At some point, the dodgy loans of the housing bubble will be recycled, delinquency rates will fall back to normal, the shadow inventory will be processed, and foreclosure rates will decline to the point they no longer dominate market sales and keep prices from rising. But when will that happen?
Based on the most recent data from Lender Processing Services, I have extrapolated recent trends to attempt to answer that question. But first, we need to understand where we are in the process.
In early 2012, lenders halted processing shadow inventory of long-term delinquent loans to attempt one more round of loan modifications to comply with the national settlement agreement. They have taken advantage of this to greatly reduce their standing inventory, particularly in non-judicial foreclosure states like California.
As a result of this shift in processing, the ratio of aged loans to the total pipeline of foreclosures has been rising abruptly (see chart below).
And shadow inventory has started rising again.
Lenders hope they can cure the loans of the long-term delinquent through HAMP loan modifications because then they can pass those losses on to the US taxpayer. At least some in Congress are fighting this, but the banks will likely win in the end. Regardless of whether or not these loans can be save through loan modifications, the delays gives more time for the market to heal and time for banks to liquidate their standing REO inventories. By the end of 2012, banks will not be storing any REO outside their normal processing pipeline.
I took the long-term chart of mortgage delinquencies from LPS and projected the current rate of decline forward to the future to see when we get back to a normal rate of delinquency. The result was January of 2015 (see chart below).
The data series for extrapolation was two and a half years of data, and the trend is easy to define. I feel confident that unless lender behavior changes, we will see normal delinquency rates by early 2015.
The foreclosure rates are much more difficult to project because we have not turned the corner on foreclosure processing. Banks have been flatlined at the maximum rate of foreclosure processing their balance sheets can take and the housing market can absorb. Projecting the rate of future foreclosures first requires an estimate of when foreclosure processing will come off this plateau, then it requires an estimate of how quickly foreclosure processing will decline.
My estimate of when foreclosures will begin to subside from the plateau is when delinquencies approach the normal range. Since the declining delinquency rate happens in part because lenders clean up long-term delinquencies, the rate of foreclosure processing should slow down as lenders begin running out of borrowers to foreclose on. This rate should start to turn down before delinquency rates stabilize. I estimate foreclosures will begin to drop in early 2014.
Based on the rate at which foreclosures increased, I estimate it will take another three and a half years for foreclosure rates to drop all the way down to their historically low levels prior to the housing bust, but it may take much longer as the large number of underwater loanowners creates a long tail. However, somewhere in between, the total number of foreclosures being processed through the MLS will decline to where they no longer dominate total sales. At that point, foreclosures will no longer be a strong drag on prices. I estimate the market will reach this magic threshold sometime in 2015 or 2016. At that point, the choppy bottoming period of seasonal ups and downs will be replaced by normal market appreciation based on income and job growth. Some of the most beaten down markets may see above average appreciation as they rebound back up to levels of payment affordability matching historic norms.
If I am right, the housing market will begin a true recovery in 2015, a full ten years after the crash began. The bottoming period will have lasted for seven full years. I might be wrong. It may take even longer.
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Proprietary Irvine Housing News home purchase analysis
$868,800 …….. Asking Price
$415,000 ………. Purchase Price
1/10/2001 ………. Purchase Date
$453,800 ………. Gross Gain (Loss)
($33,200) ………… Commissions and Costs at 8%
$420,600 ………. Net Gain (Loss)
109.3% ………. Gross Percent Change
101.3% ………. Net Percent Change
6.3% ………… Annual Appreciation
Cost of Home Ownership
$868,800 …….. Asking Price
$173,760 ………… 20% Down Conventional
3.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$695,040 …….. Mortgage
$171,263 ………. Income Requirement
$3,140 ………… Monthly Mortgage Payment
$753 ………… Property Tax at 1.04%
$267 ………… Mello Roos & Special Taxes
$217 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$47 ………… Homeowners Association Fees
$4,424 ………. Monthly Cash Outlays
($702) ………. Tax Savings
($1,084) ………. Equity Hidden in Payment
$198 ………….. Lost Income to Down Payment
$129 ………….. Maintenance and Replacement Reserves
$2,964 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$10,188 ………… Furnishing and Move In at 1% + $1,500
$10,188 ………… Closing Costs at 1% + $1,500
$6,950 ………… Interest Points
$173,760 ………… Down Payment
$201,086 ………. Total Cash Costs
$45,400 ………. Emergency Cash Reserves
$246,486 ………. Total Savings Needed
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