A few good numbers in March -- gains in consumer spending, higher number of home sales, increases in factory orders -- seems to be all it takes for some Wall Street analysts (and real estate agents) to declare a bottom and optimistically advise the public to buy, buy, buy. But the bottom is not so simple, especially if you're the middle class where your job and the value of your home matter most.
Real estate agents are ecstatic that transactions are up and inventory seems to be stabilizing. A real estate agent told me over the weekend that in a few months it may be too late to take advantage of these deals, exclaiming, "This is the bottom. Now is the time to buy."
However, the number of for-sale signs may be set to increase again as foreclosure evictions that had been temporarily suspended by a moratorium are set back in motion.
In November, when the Bush recession was beginning to look like a Bush depression just in time for the holidays, Freddie Mac and Fannie Mae established a moratorium on foreclosure-related evictions. In early January, the Fannie-Freddie moratorium was scheduled to be lifted, but Fannie and Freddie announced an extension to give the incoming Obama administration a chance to develop a foreclosure abatement program. In February, the moratorium was extended again.
Obama presented the general tenets of his foreclosure abatement plan in Phoenix in February. After full details were released to the public in early March, Fannie discretely announced that the moratorium would be lifted on March 31. The Freddie announcement was a barely noticed 'also-announced' within a press release related to renters who occupying foreclosed homes.
The moratorium passed almost without notice. Freddie Mac spokesperson told the Washington Independent that he couldn't see how people were surprised when the moratorium was lifted.
The following day -- the official launch date of Obama's foreclosure rescue programs, April Fool's Day, foreclosure-related evictions began anew (to the surprise and chagrin of many community organizers and housing advocates).
According to Ion Data, in metro Phoenix, one of the areas of the country hardest hit by foreclosures in recent years, pre-foreclosure filings (notices of trustee sale or NTRs) increased throughout the month of March (right after Freddie and Fannie announced that the moratorium on foreclosure-related evictions would be lifted April 1). A record number -- 10,689 -- were filed. Most were for residential single-family homes, and more than two thirds were filed in the two weeks preceding the pre-announced end date of the moratorium. Nationally, foreclosures increased in January and February.
Some analysts are optimistic that April could be the month housing starts to turn around. According to the National Association of Realtors, the number of pending sales rose in March. Others are concerned that too many foreclosures that should have been spread across the last five months could hit the market too fast in late April and early May. Rising inventories could cause yet another substantial drop in real estate prices, once again delaying the recovery of the real estate market.
Prices are still dropping (both median price and Schiller index). Transactions are also down substantially over last year but have posted modest increases month over month so far in 2009. Typically, transactions will reach the bottom first, but pricing stabilization comes later. (For a good visual example, see this graph from minyanville.com) For pricing to stabilize, the number of transactions needs to increase enough for inventory to tighten up. It is a simple Economics 101 lesson: Pricing will not increase until the supply is winnowed down to better correspond with demand.
Homeowners who receive a notice of trustee's sale have 90 days to either come up with the funds to make their loan current or work out a deal with their lender. At the end of the 90 days, the home is foreclosed and sold. Typically, less than half of pre-foreclosures are typically able to prevent foreclosure. The pre-foreclosures in metro Phoenix have the potential to roughly double the number of foreclosures on the market. Other cities that have been hard hit by the foreclosure crisis expect to see similar March NTR numbers reported in the next few weeks.
There is a good chance, though, that fewer NTRs could turn into foreclosures than in recent months. Both Fannie and Freddie have prohibited foreclosures on homeowners who are eligible for Making Home Affordable or other foreclosure prevention programs. According to an official statement from Fannie Mae posted to their website March 6,
[Fannie Mae] has also issued special foreclosure sale requirements in response to the Making Home Affordable program. A foreclosure sale may not occur on any Fannie Mae loan until the loan servicer verifies that the borrower is ineligible for a Home Affordable Modification and all other foreclosure prevention alternatives have been exhausted.
Even so, Sean Bowers of Ion Data says, "I think it's a little premature to start calling the bottom just yet. The number of trustee-sale notices needs to drop off a cliff before that happens."
Rising unemployment could also have a negative effect on the number of foreclosures. Unemployment rose to 8.5 percent in March, the highest its been in more than a quarter of a century (since 1983). Toss in people who gave up looking for work, and the number is 9 percent; toss in those who took part-time work to keep some bread on the table, and it's 15.6 percent.
On Sunday's Face the Nation, Treasury Secretary Geithner said we may see unemployment continue to rise for a while. Similar to the way increases in real estate prices typically follows increases in transactions, gains in employment typically follow gains in the stock market and gains in spending.
Geithner expounded this point, "Growth starts to turn positive. People start to spend more. Businesses hire more; they invest more....before unemployment peaks."
In other words, unemployment will continue to rise for several months even as spending increases. Consumer spending, durable goods, and factory orders have all increased recently, but those effects will be seen on Wall Street long before Main Street.