Surge in Housing Supply Will Drive Down Prices

by Mike Whitney – Global Research, September 16, 2010 – Information Clearing House

Home
ownership has become an albatross. Prices are falling, demand is weak,
foreclosures have skyrocketed, and inventory is backed up to the moon.
If there’s an upside, it’s hard to see.


Everyone
who bought a house in the last 6 or 7 years knows that he was fleeced
by bankers who were pushing "fishwrap" mortgage paper to line their own
pockets. Prices did not reflect the underlying supply/demand
fundamentals as much as they exposed the massive mortgage laundering
operation that was taking place in the shadow banking system. Hedge
fund sharpies and other speculators walked away with billions while
credulous homeowners were lashed to an anvil and tossed in the East
River.

Now
there are signs that the Fed teamed-up with the banks to get another
pound of homeowners’ flesh by keeping inventory off the market while
they were exchanging $1.25 trillion in reserves for the banks non
performing loans and mortgage-backed securities. Here’s how it works:
While the Fed was executing its "quantitative easing" (QE) program, the
banks began to stockpile foreclosed homes to reduce supply and, thus,
stabilize prices. It was all a hoax to conceal the transfer of reserves
for garbage assets. Now that the banks are loaded with fresh reserves,
they don’t need to play-along anymore, which is why they’ve started
dumping their massive backlog on the market. As inventory floods the
market, housing prices will tumble and homeowners will take another
pounding. Here’s an excerpt from an article in the Wall Street Journal
that helps to explain what’s going on:

"The
speed at which house prices fall over the next few months could depend
less on mortgage rates and Americans’ appetite for home buying than on
how banks decide to manage the huge number of foreclosed homes they own
or may take from delinquent borrowers in the near future.

Unlike
home owners, banks often are much quicker to slash prices to unload
properties quickly." ("Banks’ Plans for Foreclosed Homes will drive the
Market", Nick Timiraos, Wall Street Journal)

In
truth, the only reason prices have stayed high is because of
foot-dragging at the banks. If they released all of their inventory
now, prices would plunge below their historic trend. As it stands, the
deluge of foreclosed homes on the market are certain to put more
pressure on today’s prices. There’s a good chance the market will
overshoot to the downside leaving more homeowners drowning in red ink.

So, what are the banks really up to?

It
looks to me like the banks have shored up their equity and capital
enough that they feel they can clean up their books without going
belly-up. And that means that you, dear homeowner, will be left in your
two bedroom rambler in Riverside, watching the sunset on your
retirement nest-egg.

Here’s more from the WSJ:

"The
Home Affordable Modification Program has fallen short of its goals. So
far, fewer than 500,000 loans have been modified, below the target of
three million to four million. Yet the program served as a “closet
moratorium” on foreclosures that stanched the flow of bank-owned homes
to the market, said Ronald Temple, portfolio manager at Lazard Asset
Management."

Of
course, the HAMP modification program failed. It was designed to fail.
It was a stalling device like the other foreclosure moratoria. All of
the subsidies, incentives and tax credits were designed to "run out the
clock" while the banks offloaded their garbage onto the Fed’s balance
sheet. As soon as the stealth bailout ended, there was no longer any
reason to continue the "prices have stabilized" charade. So, now the
great housing inventory purge can resume with gusto.


 Servicers have already picked up the pace of foreclosures which will swell inventory and weaken demand.

More from the WSJ:

“We
see the perfect storm brewing with rising supply and falling demand,”
said Ivy Zelman, chief executive of research firm Zelman &
Associates and one of the first to warn of trouble five years ago. She
estimated that distressed sales could account for half of the market by
year-end if traditional sales didn’t rebound…..

Analysts
at Barclays Capital estimate that some four million loans are in some
stage of foreclosure or are at least 90 days past due, down slightly
from a January peak."

Homeowners
have already seen prices plunge 30% from their bubble-highs in 2006.
Now they stand to get clobbered again by an unexpected surge in supply.
This is going to ruin a lot people’s retirement plans. We’re all a lot
poorer than we thought, and the banks are determined to make us poorer
still.


Mike Whitney is a frequent contributor to Global Research

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