On Friday, we learned that existing home sales rose in February well above consensus expectations. Good news? Yes. The headlines in the financial press proclaimed (for the umpteenth time) that the worst of the housing slump is behind us. Home prices are down a mere 1.3% from a year ago, although the number of homes for sale rose slightly to a supply of 6.7 months, meaning homes are staying on the market longer, as sellers are still reluctant to sell at lower prices.
But the problems for new and existing home sales are in the future. Last year there were 400,000 foreclosures. Economy.com (Moody's) estimates that that number will double in 2007. That means that there will be an additional 800,000 homes added to the supply of existing homes this year, which is at a seasonally adjusted 6.69 million homes.
Doing the back-of-the-napkin math, that suggests there are about 3.6 million homes for sale on the market today. We could see that number grow by as much as 15-20% due to foreclosures alone over the coming months, as more homes go through foreclosure. Remember, the record foreclosures we are seeing today started as problems six months ago (or more in some states). As delinquency rates are rising sharply, the number of foreclosures six months from now is going to be even higher. It will take several years for this problem to work itself out.
800,000 Foreclosures in 2007
So, what do 800,000 foreclosures mean? It is like the old joke: when your neighbor loses his job it is a recession. When you lose yours, it is a depression. What it means depends on your position.
Let's make the math easy. Assume an average mortgage of $200,000. That would be $160 billion worth of foreclosures. But of course not all that $160 billion would be lost. The homes do have some value. Let's assume that the homes are only worth 80% of the foreclosed mortgages, an admittedly possibly bearish assumption.
That would mean lenders are going to have to lose $32 billion. Ouch. But even if it is $32 billion, in an $8 trillion dollar mortgage market and an almost $13 trillion US economy that is a rounding error, as long as you are not the lender.
Who loses? Obviously, a lot of mortgage banks. On March 2
www.lenderimplode.com listed 28 subprime mortgage firms that were shut down or taken over. One week later it was at 34. The count is now 44. Nine of the top 25 subprime lenders are either bankrupt or no longer operating independently. Many have given earnings warnings, and have massively increased estimates for loan losses. The shareholders, whether public or private, of these companies lose..
