According to CNNMoney.com writer Catherine Clifford, the number of failed banks in 2009 jumped to 52 as the FDIC took over seven more banks on Thursday. The total cost to the FDIC has been $12.3 billion this year. In 2008 there were a total of 25 bank failures at a cost of $17.6 billion, the article states. In other words, we are on pace to see the number of bank failures quadruple year over year.
While the escalation of bank failures in 2009 has yet to reach the blistering pace that we saw in 1989 when there were over 500 due to the savings & loan fiasco, it may be pre-mature to start patting ourselves on the back yet. With asset values plummeting and a fleet of commercial balloon loans coming due over the next couple of years, things are likely to get worse before they get better for the banking system.
The answer is to stop the decline in asset values, both residential and commercial. The solution to this crisis is coincidentally the same piece of legislation that was partly responsible for igniting the previous banking crisis, the Tax Reform Act of 1986.
In the latest sign that Washington has been behind the curve on this housing crisis, the FHFA announced today that they are finally changing their original refinance blueprint (Home Affordable Refinance Program, HARP) and are now authorizing Fannie Mae and Freddie Mac to include refinance LTV's of up to 125%, up from the 105% that the original plan had been based on.
This action is a result of the plan's initial failure in recognizing just how many homes are actually underwater and were unable to qualify for the 105% LTV.
According to Moody's, there is an estimated 15.4 million homes that are worth less than what is owed.
This number is only going to continue to grow as a result of the ongoing supply and demand imbalance for real estate.
It is these types of economic lapses by the Obama administration that continue to be a drag on the housing market and broader economy. Washington simply does not understand the gravity of the situation. From the banking system, to the housing market, to the economy and the "stimulus" package, the Obama administration continues to undershoot.
According to the S&P/Case-Shiller home price index, home values declined by -18.1% from April of 2008 to April of 2009.
While real estate bulls will tout that the rate of decline is slowing down, there are two counter arguments that need to be considered.
First, according to the NAR, home values declines are not slowing down, in fact they jumped in May. Here is what the year over year percentage change in the median home value has looked like over the past several months according to the NAR:
Jun 2008: -6.1%
Jul 2008: -7.1%
Aug 2008: -9.5%
Sep 2008: -9.0%
Oct 2008: -11.3%
Nov 2008: -13.2%
Dec 2008: -15.3%
Jan 2009: -14.8%
Feb 2009: -15.5%
Mar 2009: -12.4%
Apr 2009: -15.4%
May 2009: -16.8%
And second, it is worth noting that home values are driven by supply and demand. And while demand for real estate over the past couple of months has appeared to bottom, at least for the interim, there is every indication that the supply of real estate, specifically foreclosures, is about to surge. According to the MBA, a record 12.08% of all mortgages were 30 days late. There is compelling evidence that points to the fact that the real estate market is only in the eye of the storm.
According to the Mortgage Bankers Association, the weekly mortgage purchase application index fell -4.5% to 267.7 as mortgage rates eased from 5.44% to 5.34%.
The weekly purchase application had hit a 10-week high last week when it rose to 280.3.
And while the index did slip this past week, what we continue to see is that mortgage purchase applications, much like the actual demand for real estate, has been largely unaffected by sub 5% mortgage rates.
Here is a comparison between NAR's seasonally adjusted existing home sales and Freddie Mac's 30-year fixed rate mortgage survey over the past several months, this data reveals that record low mortgage rates have had no meaningful impact on demand. You can call it the law of diminishing returns, price inelasticity, beating a dead horse, whatever, this is a concept that I have wrote about on more than one occasion.
Sep 2008: 5.10 million sales / 6.04%
Oct 2008: 4.94 million sales / 6.20%
Nov 2008: 4.54 million sales / 6.09%
Dec 2008: 4.74 million sales / 5.29%
Jan 2009: 4.49 million sales / 5.05%
Feb 2009: 4.71 million sales / 5.13%
Mar 2009: 4.55 million sales / 5.00%
Apr 2009: 4.66 million sales / 4.81%
May 2009: 4.77 million sales / 4.86%
This data illustrates that the Fed blew $1.25 trillion in an experiment that was designed to stimulate the housing market and all they have to show for it is a short lived refinance boom, it has not positively impacted demand for real estate. Unfortunately, the unintended consequences is that as result of printing this money, rates will have to move much higher and that will negatively impact the housing market in 2010 and beyond. This is yet another reason why we are only in the eye of the storm for this housing depression.
