This chart showing US home vacancies tells you everything you need to know about the near-term future of the economy. The United States has twice as many vacant homes as the entire housing stock of Canada. The US has ten times more people than Canada, too, but that doesn’t exactly help us think about the problem.
With that much excess supply, prices simply have to fall. And the worst part of this story is that the foreclosure tide, which has been held back temporarily by a few Administration programs, is about to burst. Basically, the failure of the HAMP program to actually modify loan terms is about to lead to a big spike:
What you’re seeing here isn’t subprime dreck: it’s sensibly-underwritten conforming loans which were bought by Fannie and Freddie. Through 2009 and the first half of 2010, the rate at which those loans entered foreclosure proceedings was pretty steady. But as we enter the second half of 2010, there’s a huge spike, especially in the loans which have been delinquent for more than six months.
That spike is loans which entered the HAMP modification process, but then got kicked out, for reasons good or bad. Without a successful permanent HAMP modification, foreclosure comes soon enough.
As homes move out of HAMP and into foreclosure, the amount of distressed real-estate sales will rise, and home prices will of course fall in the effected areas, pushing ever more homeowners into the negative-equity status which is very highly correlated with default risk. And so the vicious cycle continues.
There are a number of ways to arrest this cycle – level the playing field for the borrower by allowing bankruptcy judges to modify loan terms, allow borrowers to rent their properties at market rates for a period of time, force the lenders to write the properties down to present value, or whatever. But clearly, HAMP can’t do it alone, and none of those other options are on the horizon. I’d put my money on the smart organizers in New York trying to force write-downs over Treasury, at this stage. But you can see in their model the options available:
Now NYCC has turned up the heat on the banks. It has joined with state and local legislators to make foreclosure a more expensive and onerous proposition for Wall Street.
In a press conference last week, members of NYCC, the State Senate, State Assembly and New York City Council announced legislation that would force banks to pony up to maintain foreclosed homes rather than letting them deteriorate at the expense of impacted communities.
State legislation that took effect in April required banks to maintain foreclosed properties so they don’t fall into disrepair, increase blight and crime and further drive down property values while devastating entire neighborhoods.
The point is that the props for the housing market are gradually being kicked away. Either the economy will suffer from the huge costs associated with foreclosures, or the banks will participate in offsetting the funding. Right now, it looks like the former.