Case Shiller Shows A Modest Bump Up In Prices, While Delinquent Prime Mortgages More Than Double Year Over Year

Let's say you were a betting person and I offered you the following bet: What month would show a bigger pick up in consumer spending, August over July of any year, or December over November any year.

Well if you were in the retail trades you'd know that August aces July, year in, year out, because of back-to-school purchases made by millions of parents for their kids. You'd also know that despite "Black Friday" in late November, December sales always trump November sales, year after year.

The same is expected of April Real Estate sales over March sales. Anyone who follows Real Estate knows the Spring selling season is the most important time of year for Real Estate sales and the season really kicks off with April always trumping March.

Thus, it's no wonder we can probably turn on any business news channel today and have some pitchman from the NAR or the NAMB telling us that housing is bottoming as the Case Shiller index slowed in April.

The Bloomberg headline reads, Yale’s Shiller Sees ‘Improvement’ in Rate of Home-Price Decline.

The article which just posted to Bloomberg a little bit ago reads,'

June 30 (Bloomberg) -- Home prices saw a “striking improvement in the rate of decline” and trading in funds launched today suggest investors believe the U.S. housing slump is nearing a bottom, said Yale University economist Robert Shiller.

“At this point, people are thinking the fall is over,” Shiller, cofounder of the home price index that bears his name, said in a Bloomberg Radio interview today. “The market is predicting the declines are over.”

Note that Shiller is not saying he thinks the bottom is in. Rather, he is just remarking that data shows people are believing the worst is over.

Bloomberg goes on to say,

Home prices in 20 major U.S. metropolitan areas fell in April at a slower pace than forecast, the S&P/Case-Shiller home- price index showed today.

The index decreased 18.1 percent from a year earlier following an 18.7 percent drop in March. Economists predicted the index would drop 18.6 percent, according to a survey of 33 economists conducted by Bloomberg. The measure declined 19 percent in January, the most since the data began in 2001.

To which I respond by reminding all that you couldn't have found 33 Economists in the USA in 2005 who were aware we had a hellatious Housing Bubble blowing, much less a soon to be major Recession on the horizon as many an astute blogger was predicting all along. Now these Economists are supposed to be able to give us predictions on a Housing Crash which they never saw in the first place?

Moving on, we had some clearer news as to what is really happening in Housing and where the next blowup in Housing is going to take place: Prime and Jumbo loans (although the next article I mention doesn't discuss Jumbo loans, Alt-ARM resets or the crashing Commercial Real Estate markets.

This next article is headlined, Delinquencies Double on Least-Risky Mortgages, U.S. Report Says, and it begins . . .

June 30 (Bloomberg) -- Delinquency rates on the least risky mortgages more than doubled in the first quarter from a year earlier as U.S. efforts to help homeowners failed to keep pace with job losses that pushed more borrowers toward foreclosure.

Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today in a report. First-time foreclosure filings on the loans rose 22 percent from the fourth quarter, the report said.

Okay, now we're getting some insight, e.g., 2.9% of all Prime Mortgages through March 31, 2009 are now 60 days or more past due. Last year, for the same time period, 1.1% of all Prime Mortgages were delinquent. Note that the headline should have read Delinquencies More Than (my edit) Double on Least-Risky Mortgages, U.S. Report Says.

I would re-write the headline because although a rise from 1.1% of prime loans to 2.9% of prime loans being delinquent might sound like small potatoes, keep in mind that we are talking about a 162% rise in Prime Loan Delinquencies in just one year's time! As a 100% rise is a double, the actual number of delinquent Prime Loans is closer to a triple than a double.

Nevertheless, we're' quibbling over the usual misleading headlines which hide the real data points we need to follow closely to know if housing is bottoming or going to continue to fall.

The article gave us three more nuggets of info:

Serious delinquencies on prime loans, which account for two-thirds of all U.S. mortgages, rose to 661,914 in the first quarter from 250,986 a year earlier, according to the report. Overall, mortgages 60 days or more past due rose 88 percent from last year, the report said.

Mortgages modified to help struggling borrowers stay in their homes fail within nine months more than half the time, the report said. About 53 percent of mortgages modified in the first quarter of 2008 were 30 or more days delinquent after six months, and increased to a 63 percent default rate after a year.

“Rising serious delinquencies are a leading indicator of increased foreclosure actions in the future,” the agencies said.

So, a quick recap of those last 3 paragraphs:

1. All mortgages combined have risen to an 88% higher delinquency rate year over year.

2. Loan re-modifications which are supposed to help people keep their homes from being foreclosed upon have a failure rate of 63% after 12 months go by.

and a very obvious point which so many bottom callers are missing today . . .

3. “Rising serious delinquencies are a leading indicator of increased foreclosure actions in the future."

Keep in mind the majority of resets for Option ARMs will take place in the years 2011-2013. Do any of you think defaults will stop rising anytime soon? The coming tsunami of resets will force many an ex-Big Real Estate Mogul on paper to walk away from their Prime . . . and Jumbo . . . Loans.

Add in continued job losses, credit card defaults, the loss of the Housing ATM (via HELOCs), a disturbing rise in Boomer retirements, more social programs coming as safety nets (meaning more taxation), crumbling infrastructure, Global Warming swallowing up more acreage of Florida and other Gulf Coast states every year, the now crashing Commercial Real Estate, the dying malls, and so on and so forth, and without a doubt, anyone thinking Housing is bottoming right here and now is not paying attention to History.

I opine that Housing is having a "Dead Cat" bounce. Remember, the wipe out in Real Estate in 1928 in Florida took out many a wealthy individual's home equity and it never returned.

As always, Caveat Emptor and keep your thinking caps on . . .


Rock Trueblood