Housing Being Pummeled By 3rd Stimulus Hangover: Here's Why The Wall Street Bulls Have it Wrong

Most think of the effects of foreclosures & short sales (distressed) only in the first derivative…that they are bad for housing and prices.  As such, bullish leaning headlines of plunging defaults, foreclosures and short sales over the past two years are everywhere, often.

Some analysts actually follow and publish the data weekly presenting them as further irrefutable evidence of a real “recovery”.   But, of course, when it comes to new-era housing what instinctively sounds like a positive, or negative, is more often than not the exact opposite.   And what’s ironic is that the lagging default, foreclosure, and short sale data they publish in the bullish context is actually leading indicating data of a bearish trend-reversal in housing happening right now, which will lead to the third stimulus “hangover” in the past seven years.

So, the next time you see the headline “Mortgage Defaults (or Foreclosures) at a 6-year Low!!!” you might want to say to yourself “humm, that’s a real problem for purchase demand, house prices, construction labor, materials, appliance sales” and so on.

Bottom line: When it comes to defaults, foreclosures and short sales and how they really fit into the macro housing and economic mosaic, “less is bad”.  Foreclosures and short sales “were” a significant housing and macro economic tailwind that drove transactions, prices, home improvement retail, labor, materials, and durable goods sales, which now — down 75% since 2012 — have turned into a stiff headwind.

How it really works on Main Street

  • After the initial displacement of the homeowner and foreclosure/short sale, which can drive down house prices in the short-term;
  • the previous homeowner rents a property for an amount they can afford this time around and are able to de-lever and raise capital so they can go back into the market at a future date.
    • they rebuild credit through high interest rate credit cards and subprime auto loans, now back at record highs;
  • foreclosures rehabbed and sold at the highest prices in neighborhoods helped send house prices back into bubble territory in leading indicating legacy bubble years regions all over the nation;
    • if held over 6 months by investors before resale, house price indices can pick up the sale and have no way of knowing that the lion’s share of the price gains were due to rehab labor and materials artifically skewing index levels higher;
  • “distressed” supply drives resale volume with some properties being counted as sales 2 or 3 times per calendar year due to flips;
  • “all cash” buyers from 2011 to 13 — operating based on various subjective approaches — acted much in the same way as “exotic loans” from 2004 to 07 on house prices and are responsible for the lion’s share of the past two-years hyper-appreciation in the legacy bubble-years regions;
  • foreclosures / short sales boosted the macro economy in a notable manner, as “distressed” was multiples of builder volume and required the exact same labor, materials, appliances etc as builders use;

In summary, the halting of foreclosures and short sales due to can-kicking — and to a larger extent exotic mortgage mods — has caused serious structural damage to the demand equation of the macro housing market, which amazingly hasn’t not dawned on many yet.  They see and report the data each month, but most haven’t connected the dots…”distressed” drove the past few years of housing market “stim-covery“; and millions of over-levered, underwater homeowners stuck in their house either underwater or in a 2% interest only mod — unable to sell or rebuy — greatly diminished the nation’s “total potential demand. One needs to look no further than the dramatic divergence between builder demand (driven by end-users) and resale demand (driven by spec-vestors) to understand this.

Bottom line, the plunge in foreclosures and short sales is not only a significant housing market headwind, but a macro economic headwind as well.  Just look at recent earnings disappointments from housing related retailers as an example.  Moreover, to new-era, Fed-induced, buy-to-rent spec-vestors who were counting on millions more families to be displaced due to foreclosures/short sales — to whom they would rent and eventually sell properties in 3 to 5 years — the lack of foreclosures presents a serious demand problem that will ultimately force liquidations.

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