How the National Association of Realtors Convinced Taxpayers to Subsidize the American Dream

By Andrew Jeffery
(Published by FT Press, in conjunction with Minyanville.com)

Wall Street has been occupied. Mortgage brokers shut down. Bankers, vilified. Even struggling homeowners, behind on their mortgages, receive scant pity as they are forcefully removed from their homes.

But what about real estate agents? By and large, the people paid to advise us on what’s often the biggest financial decision of our lives, have gotten off scot-free, avoiding the scorn so heavily heaped on nearly every player in the real estate game.

It’s a mystery to which every one homeowner – and prospective homeowner – should want an answer. And here it is:

Cirios Real Estate’s Andrew Jeffery chronicles the influential role the National Association of Realtors, or NAR, played in designing US housing policies that enriched real estate professionals by making buying a home cheaper and easier than ever before. NAR argues that by subsidizing home buying, the government can help American families realize the American Dream, making upward social mobility possible for everyone.

But at what cost?

Tracing a path that begins in Depression-Era politics and the New Deal, we follow real estate industry lobbyists through the Great Depression, World War II, the Civil Rights Movement and into the housing boom. We examine accusations that NAR was an essential, albeit often overlooked culprit, in blowing the housing bubble, the bursting of which nearly took down the entire global financial system.

To read this newly published e-book, click here: (Non-Kindle owners can use read.amazon.com to read it online)

Some of the highlights of the piece can be found below:

Critics argue that NAR’s positions are laced with a fundamental contradiction: claiming to believe in free markets even while zealously fighting for generous government subsidies to support homeownership. (read more)

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It is a sad irony that the very policies that over decades shaped the U.S. real estate market and eventually culminated in the bursting of the housing bubble were advanced under the guise of supporting the American Dream of owning a home. (read more)

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In President Roosevelt’s own words: ‘The number of new refrigerators means something besides just plain dollars and cents. It means greater human happiness.’ (read more)

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With FHA insuring mortgage payments and Fannie Mae providing liquidity in the secondary market, homeownership, once lauded for its status as a private enterprise, had become a market almost entirely supported by the federal government in less than a decade. (read more)

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With affordable housing options in short supply, swelling ranks of poor minorities piled into inadequately funded public housing. Meanwhile, whites flocked to the quiet suburbs and newly minted single family homes that were being built with government-backed development loans from the FHA. (read more)

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In pre-1968 America, private residential development deserved an infamous appendix: ‘Whites Only.’ (read more)

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White Americans received an astounding 98% of federally approved mortgages between 1934 and 1968. (read more)

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An FHA underwriting manual from 1938 stated that lending restrictions should include property-specific provisions for reasonable items like “adequate light and air,” but also specified “prohibition of the occupancy of properties except by the race for which they are intended. (read more)

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Lenders were still reticent to make loans in poor, urban neighborhoods. They were, however, happy to take local residents’ deposits, turn around, and lend out the money to middle class families buying homes in the suburbs. (read more)

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The ensuing refinance boom set off a six-year speculative housing orgy, financed by cheap loans and the expansion of a niche segment of the mortgage market called subprime. (read more)

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During the boom years of 2002–2006 … real estate agents collectively earned between $400 and $500 billion in commissions. (read more)

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As the housing market began to crumble, NAR’s message to consumers was clear: ‘Right now may actually be one of the best times to buy a home. The outlook is for home prices to increase next year.’ (read more)

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Perhaps as a thank you for NAR’s $40 million ad campaign, USA Today crowned NAR Chief Economist Yun the top economic forecaster in 2008, despite having an impeccable record— for being dead wrong. (read more)

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NAR is advocating for a near-complete abdication of the mortgage market to the federal government—in the same letter that begins with a statement in support of free markets. (read more)

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If owners are so much better off than renters, why should mortgage interest and not rent be tax deductible? The answer’s easy—because renters don’t generate real estate commissions. (read more)

12 Housing Themes for 2012

As 2012 rumbles out of the gate, the US housing market correction enters its sixth year. By all accounts, it’s been the worst real estate slump in generations. But even this far into the cycle, housing bears continue to troll through data releases looking for ominous warnings that vindicate their view that homebuyers and investors alike should shun real estate. They have a point, but record foreclosures, bloated inventory and home price declines are anything but news.

