The U.S. Housing Market: The Real Story

Several days ago, Massachusetts’ Supreme Judicial Court voided the foreclosure of two homes by Wells Fargo & Company (NYSE/WFC) and U.S. Bancorp (NYSE/USB), because the court says the banks failed to show they owned the mortgages at the time of foreclosure.

You have to wonder if it is all a conspiracy to slow down the foreclosure of U.S. homes where the lenders are in default.

After all, three different levels of governments are investigating home foreclosures:

All 50 state attorney generals are reviewing the “foreclosure process” and will not have their investigations complete until the spring. The FHA (Federal Housing Administration) is examining whether lenders are using all legal options available to them before foreclosing on government-insured loans. Then there is a branch of the Justice Department (Executive Office for U.S. Trustees) that is doing its own examination of lenders and their law firms in respect to homeowners’ bankruptcy filings.

U.S. home foreclosure activity fell 21% in November from October, according to an Obama Administration report—but they are not falling because the housing market is getting better. On the contrary, foreclosures have declined because lenders have dramatically slowed their pace of foreclosure in light of all the government investigations.

Let’s call a spade a spade: If I am a bank and I lend you money on your home, and you are not paying your mortgage to me, I should have the right to come in and take the home back due to non-payment after I’ve given you written warning to make good on your payments. That’s how real estate has always worked. That’s how capitalism works and how banks have always worked in their lending practices.

I’m reading all kinds of reports that say homeowners are missing their monthly payments on their mortgages because they have caught on that lenders have curbed their foreclosures.

I wonder if it is all a ploy to get lenders to modify their mortgages (take haircuts) as opposed to foreclosing.

Is someone so smart at the White House that they said: “Hey banks, you started this mess by lending people money to buy houses they could not afford! Now we are going to make it hard for you to foreclose on your mortgages, so go back and work with the homeowners to reduce the amount of their mortgages to market value.” I’d have to call that quite brilliant if indeed this is the plan.

But we need to respect how capitalism works. That is what America is all about. Regardless of whether a bank takes a haircut on a mortgage or forecloses, they are still taking a loss that shareholders will have to endure.

In the immediate term, stalling foreclosures will move housing prices slowly up, as less home supply hits the markets. Most home real estate auctions I follow are showing prices actually rising. Some neighborhood homes are selling at lender auctions today at five percent to 10% more than last year because less supply is on the market.

But eventually the piper needs to be paid. The housing market cannot have a meaningful bottom (or bounce in price) until all the foreclosures are washed out of the system. According to a report in The New York Times (1/9/11), “More than four million households are in serious default and vulnerable to losing their homes.” Until these homes “come onto the market,” a black cloud will hang over the U.S. housing recovery.

Michael’s Personal Notes:

We pride ourselves on providing our PROFIT CONFIDENTIAL family with editorials, opinions and financial ideas they will not read anywhere else. Robert Appel, a financial analyst here at Lombardi (who is a lawyer turned stock-picker) and is someone whose financial savvy I truly respect, had the following to say about the markets and the economy. I thought my readers would find this thought-provoking:

“We start 2011 with a number of interesting events, all of which are a cause for concern singly, yet form a larger concern if taken as a group:

• A haircut in the gold pits—this was not unexpected and indeed the possibility increased as gold became overbought. Accumulate. This too shall pass.
• A campaign by the major media (who, suspiciously, always seem to serve up the same stories at the exact same time) to invest in the market because things are looking “great” for the U.S. economy. Especially now that the housing boom is over, why not go back to stocks? We consider this a bear signal.
• Ongoing “QE23 by the Fed (a euphemism for printing money) and maybe even plans for QE3. We consider this ominous as well.
• Real bond yields are moving higher (as I projected) meaning that the “fuse” on the timer has been set. It is a matter of time (maybe a year) before this impacts the stock markets at all levels in all locations.
• Many “calendar” events set to take place this spring in Europe affecting debt becoming due. The good news is that they distract from the mess in America. The bad news is that they could collapse markets worldwide. Ominous.
• Inflation in China, especially in housing, and signs of trouble. A close similarity to where Japan was in the 1980s—and look how great that ended up! Ominous.
• Signals that the public has 100% failed to grasp the problems with infrastructure and fund-raising at the state and city levels: Stories of drivers going state to state, and reporting on problems with bridges and roads, yet with no repair crews on the jobs. Ominous.
• Signals that the U.S. is going after pensions, just as it happened in Europe last year. Ominous.
• Surveys showing that the educational standards of the U.S. relative to other countries have dropped yet again. Ominous. (At this rate, as one pundit quipped, they will bring those call-centers back to the U.S. from India and Indonesia, and re-classify them as “skilled labor!”)
• No sign that Wall Street is curtailing pay to its executives. One study said that the average Wall Street executive makes 60 times—that’s 6,000%—what the average working stiff does, plus bonuses. And this is supposed to be a “service” niche that merely “facilitates” commerce, not swallows it whole and then spits out the bones.
• Government now making laws regulating the Internet. Ominous!

The earliest the U.S. can begin to form a new “low-expectation economy” that is somewhat self-sustaining would be in the period 2018-2022. Until then, we remain very concerned about the stock market and economy for 2011.”

Where the Market Stands; Where it’s Headed:

The stock market had another small push upwards yesterday. This morning, the news that Portugal was successful in selling about a billion euros in government bonds has stock futures rising again. As I have been saying, this bear market rally has immediate-term life left in it and that is exactly what has been happening—stocks continue with small spikes upwards.

The Dow Jones Industrial Average opens this morning up about one percent for 2011. I’m still very concerned in the short term about several factors, including too much bullishness amongst investors and advisors, out of control government debt (Congress will have to raise the limit by which the U.S. can borrow money again this year) and rising long-term interest rates.

(The cost for Portugal to sell its bonds was high. The three-year bonds went at a yield of 5.4%, the longer-term 2020 bonds went at a yield of 6.7%—more proof of interest rates rising worldwide. Imagine if the U.S. had to pay this kind of yield on its Treasuries? It could and it will eventually happen…which will push our interest payments on our debt to one trillion dollars annually!)

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.