According to the Census Bureau, new home sales disappointed expectations by declining -0.6% in May compared to April when they fell to a 342,000 seasonally adjusted annual rate.
The current rate of new home sales continues to hover around the record low pace that was set in January of 2009 at a seasonally adjusted rate of 329,000.
The pace of home sales is still down -32.8% from last year, and 2008 was a really bad year for new home sales.
New home inventory of unsold new homes also fell by -35.5% from last year to 292,000.
The end result is that the relationship between the supply and demand for new homes, the month's supply of housing, remains very close to what it was last year. Currently there is a 10.2 month supply of new homes, last year there was a 10.7 month supply, that represents a 4.7% improvement year over year. At this rate of "improvement", it will be 7-9 years until the new home market has a balanced supply (7 month supply) and demand relationship for new homes.
But before Jim Cramer gets too excited about these preposterous "green shoots", it is important to recognize that the new home market is about to be hit by yet another tsunami of foreclosures. As we have seen in the past, as more foreclosures come to the market, new home sales typically have a very challenging time competing against the banks.
But who cares about new home sales right? It's not as if municipalities benefit from new property tax revenues or that jobs are created when homes are built, right? After all, the builders are the vilians in all of this aren't they?
Not really. The supply of new homes which currently stands at 292,000, is dwarfed by the supply of existing homes of 3.798 million. The new home market only has a 7% share of overall housing inventory.
The problem with the housing market is foreclosures, there are not enough buyers for them, specifically investors. Until the excess inventory gets cleared off the books, home values will continue to deteriorate.
President of Mark MacKenzie Real Estate Planning, a real estate research and investment services brokerage; author of "It's The Housing Market, Stupid!"
He's been featured as an "Innovator" by the Phoenix Business Journal and a "life-time advisor" by REALTOR Magazine.
Mark MacKenzie has contributed to articles in the Wall Street Journal, the Arizona Republic, national REALTOR Magazine, and he has a regular feature in Personal Real Estate Investor Magazine which is available in Borders & Barnes & Noble bookstores throughout the country.
Mark MacKenzie Real Estate Planning is a real estate research and investment services brokerage. They track local supply and demand trends for over 75 markets throughout the country.
Mark has written and published three books, "It's The Housing Market, Stupid!", "Marketopoly", which debuted on Amazon.com as the #1 real estate and investment book, as well as "The New Gold Rush - Real Estate".
It's The Housing Market, Stupid! is the name of Mark's latest book and economic policy that would stimulate investment demand for real estate and subsequently provide a back-stop to declining home values, foreclosures, and economic conditions.
The fiscal stimulus has its origins in the Tax Reform Act of 1986 as well as the Gulf Opportunity Zone Act of 2005. The policy would allow for more Americans to be eligible to receive greater tax benefits when investing in real estate. The result would be an increase demand for real estate, the excess supply of homes would be absorbed, Americans would receive a tax cut, and banks would be provided with a good source of new loans and income.
"Clearly demonstrates the author's thorough understanding of how tax law and legislation impacts the housing market. Little changes can make a huge difference and that's the very valid premise of this book. I think everyone who has ever considered themselves a real estate investor, or thought about being one should read this very important book."
Diane Kennedy CPA, Bestselling Author - Loopholes of the Rich
"What we need is incentive in the form of new found confidence in free enterprise and capitalism, not another bailout. Mark MacKenzie expertly illustrates the way out of the real estate depression is through renewed interest in investing in the most stable commodity since the 1930's - real estate."
Real Estate "Artist" Frank McKinney
5-time bestselling author, including Burst This! Frank McKinney's Bubble-Proof Real Estate Strategies and The Tap
"Refreshingly grounded in the fundamentals of impacting demand in today's housing market."
John Foltz, President - Realty Executives
"If you're looking for a real estate professional, someone who uses proven techniques and hard work to help you achieve your goals, then Mark is your man. From locating the property, securing financing, closing escrow, setting up property management, and beyond, Mark was right there with us. We often felt as if we were his only clients! Honesty, integrity, and dedication aren't easily found these days, but that's what Mark is all about!"
