Unemployment Rises and Hopes of a Wide Spread Housing Recovery Begin Falling.
Many of you have been hearing that in some areas of the country, home prices are rising and sales are starting to recover however, it has been my argument that with an unemployment rate above 8%, this recovery is a false recovery brought on by REOs being held off the market for political gain.
A 8.3% unemployment puts us back in the unemployment numbers of February of 2009, per the Bureau or Labor Statistics (see graph below) and if my memory serves me correctly, REO Listings Agents were slamming and jamming. That is, it wasn't uncommon for mega REO agents to be closing a REO a day. Yet, here we are with the same, if not worse unemployment number and REO has dried up much like the unprecedented drought in the Mid-West.
| Year |
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
Annual |
2002 |
5.7 |
5.7 |
5.7 |
5.9 |
5.8 |
5.8 |
5.8 |
5.7 |
5.7 |
5.7 |
5.9 |
6.0 |
|
2003 |
5.8 |
5.9 |
5.9 |
6.0 |
6.1 |
6.3 |
6.2 |
6.1 |
6.1 |
6.0 |
5.8 |
5.7 |
|
2004 |
5.7 |
5.6 |
5.8 |
5.6 |
5.6 |
5.6 |
5.5 |
5.4 |
5.4 |
5.5 |
5.4 |
5.4 |
|
2005 |
5.3 |
5.4 |
5.2 |
5.2 |
5.1 |
5.0 |
5.0 |
4.9 |
5.0 |
5.0 |
5.0 |
4.9 |
|
2006 |
4.7 |
4.8 |
4.7 |
4.7 |
4.6 |
4.6 |
4.7 |
4.7 |
4.5 |
4.4 |
4.5 |
4.4 |
|
2007 |
4.6 |
4.5 |
4.4 |
4.5 |
4.4 |
4.6 |
4.7 |
4.6 |
4.7 |
4.7 |
4.7 |
5.0 |
|
2008 |
5.0 |
4.9 |
5.1 |
5.0 |
5.4 |
5.6 |
5.8 |
6.1 |
6.1 |
6.5 |
6.8 |
7.3 |
|
2009 |
7.8 |
8.3 |
8.7 |
8.9 |
9.4 |
9.5 |
9.5 |
9.6 |
9.8 |
10.0 |
9.9 |
9.9 |
|
2010 |
9.7 |
9.8 |
9.8 |
9.9 |
9.6 |
9.4 |
9.5 |
9.6 |
9.5 |
9.5 |
9.8 |
9.4 |
|
2011 |
9.1 |
9.0 |
8.9 |
9.0 |
9.0 |
9.1 |
9.1 |
9.1 |
9.0 |
8.9 |
8.7 |
8.5 |
|
2012 |
8.3 |
8.3 |
8.2 |
8.1 |
8.2 |
8.2 |
8.3 |
Granted, a 8% (+) unemployment rate isn't good however, it's not the "real" unemployment rate. Keep in mind, that number is only reflective of the people claiming unemployment for the first time and those getting a government paycheck from unemployment insurance. The reality is, many more people have fallen off the unemployment radar because they have exhausted their benefits and are no longer counted however, they do count. The Government does release this "real" unemployment number and it's called the U-6 which as described provides a more complete tally of how many people are really out of work. As of today, this number is 14.9%, according to the Bureau of Labor Statistics.
At a 14.9% U-6 number (Real Unemployment Rate), I have one question....... Where are all the REOs?
It's no secret, the Federal Government is doing all it can to keep people in their homes and as noble a cause that is, it doesn't change the fact, you can't pay a mortgage without income. Many of us in this industry have known for years, the banks, Fannie Mae, HUD, etc.... are holding massive amounts of REO inventory off the market. I understand why, if it was dumped on the market, we would collapse the US economy in a way never before seen but, to not release the inventory in hopes of artificially inflating the market you do more damage in the long run.
So, what damage is done by holding on to these REOs and not letting them hit the market?
Well, I am no economist and I don't play one on television however, I have a working man's knowledge of my industry and can tell you what I have observed. I will focus on one major negative that I see because I don't want this blog to become a book.
1. Paradigm Shift: Back in 2006 / 2007, when you weren't able to make your house payment, you knew that in about 3 months or so, you were going to be evicted and your house was going to be sold at auction. This is no longer the case. The last relocation assistance package I negotiated the man had been living in the home for 52 months without making a payment. This seems to be happening more and more. That is, I am seeing more people living in the home for 15+ months or longer before I am even called out to offer relocation assistance. This increase time that people have to free load causes an incredible shift in how people view foreclosure....or better yet, just paying their mortgage. It causes people to become entitled, lazy and even belligerent or combative about the relocation assistance or ultimately the eviction. They start feeling, thinking and fighting for their "right" to keep their home. They start acting and believing they are owed the home even though they can't pay the debt.
With all of this, where do we go as a country? Who do we look to? As America has done and I believe as we will do, we will look inward. We will realize our mistakes and we will recover, just when that happens, I don't know.
Comments
Hey Mark, Mortgage Insurance aka PMI plays a huge role. Keep in mind, a lot of these foreclosure did 80 / 20 loans and therefore, avoided the PMI requirement so, on those homes, it's a total loss. For those homes with PMI, keep in mind, the insurance companies typically have a loss matrix that they share with the servicers, giving them an idea of what they will or won't accept. Obviously, this heavily revolves around how much the insurance is going to pay out on the loss so, it will be different per property but, not by much. Granted, some servicers aren't given the loss analogue information aka loss matrix so, they end up sending all offers up tot he insurere for consideration but, some are truly pre-approved and the servicer can make the decision on their own. In other words, yes...the PMI does play a large role but, not in the sense of keeping property off the market, that falls square on the servicer. Now, that being said, the servicer, knowing the loss, knowing the PMI payout, may be thinking..."damn, this is a really bad loss, we can't afford this" and decide to hold for that reason, I am sure it's a combination of "all things considered".
Jesse, where does the mortgage insurance play into this? On foreclosures, do banks collect on the difference between the sold price and the original mortgage amount?
Hey Marcy,
It's both, banks are holding inventory and allowing default occupants to stay in the home. The only upside I can see is that by doing this, they can prevent a total collapse of the US economy by not flooding the market place. You see, many of these banks....Fannie Mae included do not have the liquid cash on hand to cover the short on all these homes so, if they flood the market, or release to the market more than they can afford, then bank deposits will dry up. More specifically, you will go down to your local Bank of America ATM and instead of getting out $20.00 for lunch that day, you get an I.O.U. slip. This may seem amazing to people and in fact, it's so catastrophic that many can't believe it or choosing not to believe it but, that is exactly where we are. So, the banks have to hold, they don't have much choice. They can't sell till they have the cash on hand to cover the loss and because they don't, they don't release inventory but in a controlled measure. In fact, the worse it gets, the less money on hand they have to cover the massive losses, the less they will release. Short sales were once the answer but even now, that is going to dry up if Congress doesn't pass the extension of the 2007 Mortgage Debt Forgiveness Relief Act, which expires in December this year. 2013 may very well be the worse double dip housing depression this country has ever seen.
Jesse,
Are banks really holding back inventory they actually own, or are they just not foreclosing and letting the time of default increase. What is the upside to the bank of holding back inventory when it is so low in so many areas? It seems more logical to me that the banks are just not foreclosing but what do I know?
I agree with you completely! On July 12,2012 a law was passed here in Oregon making it manditory for Banks to mediate before foreclosure. Rep from Bank has to phyisically come to Oregon & appear before mediator to work out best option with foreclosure being a last resort. This is really going to clog our court system!