Housing Recovery 2011

With a brush of good news coming out once again regarding the housing market's bottom, recovery, or whatever the word of the day being used by the media, I thought it would be a good time to take another real look at the market.

One of the pieces of information that the media uses to show the "recovery" in process is the diminishing size of the real estate owned (REO) properties.  This is used to show that the current foreclosure inventory is shrinking in size.

The REO inventory is the final stage of the foreclosure process.  They are homes that are listed for sale on your street and in the spot light.  However, the real problem facing the housing market is not the REO inventory, but the shadow inventory.

The true shadow inventory is broken up into 4 phases:

1. Under 90 days delinquent - 2.48 million
2. Over 90 days delinquent - 1.9 million
3. Foreclosure - 2.16 million
4. REO - 500,000 (graph above)

The following graph shows the flow chart through the foreclosure process:

The REO number touted by the media is a spec of dust in the big picture.

The true inventory is 6.54 million in size, not 500,000.  The reason for this is because when a homeowner enters the phase 1 delinquency stage they almost never exit the 4 part process; like someone trapped in quicksand.

But that is not all.

I'd like to add an additional stage, even though it can't be technically included.  It is the "pre-quel" to the 4 part movie.  This stage is called underwater.

When the price of a home falls under the value of the mortgage, that loan is essentially a dead man walking.  The only thing separating that home owner from becoming part of the under 90 days delinquent (phase 1) is common sense. 

How large is this dead man walking inventory?  Most estimates have it at over 10.1 million mortgages, or about 25% of all mortgages in America.  This number grows by the hour as home prices continue to fall.

One morning a home owner wakes up and decides they are no longer paying.  They then officially move into phase 1.  What happens when a home owner moves into this terrible position?

The most recent LPS statistics show that this American on average will now live in their home payment free for 599 days.  I know, I know, it is truly horrifying. 

Interest rates are currently hitting all time record lows close to 4% with low down payment loans provided exclusively by our government. 

What would happen if interest rates were to rise off rock bottom levels?  What would happen if the government could no longer afford to provide 100% of the mortgages to Americans?  Do you think they will choose social security and medicare payments over new mortgages when our debt crisis comes?

I do.  I look forward to buying my piece of the American dream, but I think I'll wait until the nightmare arrives before calling a realtor.

h/t drhousingbubble