They are also missing the point entirely: The time to be bearish on housing was in 2005, not 2012.

For those not in the market, who get their color from the blogosphere and headline-selling financial press, the housing market is a mess: Foreclosures persist, unemployment is high, Europe is in turmoil, growth in China and the other BRICs is slowing and banks are doing their best to avoid giving out loans. And that’s all true.

But come December when we look back at how the housing market fared in 2012, this will not be a year remembered for how bad it was, but for how bad it wasn’t. Over the course of the six year housing correction, immense amounts of risk have been bled out of the market to a point where, in general, opportunities for good investments outweigh the risk of further losses.

Below are 12 themes for housing in 2012, and while not all represent rosy optimism, they support my continued view that housing bears are seven years late to the party. And while bulls may be early, the good ones always are.

1. Bottom Calling
All of a sudden its cool again to call the bottom in the housing market. Already, some prominent pundits and analysts have said 2012 will mark housing’s nadir. Goldman Sachs came out with a report in December predicting that the widely-watched Case Shiller Home Price Index would slip in 2012 but find a bottom. Optimism that Goldman’s forecast will come true should be tempered, however, since real estate website Zillow — a company built primarily on providing consumers misleading information about their home’s value — recently published a report of their own pointing to 2012 as housing’s low point. And remember, in 2009, 2010 was supposed to be the bottom. Then it was 2011. Midway through this year, if housing remains weak, look for those bold analysts to backpedal, finding unforeseen circumstances that rendered their predictions null.

2. Robo-signing hangover, cured?
This time last year, the housing market was holding its collective breath as the robo-signing scandal broke, revealing shoddy foreclosure processes, first at Ally Bank (formerly GMAC), then Bank of America, JP Morgan Chase and nearly all the country’s biggest lenders. The repossession machine ground to a halt, resulting in limited supply of new foreclosures coming to market. Banks scrambled to “investigate” their procedures, uncovering a litany of practices that were sloppy at best, illegal at worst. Even firms like Lender Processing Services, which provides back office support and services to the mortgage industry, got wrapped up in the scandal. As a result, foreclosures virtually ground to a halt in 2011, which helped prop up prices up in the first half of the year. In many areas, price declines accelerated into year-end as banks resolved their robo-signing issues again and restarted the foreclosure machine. 2012 looks to be another year heavy in foreclosures, but with hoards of cash buyers looking for distressed properties, it will take a true deluge of inventory to overwhelm pent up investor demand.

3. Geopolitical Uncertainty
The world is a mess. The list of geopolitical tinderboxes that could catch flame at any moment is too long to reprint here. Suffice to say, every asset class on investors’ menus is laced with risk, many of which have little to do with the fundamentals of the investment itself. And with risk at all-time highs and returns on savings at all-time lows, steady, cash flowing assets are starting to be seen as more attractive than they are boring. This flight to quality is one of the reasons cities like San Francisco, New York, Boston and Washington have seen investors flock to their Class A properties. A world where demand dries up in midtown Manhattan or downtown San Francisco is an ugly world indeed, and many view real estate a safe “as long as the world doesn’t completely implode I will be OK” bet.

4. Foreclosure Rental Program
The latest in a string of Washington-directed solutions to the housing market’s woes is the turning of millions of foreclosed homes into rentals. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, received over 4000 proposals after requesting ideas on how to structure its program to rent foreclosed homes. All the big players tossed their hats into the ring, in additional to financial firms like Fortress Investment Group, Deutsche Bank and Barclays Capital. With rents rising and home prices falling, regulators and politicians alike think they may have found a way to not only keep bank owned homes from pushing home prices down any further, but earn a couple bucks in rental income in the process. And while major lending institutions are playing ball to show they don’t relish in kicking Americans out of their homes, the logistical challenges to managing nationwide rental programs are, in a word, significant. Time, and data on actual REO homes turned into rentals will prove out just how successful the initiative ultimately is, and how much of it is political fluff.

