Saturday, June 27, 2009

Lower Prices Accelerate the Downward Spiral

Unfortunately for the green shoots crowd, the trend in residential real estate continues its downward spiral.

It's so out of control now, not even Sully Sullenberger could land this one safely.

And while sales may have turned up a tad in May according to the National Association of Realtors (NAR), the 800 lb. gorilla in the room is being largely ignored.

But there he sits, huge, hairy, and mean. And the bad news for the U.S. Housing Market is he's getting hungrier by the minute.

That's because the much bigger problem — for borrowers of all stripes — is actually the continuing decline in values that could reach as high as 36% from peak to trough.

The U.S. Housing Market's Heavy Chains

In fact, according to the NAR on Tuesday, the median price of an existing home fell to $173,000 in May from $207,900 only a year earlier.

That $34,900 drop in price left every single "median buyer" so deep underwater, their ears will soon pop.

So, sure, while low rates and tax credits may have brought some buyers in from the sidelines this spring, it will also chain a fair share of them to that big gorilla — an asset whose value is dropping like a rock.

For those willing to take on those heavy chains, the price of "ownership" is that some of them will find themselves hopelessly upside down as prices continue to slide. But at least they'll have plenty of company, since Zillow estimates 22% of all Americans are underwater on their mortgages.

That, of course, is a no-win situation for everyone involved, and it's the big reason why falling prices drive far more foreclosures than higher payments ever will.

After all, who wants to be chained to a gorilla?  

In fact, according to a report last week from Fitch, home prices will fall by an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010 — over a year from now.

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Lawrence Yun's Latest Boogeyman

That is a prospect that keeps the NAR's chief economist (read: shill) Lawrence Yun awake at night rubbing a Buddha's belly while clutching a rabbit foot. Even still, he hears noises under the bed and sees terrifying figures in the closet.

Yun's latest boogeymen are those awful appraisers who are now doing their jobs without the threat of coercion.

You see, when the housing market was still a land of winks and nods, an appraisers ability to "hit the number" was the only thing that kept the new orders rolling in. You either delivered the goods, or you were blackballed by the loan officers who hired you.

Because of that, appraisal fraud ran rampant, causing a portion of the big losses taxpayers are now being asked to eat.

This obvious conflict of interest has been corrected by new appraisal rules that went into effect on May 1. With a dose of sanity, the new rules now simply require lenders who sell loans to Fannie Mae or Freddie Mac to order their own appraisals, taking loan officers out of the crooked loop completely.

Restoring Integrity Means a Lower U.S. Housing Market

However, restoring actual integrity to the mortgage process is bad for both sales and home prices. And Yun knows it.

So, when honest appraisals start gumming up the works, Yun begins to scream bloody murder, forgetting that an independent price opinion is the cornerstone of sound lending.

"It's pointing to thousands of delayed or canceled transactions," Yun whined yesterday in response to low appraisals. "We've had a massive inundation from members saying this is a big problem."

To which the Appraisal Institute rightly responded, "We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with."

All of which reminds me of a nursery rhyme about an egg that fell from a pretty large height. No matter how hard they tried, all the king's horses and all the king's men couldn't put Humpty Dumpty back together again!

It really is that simple. Unless, of course, you are an insomniac named Lawrence Yun.

For some reason he still thinks he can tame an 800 lb. gorilla.

By the way, things have gotten so bad in the housing market lately that yesterday the S&P lowered its ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities issued from 1998 to 2004. That's notable because these securities were previously thought to be safe, due to when they originated.

"The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement.

Translation: Look out Below.

It kind of makes you yearn for the days when all this mess was supposedly confined to sub prime. Up the ladder the gorilla goes. .

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