The 3 Scariest Numbers for the U.S. Housing Market

I’m normally not a doom-and-gloom person, when it comes to reporting on the housing market. But I’ve come across some numbers recently that shrink whatever hope I had for a timely recovery. So without further ado, I give you the three scariest numbers in the U.S. housing market.

33 Percent

Price ReducedThat’s how far home prices have dropped since their 2006 peak, in the 20 major cities tracked by the Case-Shiller / S&P Home Price Index.

Granted, it’s only 20 cities. But these cities were chosen for a reason. They give a representative view of what’s happening across the country. And what’s happening isn’t good.

This number has a lot of people dragging out the ominous “double dip” phrase. The Case-Shiller report released on May 31 indicates home prices have dropped below the previous post-housing-crash low, which occurred in April 2009.

No matter how you look at the data, it doesn’t inspire confidence. It certainly doesn’t suggest we’ve hit bottom, or that a bottom is even close. (Not that anyone is expecting a bottom this year.)

2.2 Million

That’s the number of mortgage loans that are currently in some stage of the foreclosure process. This is according to Harvard University’s State of the Nation’s Housing report, which was released earlier this week. The report also points out that 11 million homeowners in the U.S. are upside down in their mortgages. Additionally, 2 million homeowners are “severely delinquent” on their mortgage payments.

These numbers are disturbing in how they relate to housing inventory and home prices:

  • 2.2 million loans are in some stage of foreclosure. Most of these homes will come onto the market at reduced prices. They will be sold for less than market value. This is generally the case with distressed real estate. This puts downward pressure on home prices in two ways. It increases the sheer number of homes on the market (sustaining the imbalance of supply-and-demand), and it creates reduced pricing-data for comparable sales or “comps.”
  • 2 million people are falling seriously behind on their payments. Not all of these will be foreclosed on, of course. But a large percentage of them will. This will add to the excessive number of homes already entering the foreclosure “pipeline.” As a result of the robo-signing fiasco, most lenders and loan servicers are processing foreclosures at a much slower pace than they did in the past (see “400 days” below). So the pipeline will be full for a long time.
  • 11 million homeowners are upside down in their mortgages. That’s nearly a quarter of all residential properties. And as we know all too well, many underwater homeowners choose to walk away from their homes — and their debt obligations. Data from Fiserv and the Mortgage Bankers Association (and common sense) show a direct correlation between underwater homeowners and foreclosure rates. When the first number goes up, it takes the second number along with it.

All of this translates into downward pressure on home prices in most parts of the country. There are rays of light here and there, like in Washington, D.C. But for the rest of us, it’s depreciation-ville.

400 Days

That how long it takes, on average, for a bank to complete the full foreclosure process. The “clock” starts when the bank files a notice of default. It stops when they complete the foreclosure and list the home for sale as an REO (bank-owned) property. That was the average processing time for the first quarter of 2011. This time last year, it took banks an average of 340 days to complete the process. In the first quarter of 2007, it only took an average of only 151 days to complete the process.

So we have a lot of foreclosures already. On top of that, we have 2.2 million loans in the foreclosure pipeline right now. And on top of that, we have a high percentage of homeowners who are falling behind on their mortgage payments (many of whom will be foreclosed upon in the months to come). As if this were not enough, it takes the banks longer to complete the process and get these homes back onto the market as REOs.

Maybe this is why economists are revising their predictions for a housing recovery.

Bonus Number – 5 Years

Housing recovery relies heavily on the absorption rate of our current inventory. How soon can buyers and investors absorb (purchase) all of those homes for sale — and the homes that will be for sale once they clear the foreclosure pipeline?

Michael Feder, the CEO of housing research firm Radar Logic, thinks it could be a long wait. During a March 2011 interview with Bloomberg radio, Feder said:

“The reality which you add up all the houses for sale, houses vacant not yet on the market, houses underwater, seriously delinquent, in foreclosure, almost in foreclosure, the number is closer to 60 months, 5 years.”

According to the aforementioned report by Harvard University, the excess housing inventory at present could be as high as 2.6 million units. We will need to see a lot more demand before these numbers start to come down.

Uncharted Waters?

Perhaps the most disturbing concept of the current housing market isn’t a number at all, but a notion. In previous boom-to-bust cycles, housing and home-building have always led the charge to recovery. But not this time.

Currently, the U.S. economy is dragging the housing market along like so much dead weight. Home building, in particular, has hampered GDP growth. The drop in residential fixed investment (RFI) in Q3 2010 put a tremendous drag on economic growth. This is something of a rarity. It challenges our understanding of how these cycles are supposed to work.

When economists make predictions, they do so using historical data. But in some ways, the current trends in our housing market lack any historical precedent. We have entered uncharted waters.