Monday, September 28, 2009

Amherst Securities Issues A Report On The True Housing Inventory Overhang

Amherst Securities, perhaps most famous to TILB readers for their famous jobbing of JP Morgan, is back and this time they share an analysis of the true housing inventory overhang that exists today.

Basically, while the traditional media regularly touts the improvement signified by the contraction of housing inventory down to 8.5 months, these stories overlook the massive foreclosure/REO* inventory and pipeline that is building on the books of banks and servicers. Loans continue to move through the delinquency pipeline toward REO at a rapid pace but are moving out at a slow pace (meaning bank balance sheets (and the FDIC balance sheet!) are filling up with foreclosed homes that ultimately need to be sold). These properties are destined for liquidation of one kind or another and thus will be competing for scarce buyers with "normal" housing inventory. TILB argues that the shadow inventory is understated yet further by two factors:
  1. Folks that would like to sell but are unwilling to list their house during an unstable market. Everyone knows someone(s) like this and we suspect this is a huge backlog (of course, most "normal" sellers are would-be buyers as well)
  2. Investment properties. An enormous number of foreclosure sales have been purchased by investors that ultimately plan to re-list the properties they've acquired in order to have an exit and chrystalize their "gains". Unlike #1, these sellers do not come accompanied with a buyer. They are net sellers.

This point about "net sellers" is an important point. While "normal" housing inventory are homes owned by a bunch of sellers that expect to be buyers (e.g., they are moving and so they may sell a house in Cupertino and buy a house in Dallas, thus they are "net zero" to the nationwide supply/demand dynamic), REO inventory and investment property inventory are net negative. They do not have an natural "buy" that follows their sale. As such, this is a much "worse" kind of inventory, from a house price perspective.

Here's the synopsis Amherst provides about their report followed by the report itself. It is excellent.


The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales. We look at the impact on a number of local markets, then look to the causes of the overhang: (1) transition rates are high, (2) cure rates are low and (3) loans are taking longer to liquidate. We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary.
Here's another juicy tidbit:
The Mortgage Bankers Association (MBA) Quarterly Delinquency Survey covers 44.7 million units, or approximately 80% of the total universe. Thus, about 55.9 million homes in the United States have a mortgage. Exhibit 1 (below) shows that at the end of Q2 2009, a staggering 13.54% of mortgages in the MBA survey were in some stage of delinquency: 4.3% of units surveyed were in foreclosure, another 3.88% were 90+ delinquent, 1.68% were 60 days delinquent, and 3.68% were 30 days delinquent.
Using transition rates for the calculations, our Q2 numbers indicate that the cure rate is near “0” for loans in foreclosure, and it’s 0.8% for 90+ days delinquent, 4.4% for 60 days delinquent, 26.5% for 30-day delinquent loans (thus, we assume 100% of the foreclosure bucket, 99.2% of the 90+ delinquent bucket, 95.6% of the 60 day
delinquent loans and 72.4% of 30 day delinquent loans will eventually liquidate). This implies that of the 13.54% delinquent units, we expect 12.42% of units to eventually liquidate. If the MBA data is representative of the mortgage universe, it suggests that 12.42% of 55.9 million units (6.94 million units) are already in the delinquency pipeline and will eventually liquidate.

To put that into perspective, existing home sales total around 5.2 million units - - so the overhang is approximately 1.35X one year of existing home sales. [emphasis added]
Honestly, we could go on and cut and paste the entire report, but you may as well click the below link and enjoy the source document yourself.

Green shoots!

Shadow Inventory Report Amherst 9-23-09

*REO means "Real Estate Owned". This is industry parlance for homes that banks and servicers have taken back, generally due to foreclosure, and thus no longer are recorded as a mortgage "loan" on the balance sheet of these entities but are now recorded as REO.

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