5. Return of alternative lending
So-called “exotic” lending during the boom was one of the chief culprits in the housing market’s eventual collapse. But to think that alternative lending has no place in the market is plain ignorant. Through Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), government-backed mortgages – and their strict guidelines – dominate the current market for home loans. But increasingly, small originators are gaining market share by offering more flexible loan products. No one will call the loans “Alt-A” or “Subprime,” but that’s exactly what they are. But from the guidelines my firm has has seen, underwriting is far more reasonable and responsible than it was during the boom. Good borrowers with dinged credit or alternative income situations have been locked out of the mortgage market since the crash – bringing them back in will be a positive headwind for housing in the coming years.

6. Multi-family momentum
The hottest sector in real estate right now is multifamily. It seems like everyone wants to buy apartment buildings, in particular in coastal metro markets where rents are going through the roof. Cap rates have compressed to levels not seen since the market’s peak, interest rates are low (although loans are still a challenge to get funded) and money is pouring into the market. In Class A markets like San Francisco and New York, competition is heated for big buildings. But with smaller investors still reeling from the downturn, the small building market (5-20 units) is still awash with opportunities. Strong demographic trends (more below) that favor the rental market lead us to believe that apartments are hot for good reason, and should stay that way for the foreseeable future.

7. Foreign Investors
An often overlooked reason why housing is unlikely to fall off another cliff any time soon is the extent to which investor demand for distressed assets dwarfs supply. This is true for rundown duplexes in Oakland and Manhattan high rises alike. And within that world of buyers stalking the market for deals, a surprisingly large percentage of all cash buyers have names most Americans would have trouble pronouncing. To wit, in the past six months, 19 of the 20 cheapest homes in San Francisco were purchased by buyers of Asian descent. The money keeps pouring in, be it from wealthy foreign businesspeople looking favorable the tax treatment our government gives direct investment, speculators yanking money out of the rapidly cooling Chinese market or Canadian “snowbirds” picking up a desert spread on the cheap in an exclusive Scottsdale development. Our housing market is far from fixed, but when investors look around the world at their asset class options, the US real estate market is benefiting from being best in show at a really, really lousy show.

8. Hazy Future for Fannie and Freddie
Remember Fannie Mae and Freddie Mac? Those little government-sponsored entities no one outside the arcane world of mortgage finance had heard of until they blew up sky-high in September 2008? Since that time, the two companies have needed nearly $200 billion in capital to make up for losses on mortgages bought or insured before the market collapsed. Since Fannie and Freddie were put into federal conservatorship, regulators, market participants and lobbyists have squared off over how to reshape the federal government’s role in housing. Most experts agree that the housing market cannot become truly healed until there is resolution on this issue, and with 2012 being an election year, few expect meaningful progress on this complex, hotly debated issue. (For more on the history of government involvement in the housing market and how the real estate lobby shaped federal policy to support homeownership at all cost, check out my recently published e-book: “Homeownership at Any Cost: How the National Association of Realtors Convinced Taxpayers to Subsidize the American Dream.”)

9. False Election promises of a Silver Bullet
Notably, housing was absent from even the most economically-focused Republican primary debates. Unfortunately, politicians have little to gain by proposing bold steps to fix the housing market, primarily because no such bold step exists. Some programs have been more successful than others, and certain ideas to improve the market have more merit than others, but “solutions” that tap into federal funds are attacked from the right while those that aim to remove barriers to foreclosure receive equal scorn from the left. Trying to fix the housing market at this point is a bit like happening upon a beached whale, long since dead and starting to reek, and pulling out a garden house.