-Greg & Patty Spears
"Before we started using Mark MacKenzie a few years ago we always thought of real estate agents as a necessary evil, but he has completely changed our mindset. Since then he has become one of our biggest assets in our financial planning. Now, whenever we hear that any of our friends and family are making any sort of real estate decision we give Mark our highest recommendation. Each time we've been thanked and now Mark is one of their biggest assets too. He's not only been beneficial in our home buying but every stage in between. We feel tremendously blessed to have found someone like him at this early stage in our lives. His integrity, work ethic and friendship is something that we know we will enjoy in the many years to come."
-Clint & Kim Rowley
"I would like to express my sincere gratitude, respect and admiration I have for Mark, and his innate ability to assimilate and support my investment initiatives, on both a professional level and a personal level. Mark MacKenzie Real Estate Planning has provided me the means, I feel, to move forward with a plan to personal wealth and eventual financial security.
After contacting Mark initially, he understood my business /real estate plans, with the immediate focus to be on rental properties with positive monthly cash flow. This has been accomplished within the first few months, with an initial purchase of a rental, duplex home in Mustang, Oklahoma.
Mark worked diligently for months with the Sellers, Lender, and Property Management organizations to close the deal, as the properties were still under construction. The purchase of the property was contingent upon the properties being rented upon completion of construction. This provided the immediate cash flow, and not the typical initial vacancy with myself to carry the credit float.
I would like to add that Mark is always available via phone to answer questions or provide his Real Estate expertise. He was patient as he mentored me on many Real Estate disciplines. Where else can you find expert advice at no charge. I look forward to many successful, future real estate transactions with Mark MacKenzie Real Estate Planning."
-Timothy D. McManus
"We are very impressed with Mark's real estate knowledge in forecasting what markets he thinks are going to be a good investment. Over the past three years we have developed a great working relationship and have purchased three investment properties with Mark's tremendous help. His devotion in finding us exactly the right properties and giving us all the information we needed helped make our decisions and the buying process very comfortable and smooth. We appreciate his attention to detail and tireless work ethic and look forward to working with him on all our future real estate endeavors."
-Kurt & Kathy Dodge
"Mark's knowledge of Real Estate investing starategies has been a tremendous help to my wife and I. We are following the 10 year plan outlined in his book and are on our way to financial independance!"
-Jason & Danielle Bliss
"We recommend working with Mark to any buyer or seller. Whether you are a 1st time buyer, or a seasoned investor, Mark is an excellent listener, very knowledgeable about real estate, and will always put your needs first. We worked with Mark in purchasing an investment property in New Mexico, and plan on doing so again. Further, Mark will also help evaluate and advise you on how to achieve not only your short term, but long term real estate goals as well."
-Bryan & Kimberly Lynch
"We have known Mark now for several years. We have worked with him in the purchase of rental properties and continue to do so.
We have found his honesty and expertise to be unsurpassed. He has been of the utmost help to us and others we know. He is an extremely professional individual and takes excellent care of his clients. Mark is always easy to contact, immediately returns phone calls and provides superb real estate market information. We plan to continue to do business with him as we have great respect for his knowledge of the market.
One of the things that we truly appreciate about Mark is the way he looks at all of the real estate market information before we even start searching for a property. Once we have that information it is much easier to choose an area to invest in and feel confident about the purchase that we are making. We can later follow up on our investments by using Mark's web site to access current market information on each property we have purchased. The web site, with use of our password, shows pictures of our properties with a link to the property values which Mark updates quarterly. Mark is licensed in Arizona as well as other states which allows us the opportunity to invest in multiple markets.
We consider Mark to be more than just someone with whom we do business with. We now consider him a friend as well."
-Tim & Andrea Rattenbury
"My wife and I had talked about investing in real estate for a long time (years) but we just didn't know how to get started. We bought our first home in 1990 and it seemed like a nightmare. The ever changing figures, too many meetings and back and forth negotiating.
A couple of years ago we heard about Mark MacKenzie from a mutual friend. We contacted Mark and within 30 days we had purchased our first invesmtent property. Mark makes it easy and stress free that I can't wait to do it again.
Mark went so far as to walk the property for us and even set up a property manager. We gained more than an agent, we gained a friend.
Mark gained our trust, friendship, and lifelong investments. I still can't believe how easy and worry free Mark made our investment and the lengths he graciously went to just insure we were comfortable. We look forward to our next investment."
-Jay & Jeannette Giles
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