”. These were new housing (and population) enclaves which were springing up so far from major population (and employment) centers that they couldn't even be classified as “suburbs”.
In February of 2009, I wrote a piece which I referred to as a “case study” of the U.S. housing collapse: the town of Merced, California. Merced was located 110 miles southeast of San Francisco, the nearest employment center, and thus the average length of commute facing Merced residents. If such housing developments were ever viable, it would only be in a world of cheap oil. That world no longer exists.
Given this reality, I reiterated my position that the U.S. government would have to demand that at least 1million of these homes be bulldozed. This would solve two problems. It would eliminate housing units which would likely never be sold and remedy the problem of overall excess supply, where there are currently somewhere around 20 million empty homes in the U.S. (and an even greater number of “underwater” mortgages).
The problem with this solution is that the U.S. banks holding these mortgages – and holding trillions of dollars of leveraged housing-derivatives would have to take virtually 100% write-downs on these units. While the U.S.'s “mark to fantasy” accounting rules allow U.S. banks to maintain totally fictitious valuations on U.S. housing units (and their derivatives) as long as the homes are still intact, that would not be the case once they were razed to the ground.
In the efforts by U.S. banks to maintain fictitious valuations on U.S. homes, and to create the artificial appearance of a “bottom” in the U.S. housing market, U.S. banks have been holding vast numbers of “REO” homes off of the market. Part of this game is being played by U.S. banks dragging their heels on foreclosure proceedings – which has been aided by the sheer quantity of defaulting mortgages: enough to totally clog-up the court systems of many U.S. states. In Florida alone, there is a backlog of more than 500,000 foreclosures, with only a trickle of those homes actually reaching the market.
Even after U.S. banks take possession of homes, they frequently simply hold those homes off the market – to allow the propaganda-machine to distribute fictitious numbers for U.S. “housing inventories”. This is especially true with high-end homes, where for the first time in U.S. housing history, mortgage-defaults of expensive U.S. homes are comparable with the rates of defaults for lower-end homes. The difference being that buyers are more likely for those low-price homes.
With this “shadow inventory” of unsold/unlisted U.S. homes totaling somewhere between 5 million and 10 million units, another wave of foreclosures/defaults is about to explode upon this market – as millions of the infamous “option-ARM” mortgages will be resetting over the next 2 years, with a large chunk of those millions of units representing certain defaults.
For those still not familiar with this terminology, an “option-ARM” is an “adjustable rate mortgage” which also allowed reckless borrowers to not only pay no principle during the “teaser period” before these mortgages reset, but they even allowed borrowers to pay less than 100% of interest with that unpaid interest being added to the principal. Thus, for many borrowers, when these mortgages reset they will face a triple-shock to their budgets: first the interest rates will rise on most of these mortgages, secondly all that additional principal would now be factored-into their new payments, and lastly they would now have to make full payments on these mortgages.
For some homeowners, they will now be forced to make payments of up to three to five times their current, partial-payments. What makes this upcoming crisis truly horrifying to anyone foolish enough to venture into the U.S. housing market is that over 40% of these option-holders have been making minimum payments (or less) on these mortgages, and virtually 100% of those mortgages are certain to default.
The combination of the massive “shadow inventory” of U.S. homes and the new tidal wave of defaults about to hit the U.S. market means that the U.S. housing market is about to suffer a second, worse collapse. With U.S. housing valuations still grossly inflated in relation to income/wealth levels, and with the total “equity” held by U.S. homeowners continuing to shrink, the next collapse in the U.S. housing sector will either be even steeper than the first collapse (which was three times as bad as the worst year of the Great Depression), or this next collapse will simply grind on much, much longer (a more likely scenario).
As regular readers already know, this next collapse in the U.S. housing market will also be severely aggravated by two, other factors. First, in an effort to create a second U.S. housing-bubble, most of the new mortgages written-up by government fraud-factories in 2009 had zero down-payments. This means that none of these homeowners has any equity in these homes and (with U.S. house prices now falling again) these homeowners are virtually all “underwater” on their new mortgages.
With these new 'homeowners' (who actually “own” nothing) having no equity in these homes, and having just started making payments, these new buyers will be even more likely to default, or simply walk away than the U.S. homeowners who already were defaulting/walking-away in the largest numbers in history.
Secondly, with the pensions of spendthrift baby-boomers grossly underfunded (by as much as $3 trillion), there is zero possibility of these retirees collecting full pensions. This will necessitate that baby-boomers dump trillions of dollars more real estate onto this grossly over-supplied market, or they will have to drastically reduce their standards of living (and consumer-spending) – or some combination of the two. Both of these developments will have a severe (negative)impact on the U.S. housing market – with the only difference being that one will impact the market directly (dumping real estate) and one will impact the market indirectly (reducing spending, which reduces employment).
With the U.S. government and the U.S. propaganda-machine no longer able to pretend that there is a “bottom” in this market, we are finally seeing glimmers of reality seep into the reporting of this upcoming crisis.
Recently, the “chief economist” for Fannie Mae bluntly stated the obvious: some of these absurd developments “might have to be torn down”. The reality is that most of these “exurb” housing units will have to be torn down – along with some of the worst areas of “urban blight” in the U.S. In many of the most economically devastated U.S. cities, the combinations of waves of foreclosures, crime, and a lack of city funding for basic maintenance have left vast tracts of U.S. cities looking like Baghdad – during the worst of the U.S.'s Iraq-invasion.
The Fannie Mae executive offered no specifics or ideas of any kind on how many units would have to be destroyed, and (naturally) left open who would absorb the massive bank-losses on these demolitions. Obviously, as a fellow-bankster the Fannie Mae official didn't think that Wall Street would or should absorb any of its own losses (isn't that what the Federal Reserve's printing-press is for?).
In the real world, as I have mentioned in previous commentaries, this demolition process has already begun. Some new housing developments have already been quietly bulldozed, while at least one U.S. city is already deeply into planning mass-demolitions of entire neighbourhoods. These were realities which totally contradicted the mythical “U.S. economic recovery”, and so were ignored by media propagandists and politicians alike.
Sadly, what Americans are about to discover is that instead of being more than one year into a “U.S. economic recovery” that (as a product of massive manipulation) they have merely been poised in the “eye” of an economic hurricane. This period of false-stability is over.
The pretend-bottom in the housing market is gone. The feeble wave of census-hiring is over. The flood of “stimulus dollars” has slowed to a trickle and bankrupt state and local governments will now either have to formally default – or radically slash spending and raise taxes to prevent such bankruptcies. When the government GSE's who bankroll 95% of U.S. mortgages start talking about demolishing homes, you know that “the party is over”.
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