10. FHA Shortfalls
Google “FHA is running out of money” and the first articles that pop up are from 2009, when concerns first surfaced that the Federal Housing Administration, or FHA, was running short of cash. Unlike Fannie and Freddie, who purchase actual mortgages, the FHA provides mortgage insurers that protect lenders in the event borrowers stop making payments. FHA loan guidelines are strict in many ways, but loose on credit and allow tiny down payments in order to provide finding options for low-income or credit-impaired home buyers. FHA squashed rumors of financial troubles in 2009, but concerns were raised again late last year when an independent auditor found that there was close to a 50% chance the FHA would run out of money and require a federal bailout. If FHA is indeed forced to go hat in hand to Washington for cash, the chances of such a request being well-received are, to say the least, somewhere squarely between slim and none.

11. Private Securitization Market Remains Stalled
Since the mortgage-backed securities market’s zenith in 2005, when according to the Securities Industries and Financial Markets Association issuance peaked at $740 billion, the market for private-label securities (those not backed by the US government via Fannie Mae and Freddie Mac) has plunged 99%. But ever since the boom’s big issuers like Goldman Sachs, Morgan Stanley and UBS all but shuttered their mortgage desks, they have been biding their time to when such securities were once again economic to create. Ratings agencies, namely Standard and Poors and Moodys, have altered their models such that issuances are no longer profitable, so precious few new securities have been issued. Redwood Trust, a California-based mortgage investment company, is one of the few firms doing new issuances and all have been of the jumbo variety. Even though others would like to follow in Redwood’s footsteps, until the regulatory landscape becomes far clearer, few will.

12. Housing demographics of young people
After peaking at nearly 70% in 2004, the US homeownership rate has tumbled to around 66%, a level not seen since 1998. Young owners, in particular, have been hardest hit. According to demographer Cheryl Russell, homeownership among 30-34 year olds is falling faster than any other age group: A loss of middle class wealth, student debt loads and uncertainty about the future are just some of the reasons young people are shunning homeownership. Couple that with trends towards transience and a general movement towards smaller spaces and city-centers, and the outlook for rentals starts to look pretty good. It’s no mystery why the real estate investment community can’t get enough of multi-family.

To call the US housing market anything but distressed would be foolish. But to mistaken a distressed housing market for one to avoid would be even more so. And so we plunge, headlong into 2012: Good luck out there.

This post first appeared on Minyanville.

It doesn’t make nearly the headline fodder as revolution in Egypt (or Wisconsin), but the fate of the mortgage interest deduction, or MID, is a hot topic in housing finance circles this budget season. And while eliminating the MID may sound like a popular, hard-line approach to expensive government subsidies for the housing market, the stark reality is that the MID is not going anywhere anytime soon.

The new Obama administration budget calls for stemming the benefit homeowners get by writing off interest on mortgages. Specifically, the president wants to limit deductions for homeowners earning more than $250,000 in annual income. Meanwhile, deductions on up to $1 million in mortgage debt, loans on second and third homes, and home equity lines of credit would remain in place. The MID isn’t the budget’s largest line-item, but it is no small potatoes, either.

Estimates vary, but the consensus is that the MID is around a $100 billion per year budget item. However, only one-third of homeowners actually get to take the deduction because many homeowners don’t itemize their deductions, missing out on one of the highly touted tax benefits of owning a home.

Lining up to defend the MID are powerful real estate and mortgage special interest groups, eager to promote home ownership (and of course member commissions). They argue that at a time when the housing market is already so shaky, removing this incentive to own real estate would undermine the feeble recovery that already appears to be faltering. Unsurprisingly, the National Association of Realtors, or NAR, the powerful real estate lobbyist group, is up in arms: “NAR opposes any changes that would limit or undermine current law.”

On the other side are a smattering of economists who aren’t sure the MID has much of an effect anyway. And if it does, the tax savings could be put to much better use. In a recent Financial Times piece, Robert Pozen pointed out that in Australia, Canada, and England, countries with similar demographics and legal structures to the United States, there is no MID yet home ownership rates remain higher than ours (which currently stands at its lowest in more than a dozen years).

