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Reuters- “Evidence” suggests anti-foreclosure laws may backfire | Not So Says Adler

Quoted sections below from Insight: Evidence suggests anti-foreclosure laws may backfire | Reuters.

State and federal laws enacted to protect homeowners from eviction in the wake of the 2008 housing crash may be extending the slump, according to a growing number of economists and industry experts.

Everyone with a complaint about this has a vested interest in the process. It turns out that a quick look at the facts shows that what these sex spurts and conomists are claiming simply is not true.

Foreclosures have all but ground to a halt in Nevada, which passed one of the stiffest borrower-protection laws in the country last year. Yet the housing market is further than ever from recovery, local real estate agents say, with a lack of inventory feeding a “mini-bubble” in prices that few believe is sustainable.

The facts are that listing inventory in Vegas is down from 27,000 in June 2011 to 20,000 in June 2012, exactly where it was in 2006. That’s a lack of inventory?  The median price is up 5% in the past 12 months according to DepartmentofNumbers.com which aggregates listing prices in real time from 54 of the largest US metros. Listing prices have proven to be an accurate gauge of local housing market trends in real time as subsequently released lagging closed sale prices virtually always range from 95 to 97% of listing prices.

If prices rise more, will that entice more inventory on to the market and knock prices down? Sure. It’s called a “correction.”

Feeding foreclosure inventory into the market slowly is in the lenders’ best interest, and it is bullish for the market. Even if they could foreclose and sell more quickly, the lenders know that dumping massive numbers of properties on the market in a short period of time would be self defeating. It would depress the market and impair their portfolios more than holding REO off the market will. In many cases it is not even financially feasible to foreclose and sell the collateral because it is worth less than the cost of foreclosing and selling. They call this inventory which has not come to  market “shadow inventory,” as if it’s a zombie that will come back to eat the market. It’s really “ghost inventory.” It’s dead and it’s not coming back. Most of this ghost inventory is not marketable either because of its physical condition, or because it is in locations where demand was never sufficient to meet the oversupply created during the bubble.  It was obsolete from the minute it was conceived.

More from Reuters:

A recent U.S. Federal Reserve study found that in states requiring a judicial review for foreclosure, delays associated with the process had no measurable long-term benefits and often prolonged the problems with the housing market.

Data from housing market researchers points to similar conclusions.

“Many state laws that stretch out the period for legitimate foreclosures result in no added benefit for the homeowner and produce harm to the housing finance system and to neighborhoods,” said Alfred Pollard, general counsel to the Federal Housing Finance Agency, at a House of Representatives oversight hearing in March…

At the request of Reuters, RealtyTrac compared three states where borrower protection laws had prolonged foreclosures – Florida, New Jersey and New York – with three with fewer protections and where foreclosure completion times were shorter – Arizona, California and Virginia.

In the three states with the shorter delays, the average sale price for foreclosed properties has been trending higher, suggesting a recovery that has underlying strength.

In Florida and New Jersey, home prices rose last year as foreclosure activity greatly slowed after the robo-signing scandal. But in the last few months, RealtyTrac says, foreclosure activity has picked up there after a settlement between major banks and the U.S. government over robo-signing – and home values have started to drop.

RealtyTrac Vice President Daren Blomquist says the data shows that delaying the foreclosure process in Florida and New Jersey created a mini-bubble, followed by another price drop, and had thus merely prolonged the housing slump in those states.

That’s what they say. I looked at the current real time listings data from the largest market in each state, and there is no way that any rational person could reach that conclusion. Those bastards are either looking at some very strange data, or they’re just flat out lying.

What is plain to see is that Sunbelt markets are doing better than more northern markets, and that there has been no slowdown in the past 3 months.

As for Phoenix, I don’t know what they’re drinking there, but prices have rebounded sharply after a monster decline of 58% from April 2006 to December 2011. We should note that percentages work differently on the upside than on the downside. Phoenix is still 40% off its peak levels. So while it has rebounded it is not near the unsustainable phony price level reached at the peak of the bubble.

Many real estate “experts” think that those peak levels meant something. They don’t. Today’s prices are not a mini bubble due to restricted supply. 40% above today’s level was pie in the sky. It always was. So even with the nice rebound, people are complaining, either that it’s not enough, or that it’s too much.  In reality, things got overdone on the upside. They may have gotten overdone on the downside, so with this rebound, maybe, just maybe they are in Little Red Riding Hood territory- just right.

Phoenix actually disproves the argument that fast foreclosure helps to bring more inventory on the market, helping it to forestall “mini-bubbles.” Listing  inventory is crashing at a far faster rate in fast foreclosure Phoenix than in the slow foreclosure markets. Therefore, the recovery in Phoenix and the drop in inventory would seem to be demand driven, and not a result of restricted foreclosures. Inventory in Phoenix is down by 33% in the past 12 months. Compare that to another Sunbelt market, Miami, which is a slow foreclosure market. Inventory there is down 15% over the past 12 months. Prices have advanced far more quickly in fast foreclosure Phoenix than slow foreclosure Miami, and the gains are holding in Phoenix over the past 3 months.

The arguments that these “experts” are making are simply false. They are spewing lies.  There’s just no other explanation.

An overhang of properties that the banks want to foreclose, but have not dared to, not only can hold back a sustainable recovery in prices but also might encourage blight as the defaulting borrower has less incentive to keep the property in good condition.

That’s just twisted logic. Restricting foreclosed inventory for sale is not likely to be a temporary phenomenon because banks could not foreclose and then can. It’s more likely a permanent trend, because banks realize that it is not in their interest to release large amounts of this inventory. It would cost them far more than it would gain. So they will hold it back and either release it slowly, or never release it at all. Most of it is not marketable. Blight occurs mostly in undesirable, overbuilt locations, where there are large numbers of foreclosures because of fraud during the bubble. But this is not the majority of the country. In better neighborhoods, the numbers of foreclosures are low, and they have been and will continue to be snapped up by willing buyers.

When you look at the actual facts, the argument that slowing foreclosure is hurting the market simply is just not supported.

Meanwhile, the NAR released Pending Home Sales for May today. I will have a report out on that a little later. The headlines said the number was strong, but, as usual, I will look behind the headlines at the actual not seasonally adjusted data to make sure that they are telling the truth.

Also, check out Mainstream Media Gets It Wrong- In Coincidental Truth Telling, NAR PR Shows House Market Strengthening and Shiller Goes off the Deep End.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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