In previous blogs, I have looked at the housing market and the effects of the foreclosure problems on its recovery. Over the past few days, there have been additional events which add further uncertainly to the mix. Since many relocation policies, budgets, and moves are directly affected by the strength of the housing market, some prognostication is useful for all U.S. domestic programs, not just home sale programs. Delayed or postponed sales will affect more aspects of strategic talent placement than just home sale; renting will increase, moves will be slowed or refused, and predecision counseling will become even more important in preparing the potential transferring employee for any move.
The latest estimate of houses in foreclosure is approximately 4 million, with a current inventory of homes for sale (but not under foreclosure) is about an additional 1.9 million. Sales of all existing homes, according to NAR, are running at about 4.13 million yearly. Thus just with the current inventory, the numbers imply that, everything else being equal, there is about a 14 month backlog in housing sales. Of course, everything else is not equal, and it is likely that this number is wildly inaccurate. Let’s look at the other variables, but first it is always useful to remind oneself that all housing is local; the data reflects an average, and places like Las Vegas and Washington, D.C. may look totally different.
The first of these additional factors is the existence of what it sometimes called the “shadow inventory”, i.e., houses which are over 90 days in arrears on mortgage payments, but which have yet to be foreclosed upon. There are about another 4 million in this category, and recent experience has shown that the vast bulk of these will go into foreclosure and will not be saved by virtue of the federal or lender remedial programs. The reason for this is simple; the soft economy and continuing high unemployment rates do not allow seriously delinquent borrowers to pull out of the freefall, and the still falling house prices drive them further underwater. Even at the current rate of sales, then, the addition of this group of houses to the market would slow absorption until sometime in 2012 or early 2013. Because of this overhang , it is quite probable that prices will not begin to recover in slow markets until the demand/supply balance is restored, which is normally around 60 to 120 days DOM (days on market) .
Second, there are several factors, mostly legal and political, which will likely prolong the mechanics of foreclosures, at least in the short run. While this might help the absorption rate somewhat, by holding in check any dramatic increase in DOM, it will also slow down any price recovery because of the uncertainty which it adds to the market. The most public of these factors is the foreclosure paperwork mess which I have blogged about earlier (October 6). It still looks to me that, from the legal standpoint, this is repairable. In fact, earlier this week Wells Fargo announced that it had rectified the paperwork on 55,000 foreclosure cases which will now presumably go forward. While the paperwork issues will continue to be slowly and painfully worked out, this factor alone looks like it will only slow down the process of getting the 4 million current foreclosures sold and off of the market. Of course, no one knows how long this will add to the timetable, but the estimates tend to be in the six month to one year range; still not a major increase to the 2012 to 2013 time frame for inventory clearance.
There are two political issues on the table, in addition, which could slow down the process. One regards proposed action by the attorneys general of the states, and the other is based on an issue raised by a Virginia state delegate.
The first, and potentially most troubling, is a group of 50 state officials, led by the Attorney General of Iowa, Thomas Miller, a long time opponent of electronic mortgage registration and MERS, to organize his counterparts in other states into a country-wide investigation into whether the foreclosure paperwork debacle constitutes a violation of state deceptive practices or consumer protection laws (Mr. Miller was reelected last night, but six of the twelve lead members of the group were not). Of course, all of these laws vary from state to state, but most are violated by purposefully creating false documents in the foreclosure situation. There is some resistance in many states regarding this investigation, since there is evidence that the motive is to force the lenders (and therefore the holders of all mortgage backed securities) to dramatically lower the principle amount of the indebtedness of many foreclosure properties. However, since most state deceptive practices laws provide for treble (triple) damages and the payment of attorneys’ fees, the incentive to settle these cases is very high, and, as may be expected, the major banks have been meeting with the key state attorneys general to try to work out an acceptable method of presenting documentation in judicial foreclosures. How this state investigation will affect the foreclosure timeline is not clear. Certainly the election has replaced many state attorney generals, so there will be a learning curve for the incoming officials. And demanding a lowering of principle in foreclosing houses will likely be a chimerical victory at best, since with an extremely soft economy and an over 10% unemployment rate, there are not many borrowers in foreclosure who can take advantage of the lower payments (which are also available through HOEPTA and the newer federal plans). The worst case here, in my estimation, is that state action could increase the overall increase in absorption for an additional six months, and add a significant cost to the lenders.
The second legal issue is one raised by a member of the Virginia House of Delegates, Robert Marshall, who has introduced a bill that would require MERS (which is a Virginia company) to pay county taxes on each transfer of ownership in its mortgage servicing and securitization transactions. In fact, Mr. Marshall claims that current law demands this, and he has asked the state attorney general for an opinion on it. Somewhat related is a lawsuit filed in Georgia which seeks class action status to determine whether MERS lacks the power to institute any foreclosures on behalf of lenders, servicers, or anyone else; this particular suit asks the judge to undo all previous foreclosures and give the deed back to the foreclosed borrowers.
Fortunately there has been no widespread attempt by county officials to collect any fees from MERS transfers, and the Georgia lawsuit is not likely to undo all foreclosures. Likewise, even if Virginia passes a transfer tax statute, the delays in foreclosures will likely not be great; only the cost will increase, affecting banks’ balance sheets, but not their need to clear these properties off of their books. Worst case, this, too, will add a delay to the process, but can likely be taken care of while the other delays are being dealt with.
The bottom line for the employee mobility industry is that, given what we know now, it looks like bank foreclosures will continue to slow housing absorption until about late 2013 unless the economy picks up rapidly and decisively, driving up demand and lowering foreclosures. It is likely that prices will decline slightly when the shadow inventory hits the market and that they will remain weak until inventory moves back to previous equilibrium levels, depending on the location.
Of course, any of these variables may change instantly, but that is the way it looks today, based the current legal and economic landscape.