As gauged by an aggregate of housing indexes dating to 1890, real home prices rose 85 percent to their highest level in August 2006. They have since declined 33 percent, falling short of most predictions for a cumulative correction of at least 40 percent.[1] In fact, home prices still must fall 23 percent if they are to revert to their long-term mean (Chart 1).

. . .
One factor inhibiting the new-home market is a growing supply of existing units. The 3.9 million homes listed in October represent a 10.5-month supply. One in five mortgage holders owes more than the home is worth, an impediment that could hinder refinancings in the next year, when a fresh wave of adjustable-rate mortgages is due to reset. The number of listed homes, in other words, is at risk of growing further. This so-called shadow inventory incorporates mortgages at high risk of default; adding these to the total implies at least a two-year supply.
. . .
The average number of days past due for loans in the foreclosure process equates to almost 16 months, up 64 percent from the peak of the housing boom. One in six delinquent homeowners who haven’t made a payment in two years is still not in foreclosure. Mounting bottlenecks suggest the shadow inventory will grow in the near term.
. . .
Without intervention, modest home price declines could be allowed to resume until inventories clear. An analysis found that home prices increased by about 5 percentage points as a result of the combined efforts to arrest price deterioration.[7] Absent incentive programs and as modifications reach a saturation point, these price increases will likely be reversed in the coming years. Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices, which cannot escape the pressure exerted by oversupply (Chart 3).
. . .
This unease highlights the housing market’s fragility and suggests there may be no pain-free path to the eventual righting of the market. No perfect solution to the housing crisis exists. The latest price declines will undoubtedly cause more economic dislocation. As the crisis enters its fifth year, uncertainty is as prevalent as ever and continues to hinder a more robust economic recovery. Given that time has not proven beneficial in rendering pricing clarity, allowing the market to clear may be the path of least distress.

“The Fallacy of a Pain-Free Path to a Healthy Housing Market,” by Danielle DiMartino Booth and David Luttrell, Economic Letter—Insights from the Federal Reserve Bank of Dallas, December, 2010 (emphasis added)

For further thoughts about the coming wave of increases in property taxes, see “Florida League of Cities Poll on Police and Fire Salaries Shows Public out of Touch Regarding Benefits,” by Mike Shedloc, December 23, 2010 (“Cities need to do a far better job at education the public just how exorbitant police and fire contracts are, and that it is tax dollars that support those untenable benefits, putting cities in financial jeopardy.”)

See also “Pensions Push Taxes Higher,” by Jeanette Neumann, The Wall Street Journal, December, 24, 2010 (“Cities across the nation are raising property taxes, largely citing rising pension and health-care costs for their employees and retirees.”)

Uh oh…

If you thought the real estate market was bad, just wait until you can’t get title insurance. This mess is making the Torrens Title system look better by the minute.

photo credit: mmatins

6. Selling REOs & Foreclosed Properties: Relative to the economy, here is the greatest concern: Banks are sitting on millions of foreclosed properties. Given their mishandling of foreclosures, there are now credible concerns that Title companies will not insure new REO transactions due to the banks’ administrative negligence. Without Title insurance, these houses are worth from 25-50% less than they would have otherwise sold for at REO sale or auctions. If this affects a million REOs times even $100k, that is a lot of money. And, it is potentially much worse.

The Impact of Error From Securitization to Foreclosure, by Barry Ritholtz, The Big Picture, October 15, 2010,

Not looking good at all.

I believe this is the first time a major media outlet has discussed the issue of the failure to convey notes (the borrower’s IOU) through the conveyance chain (usually four parties in total, although it can be more) as described in the contract governing these deals, the pooling and servicing agreement.

The Times has a completely different sort of account, with a headline that is remarkably blunt: “Avoid Foreclosure Market Until the Dust Settles.” This is the sort of article that gives industry lobbyists nightmares. And with good reason. It contains a horror story that is enough to scare lots of people who are thinking of buying properties out of foreclosure.

Just as the account of a man who had his house foreclosed upon when he has no mortgage persuade a lot of people that there could be real problems with foreclosures, this one illustrates how title has become a mess.

Todd Phelps and Paul Whitehead bought at a foreclosure auction. It turns out the lender who had seized the house was the second mortgage-holder; unbeknownst to them, the property had a large first mortgage outstanding, which meant it was now their obligation.

MSM Distancing Itself From Bank Party Line on Foreclosure Crisis, by Yves Smith, Naked Capitalism, October 16, 2010

Lots of homeowners are certainly hoping it doesn’t “get that far”:

Folks hoping that now the banks finally get what’s coming to them should be mindful of the fact that if we decide there’s no clear title on houses with existing mortgages, that probably means you can’t sell your home, either.

But I doubt it will ever get that far; either courts will find a way to wrap this up, or legislators will, by creating some alternate process by which titles can be established and claims reconciled. It will be messy, time consuming, and expensive, and it will delay still further the day when we can all be confident that the housing market has bottomed. The US legal system is slow to deal with emerging crises, and the solutions it crafts generally satisfy no one. But for all that, they usually work tolerably well.

Fannie and Freddie in a Mess, by Megan McArdle, The Atlantic, October 14, 2010

Yep. The uncertainty of the status of real estate titles won’t hurt only the folks losing their homes through foreclosure:

Already, it’s apparently impossible to sell a foreclosure–and people who have bought foreclosed homes are starting to sweat, wondering if they’re going to get embroiled in a lawsuit. But what about short sales? Again, if a company doesn’t have the authority to foreclose, it doesn’t have the authority to authorize you to sell it for less than the value of the mortgage. Things seem cleaner with ordinary sales, but what if some other company comes out of the woodwork to claim that the note wasn’t properly registered, and you paid the wrong guy? Does the lien go back on the house? Who owes the money?

This is why people are worried that the title-insurance system will break down.

Who Suffers From the Foreclosure Mess? Just About Everyone, by Megan McArdle, The Atlantic, October 15, 2010