Others believe that the MID and other subsidies via Fannie Mae and Freddie Mac — in addition to accommodating interest rate policy that has helped boost mortgage-lending profits at money center banks Wells Fargo (WFC), JPMorgan Chase (JPM), Citibank (C) and Bank of America (BAC) — allocate too many precious public dollars to housing. Far better to invest in innovation, or pretty much anything that can’t be boiled down to four walls and a roof.

Ultimately — and unfortunately because much of the discussion over US housing policy falls into this same category — the debate is futile in the near future. The MID in its current form reduces the cost of a home by about 20%. If this sounds astounding, do the math. The mortgage payment for a buyer putting down 20% to buy a $300,000 home and taking out a 5.0% mortgage is $1,288. The buyer gets to write off the $12,000 in annual interest paid, reducing his or her taxes by $3,000 assuming a 25% tax bracket. That’s $250 per month, making the buyer’s effective monthly mortgage payment just over $1,000 per month. The equivalent monthly payment pencils out to a home that costs around $240,000, or 20% below the original $300,000.

Current government policy states an explicit desire to prop up home prices, so expecting a policy that would almost immediately give property values a 20% haircut is untenable, at best. Even the current proposal will have a hard time surviving; a similar one last year got shot down by a Democrat-controlled Congress. Far better to focus near-term efforts on resolving the Fannie Mae and Freddie Mac debacle, as the only way the housing market can truly heal is with a functioning, liquid, private secondary market. As long as the zombie-like Fannie and Freddie are allowed to hang around, housing will remain in a painful limbo.

This post first appeared in: Cirios Trends – Special Edition: The Year Ahead

Since mortgage giants Fannie Mae and Freddie Mac collapsed in September 2008, housing experts and policy wonks alike have searched for a way forward with these two crucial pillars of the housing market. But each proposed solution, whether it includes a break up, wind down, privatization, or some combination of all three, fails to address the root of the problem: Too much debt.

We don’t need just need to figure out what to do with Fannie and Freddie. Rather, we need a sustainable system for financing residential real estate that is not so heavily reliant on debt. Equity sharing, the process by which a third party investor injects risk capital to the housing transaction in exchange for a partial equity stake in the property, is one such possible solution.

Fannie and Freddie, with their implicit (turned explicit) government backing, drove down the cost of mortgage debt, expanded the availability of credit and helped fuel home price appreciation. This worked great, until it didn’t. The system became highly unstable and ultimately crashed, largely due to the excessively high levels of debt Americans had used to purchase homes.

As any seasoned investor will tell you, asset depreciation can be tolerated and absorbed if risk is managed correctly. A key component of that risk management is smart use of leverage. Without leverage, losses take on a 1-1 ratio with the investment. That is, bet $100 to lose $100. But with leverage, the scales tip, and can do so dramatically if investors (or borrowers) are only required to post a fraction of the purchase price in equity. Even a “safe” mortgage where a borrower puts down 20%, is akin to betting $20 to lose $100. Add some zeroes and potential losses pile up quickly.

According to Freddie Mac, as of December 2010, the total value of US housing stock was $16.5 trillion, down a cool $7 trillion from the peak in 2006. Underpinning this dizzying large number is $10.1 trillion in debt, for a total current loan to value (or “LTV”) of 61.2%. Taken at face value, that actually doesn’t sound too bad. But dig into the data and its easy to see why most experts agree the housing market in this country cannot truly heal without some sort of material change to the way homes are financed.

At last tally, around 11 million US homeowners are underwater on their mortgage, meaning they owe more than their home is worth. With the median home price hovering around $180,000, that means about $2 trillion in housing stock is stuck, trapped in a negative equity situation that will either be resolved by default and eventually foreclosure, a modification or workout scenario, or simply through waiting and hoping appreciation comes back. Put another way, a full 1/3 of our excess housing value is immobile, paralyzed.

What the system needs is a structural process for injecting equity and paying back debt. Homeowners need to recapitalize their balance sheets at more sustainable levels, which would not only allow underwater borrowers to sell, but greatly reduce the portion of individual discretionary income that goes towards debt service. Pay less interest, buy more stuff, stimulate the economy, create jobs. Wash, rinse, repeat.

