Why Hopes of a Housing Recovery Are Premature

The law of attraction says that a person can bring about a particular outcome simply by thinking about it in a positive light. A popular example is that if you open your mail expecting big, fat checks from long-lost relatives, then that's what you'll get -- though, it's probably worth noting that I've never been able to confirm this despite numerous attempts.

Humor aside, it's this same type of thinking that seems to have led many of us, myself included, to proclaim that the housing market is recovering. "We are undoubtedly well on the recovery road," the CEO of homebuilder Hovnanian (NYSE: HOV  ) told CNBC last November. "It's not a question of are we beginning it. I'd say it began at the beginning of this year..."

While multiple statistics can be cited to support this conclusion, as both home sales and prices have picked up over the past 12 months, there remains one that could threaten the entire edifice: the supply of homes that are owned, or soon to be owned, by banks.

Source: FDIC's Statistics on Depository Institutions.

As you can see in the chart above, the quantity of delinquent residential mortgages held by banks has anything but recovered of late, as the figure ascended to a record high in the third quarter of last year. In layman's terms, this means that the number of past-due loans added each quarter is exceeding the number subtracted. It's like a traffic jam on the highway. Early on -- right after, say, an accident occurs -- the rate at which traffic piles up as cars approach the scene exceeds the rate at which it releases after they pass the debris. It isn't until hours later, once the accident has been cleared, that the buildup begins to dissipate.

Importantly, this doesn't mean that more mortgages are going delinquent. Rather, to continue the analogy, the added congestion stems from an entirely new on-ramp that recently opened. In normal times -- that is, prior to the financial crisis -- there was only one entrance onto our figurative freeway: home owners missing payments. But since the financial crisis, banks have also been forced to repurchase soured mortgages from public and private investors. And it's this flow that appears to be feeding the ongoing accumulation.

How do I know this? I know this because the quantity of newly delinquent mortgages, those that are 30 to 89 days late on payments, has decreased consistently since topping out in the fourth quarter of 2008 -- the same quarter, that is, in which Lehman Brothers failed.

Source: FDIC's Statistics on Depository Institutions.

Further aggravating the bottleneck is the foreclosure process, which has been inundated with volume and beset with problems. But again, the statistics here are misleading. In the third quarter of last year, for instance, the nationwide foreclosure rate fell to 4.1%, its lowest level in three and a half years. However, according to the Wall Street Journal, citing statistics from Lender Processing Services, the average loan that completed foreclosure in Florida last year had been delinquent for 1,034 days. In California, the figure was 646 days. And in Arizona it was 486 days. For every loan that's bogged down in the system, in turn, new ones continue to pile up behind it.

I don't mean to be a Debbie Downer, but the implications of this should be obvious. Since the financial crisis, we've heard rumors about the so-called shadow inventory of homes that threatens the still-fragile housing recovery. Well, this is exactly what those rumors refer to -- along with the additional multi-billion dollar inventories of toxic mortgages that remain in the hands of public and private investors like Fannie Mae and Freddie Mac.

Thus, until this backlog is clear, two things seem certain. First, ailing lenders like Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , SunTrust Banks (NYSE: STI  ) , and Keycorp (NYSE: KEY  ) will grow their loan books only slowly and reluctantly. And second, so long as this excess supply sits ominously on the sidelines, the housing recovery will, at best, be muted.

Beat the market!
The Motley Fool wants to give you a 98.79% chance at beating the market. If you're interested in the best odds in the universe -- including more than a 70% chance at DOUBLING the market's return over the long haul -- here's some very good news for you: Motley Fool Supernova is reopening to new members for the first time ever on Jan. 15! Get instant and free access to learn how you get these kind of market-beating odds by clicking here now.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2013, at 11:33 AM, cas45 wrote:

    It seems you left off the 11-12 million or so underwater homeowners who are undoublty pissed off, been left behind in all these so called "fraud settlements" and who have no incentive to short sell and every reason to just walk away, thereby hampering any real recovery for decades.

  • Report this Comment On January 07, 2013, at 3:54 PM, BMFPitt wrote:

    A housing "recovery" will be when prices are finally allowed to correct to their true value, without constant measures to prevent affordability.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2182033, ~/Articles/ArticleHandler.aspx, 8/27/2014 8:57:44 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement