Interactive Crises of Real Estate, Employment and Law

I want to touch on three interrelated aspects of Housing and Finance issues, they are crucial to understanding the key pressures on the Residential RE mess: Price, Employment, and lastly, legal issues impacting Title and REOs.

The first is Price. As I have been writing for a year now, RE remains 8-15% overvalued. I have been using numerous ratios to reach that conclusion (Price/Income, Housing stock/GDP, etc.).

As Robert Shiller, co-founder of the S&P/Case-Shiller home price index, stated at a NY conference yesterday, a further decline in property values of 10-25% in the next five years “wouldn’t surprise me at all.  Shiller added “There’s no precedent for this statistically, so no way to predict.”

Let’s take that fall a step further: When using price ratios (as I like to do), we have a tendency to focus on the numerator (the top part of a fraction). In this case, that is Home Prices. However, prices in a ratio can remain overvalued if the denominator — the bottom number — changes as well. In this case, that is Income. This means that if wages stay flat or fall, or if the total number of people working ticks downwards, Houses can can remain overpriced. This is true EVEN AS HOME PRICES FALL. That is the nature of ratio — both numbers matter.

The legal issue, which we started pounding the table on back in October 2010, continues to fester.The toxic combination of MERS and Robo-signing has led to a backlash against foreclosures both in the media and amongst judges. The WSJ has belated discovered this. In a June first article, Banks Hit Hurdle to Foreclosures, the apparent problem with MERs transferred Title has become recognized, as delinquent borrowers have alerted courts that mortgage companies which cannot prove they own the loans do not have the right to foreclose. Called “show me the paper” cases, these have been successfully defended in California, North Carolina, Alabama, Florida, Maine, New York, New Jersey, Texas, Massachusetts and others.

I have been a strong advocate for Foreclosures (More Foreclosures, Please . . .), but ONLY when they are done legally.  This may come to a shock to some Libertarians and the editorial staff at the WSJ, but Property Rights and Due Process actually matter in countries that are not banana republics.

I may have to start calling out — by name — the chickenshit cowards who would subvert the US Constitution in order to speed along illegal court activities on behalf of banks.

So far, the banks have been happy to kick the can down the road in order to forestall the writedowns that come when they foreclose. There are over 1 million REOs on the book — homes effectively owned by banks. But there may be anywhere from 1 to 2 million more shadow REOs — stratetegic non foreclosures that allow defaulted homeowners to live in homes rather than foreclose.

The MERs title issues may make it increasingly difficult not only for the banks to foreclose, but then get title insurance to convey the property to the new borrower. Hence, the banks are sitting on several million properties that they potentially may not be able to convey at anywhere near market price due to title concerns.

And they only have themselves — and MERs — to blame . . .


Shiller Says Home-Price Drop Up to 25% ‘Wouldn’t Surprise’
John Gittelsohn
June 9 (Bloomberg)

Banks Hit Hurdle to Foreclosures
WSJ, June 1, 2011

This post originally appeared at The Big Picture and is reproduced here with permission.