The challenge of course is where to find this admittedly sizable chunk of cash. Why, the free market, of course.

In a rare show of legislative foresight, Congressman Gary Miller (R-CA), introduced a bill last September that would launch a pilot program through the Federal Housing Administration for “equity sharing” as a way to reduce our dependence on debt to finance the purchase of homes.

Equity Sharing, while containing certain complexities, is relatively straightforward. A homeowner finds an equity partner to help pony up cash for a down payment. The homeowner retains the obligation to make the monthly mortgage payments, but in exchange for the down payment assistance gives up a chunk of home’s equity. The equity partner is silent(ish) in that he or she doesn’t get to pick carpet or paint colors, but the homeowner is obligated to maintain certain levels of responsible home maintenance.

Far from just another way to make it easier for individuals without much money to buy houses, equity sharing programs inject risk capital into the housing finance system rather than debt. That is, equity investors stand side by side with homeowners and take the first loss if housing prices fall, providing lenders more cushion and ultimately less risk on their loans. More equity (and consequently less debt) creates a more stable, less risky housing market.

Equity Sharing has applications in distressed housing situations as well. Third party equity investors can inject capital into underwater mortgages, enabling borrowers to lower LTVs to acceptable levels for a refinance.

And while far from a silver bullet to solve our country’s housing woes, equity sharing is a start. Already firms are popping up looking to set up equity sharing transactions. Steve Cinelli, CEO of Primarq, an equity sharing facilitator headquartered in the Silicon Valley, is optimistic about the industry’s potential: “[Equity Sharing] sets forth a direction for more affordable and sustainable homeownership, more prudent lending practices and a reduction of the role of government in supporting a most critical element of the US economy.”

This post first appeared in: Cirios Trends – Special Edition: 2010 Real Estate Roundup

A 2010 housing market recap would be incomplete without a rundown of what has become known as “Foreclosure-Gate,” a foray into the procedural minutiae of distressed mortgage servicing.

In September of this year – in the midst of the crucial mid-term elections – several large banks, including Ally Bank (formerly GMAC), Bank of America, and JPMorgan Chase, acknowledged problems with their foreclosure procedures. Bank employees, in addition to third party mortgage servicers and legal vendors, were found to have signed as many as several thousand documents a day, at times without personal knowledge of the facts they were attesting to in courts.

The practice became popularly known as “robo-signing” and sparked fresh political wrangling over the process by which Americans are forcibly removed from their homes.

In the wake of press reports and political backlash, lenders froze foreclosures and initiated internal reviews in the hopes of swiftly (and correctly) resuming foreclosures. The review process, however, has been anything but swift.

All 50 state attorney generals filed suit against transgressing lenders, in no small part because many were up for reelection at the time. By late November it was rumored that both sides were working towards a settlement. Some reports speculated the settlement could include: 1) a fund that banks pay into to compensate borrowers whose mortgages were wrongfully foreclosed; 2) banks eliminating the dual track of simultaneously reviewing modification requests and advancing the foreclosure process; and 3) a third party mediator review of cases where borrowers claim a foreclosure was in error.

As of publication, no actual settlement has been announced and repossession proceedings in many states remain delayed.

As reported in the Washington Post, mortgage industry representatives, including executives at Fannie Mae and Freddie Mac, have testified in front of Congress that mortgage servicers and the law firms filing foreclosure actions are to blame. Vendors, for their part, argue that Fannie and Freddie set policies and procedures that encouraged the sort of cost cutting automation now blamed for the errors.

In the rush to provide competitively priced services and reduce overhead, mortgage servicing companies and foreclosure filing law firms introduced high levels of automation to the document-intensive foreclosure process. The rub, however, was that human
reviewers would have to handle more and more files, with less and less time dedicated to each one.

For example, the ABA Journal reported on December 3, that a Pennsylvania law firm, Goldbeck McCafferty & McKeever, was accused of the unauthorized practice of law for non-attorneys routinely preparing and filing foreclosure suits without direct attorney oversight, including signing the purported attorney’s name themselves. In other instances, it has been learned that reams of documents were signed via stamps and that the signers had not actually read the documents they were signing.

Further revelations as to the mechanical foreclosure processes in place are likely to increase, which could continue to cause undesirable consequences to the entire housing market.

First, foreclosure freezes have resulted in delays in the healthy clearing of housing inventory via foreclosure. According to ForeclosureRadar, in Arizona, California and Nevada, the number of properties hitting the auction blocks has dropped more than 30%.

Second, investors that were buying distressed loans and foreclosed homes at auctions have become more cautious. For vulture investors buying defaulted loans and flippers buying REOs at auction, speed is essential to their investment return models. If more homeowners are successful in delaying foreclosures due to shoddy paperwork by servicers and law firms, what is to stop homeowners from attempting further delays even after an auction sale? This notion of continued delays has investors tweaking their pricing models to the downside.

Third, individuals buying REO properties on the open market have been more hesitant to purchase foreclosures due to the media’s regular coverage of the Foreclosure-Gate debacle. Many would-be buyers have begun to believe that if they purchase an REO, they could later lose the home to a former owner filing a lawsuit claiming they were incorrectly foreclosed upon. If fewer investors and homebuyers are interested in purchasing REOs, more REOs will languish unsold on the market, further eroding prices.

Unsavory as it may seem to be profiting from foreclosures, these players are vital to the process by which over-leveraged housing stock is flushed through the system. This price discovery is the only way a sustainable bottom in home prices will be found.

These consequences point towards further downward price pressure in the broad housing market. Until banks are able to legally move forward with the clearing of the large inventory of foreclosures, a true recovery in the housing market will not take root.

This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

There is no ambiguity about the goal of current US government policy when it comes to housing: Prevent home price depreciation at all cost.

As such, this month’s State of the Markets was going to discuss shadow inventory, diving into the numbers to see just how long we’ll have to live with looming supply of bank owned homes. At current repossession rates (around one million per year according to Lender Processing Services), it will take around four years to work through all loans that are more than 90 days delinquent. Morgan Stanley agrees, pegging 47 months as the time required to work through the backlog of distressed loans. And those figures assumes no additional loans get added to that severely delinquent bucket.

Sobering stuff, and evidence that foreclosures are going to be a dominant market force for the foreseeable future.

But as we dug through the data, something wasn’t adding up. Many are fearful that supply will flood the market as banks push through foreclosures. Housing bears often cite this inevitable inventory spike as evidence housing is in for a second leg down.

This is a very valid concern, and in order to remain ahead of the curve, Cirios closely monitors real time foreclosure and new listing data, watching out for early signs of a supply shock.

Our antennae were tripped in April as Trustee Sale activity began to ramp up and repossession levels began rising. Nervously, we waited for the natural increase in listings that were sure to follow. It never came. It still hasn’t come. Something isn’t adding up.

When banks take back homes, the next step in the process is to list those homes for sale. But that wasn’t happening. Banks were foreclosing on more homes but the trail stopped there.

So we went to the tape. Since 2000, the average increase in new listing activity from April to May was 2.9% on the Peninsula and in the South Bay, while over in the East Bay, new listings rose almost 5.5%. During good times, the typical increase is a bit higher, while during bad times new listings in May can actually decline. In fact, they have declined in each of the past three years.

But this year, throughout the Bay Area, new listing activity in May plummeted relative to historic norms. East Bay new listing activity fell 15.8% while Peninsula and South Bay activity dropped 12.8% – both the highest on record. So what gives?

Without sounding like conspiracy theorists, we’d like to put forward the following, very logical thesis: Imagine you are the government. The tax credit expires, the economy starts to sputter, Europe begins to melt down, the Gulf is literally full of oil and the job market turns out not to be on the mend after all, and you have a stated policy of propping up home prices, what would you do?