'Shadow inventory' of homes could topple real-estate recovery

Officially, there are 3.5 million homes for sale nationwide. But there are millions more lurking in the shadows -- hidden neatly away on banks' balance sheets, stalled in foreclosure court proceedings, or simply occupied by nonpaying owners as lenders wait months or years before taking action.

The housing market's ballooning shadow inventory -- buoyed by a yearlong foreclosure slowdown -- stands as its most menacing problem, threatening to stifle recovery for several years.

Economists insist that the housing industry will not normalize and recover until most of the foreclosures work their way through the system -- a process that will likely last several more years.

Shadow inventory can be broken into three categories:

• Properties lenders have repossessed, but have not put up for sale. These homes are referred to as real-estate owned, or REOs.

• Properties caught up in the clogged foreclosure process.

• Properties that are severely delinquent in loan payments -- almost certainly headed for foreclosure -- but have not yet entered the process.

And the number of homes.

Calculating the size of the shadow market has proven difficult, and estimates range from 1.6 million to seven million homes

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Average Default Amount Nearly $80,000 on California NODs in May 2011

That's a lot higher than expected.

Maybe it does make sense to strategically default, at least if you live in California.

If you're a California homeowner who stopped making your mortgage payments in the last few years, you could have "saved" $80,000 on average in housing costs, according to an analysis of Notices of Default that were entered into the RealtyTrac database in May 2011.

However, I shouldn't be shocked according this CoreLogic report this morning from Calculated Risk.

This report provides a couple of key numbers: 1) there are 1.7 million homes seriously delinquent, in the foreclosure process or REO that are not currently listed for sale, and 2) there are about 2 million current negative equity loans that are more than 50 percent or $150,000 “upside down”

Home clearance sale coming from 'desperate' sellers

I'm not surprise some owners have to sell due to divorces, deaths, or job transfers.  You could also put that some people need cash and want to sell before their equity drops further.

Accelerating price drops: Home prices have already reached their lowest level since the housing bubble burst, and are now at 2002 levels. Sellers will feel the pressure to make deals before their homes lose even more value.

Bloated inventory: There are boatloads of homes on the market, more than eight months worth at the current rate of sales. Many are distressed properties -- short sales and bank repossessions. Such homes are selling at discounts up to 50%.

Tight credit: Some homebuyers still can't obtain mortgages, limiting demand.

Unemployment: While the job picture has brightened, unemployment is still around 9%. People without jobs don't buy homes, obviously, but high unemployment also rattles working people. Lacking the confidence that their jobs are secure, they may not look to buy.

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Why house prices will keep falling: Fortune

Some analyst are now pushing housing as an inflation hedge.  Arguing as inflation increases, then housing as commodity will increase.  This article states due to the bubble, there is still correction coming and this still maybe not be the time to buy.

So while house prices have dropped by a third from their bubbly highs in 2006, that only closed part of the gap (see chart, right) between house prices and inflation that opened up during the bubble years. Assuming the Federal Reserve isn't able to inflate another housing bubble, house prices have much further to fall.

"Despite the 33% drop in the Case-Shiller home price index from the peak, the cumulative gap since 1987 between baseline inflation and home price inflation is still 25%," Oppenheimer analyst Chris Kotowski wrote in a note to clients this month. "Thus, we believe home prices will still trend flat to down for a number of years."

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High Oil Prices Complicate Housing Recovery

Most economists think the rise in fuel costs will deter output growth rather than boost inflation. That is because higher energy costs leave less money available to spend on other goods. Given the slack in labor markets and capacity, higher fuel costs won’t translate much into higher wages or prices that would push up core inflation.

The oil-related drag on output, however, means fewer jobs. And faster job growth was a key support for housing in 2011. Every $10 rise in oil prices, if sustained, subtracts a one-half percentage point from gross domestic product growth. Every 1% increase in GDP translates into about one million new jobs. So, if oil prices don’t reverse, the drag on GDP growth could mean 500,000 fewer new jobs created over the course of 2011.

Of course, fewer jobs mean fewer new workers going out on their own. Household formation is the main determinant of housing demand. Curb formation and you curb home sales. That is why the housing outlook looks more precarious than it did just a few weeks ago.

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No Inflation? Grocery Stores, Gas Prices Tell Different Story

Inflation is being watch and it affects housing both positively and negatively.  Negatively, since inflation will increase the cost of borrowing and put pressure on home prices.  Positively, since as inflation happens and de-value the dollar assets such as Real Estate tends to hold it's value.

"It's not good news from a whole variety of perspectives," says Nicholas Colas, chief investment strategist at BNY ConvergEx in New York. "Food inflation is getting very bad and that's just bad news for the majority of consumers who are still stretched. It's bad news for the 42 million people who are on food stamps."

Price inflation is coming primarily from upward global pressure on commodities like the multiple grains that go into food production as well as heating oil and gasoline that power the world's growing economies.

It's also being driven by a weak dollar, which has continued to fall in value as the Federal Reserve has printed more and more money to pay for programs it hopes will stimulate growth

And

Does QE2 help middle America? No, it just makes everything more expensive for middle America," banking analyst Meredith Whitney said in a CNBC interview Thursday. "I think that is a complicated policy and a dangerous policy to take things that much further."

The good news? Analysts have upgraded revenue expectations for companies that benefit from higher commodity costs, such as farm equipment manufacturers, miners and large multinationals, despite the expected slow growth of the US economy.

"[I]t does seem clear that weak/dollar commodity inflation is beginning to seep into analysts' expectations," Colas, of ConvergEx, wrote in a note to clients. "It took some time-the dollar has been weakening much of the year-but analysts have clearly caught on and begun to model the current state of affairs into loftier revenue targets for the next few quarters."

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Dollar Depreciation and the Higher Cost of Living

This leads to higher mortgage costs which will put pressure on housing prices.

In turn, dollar-denominated commodities have surged. Since August 27, when Bernanke first suggested that the Fed might consider another round of QE at his Jackson Hole speech, the price of gold has jumped 9%; the price of copper is up 12%; the price of crude oil has increased by $7.49; and soft commodities like wheat, cotton and corn have all shot higher.

Strategists like Gluskin Sheff's David Rosenberg have questioned what this currency debasement will now mean for your friends and neighbors. Rosenberg recently argued that, with oil back over $80 per barrel and US gasoline prices at the pump heading back above $3 per gallon, we will come to think of this dollar depreciation as a source of restraint for the consumer.

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Fed's Yellen: Low rates can fuel bubbles

In an effort to stimulate the economy, the Federal Reserve has held interest rates unchanged between 0% and 0.25% since December 2008.

As the economic recovery has shown signs of weakness this year, the Fed has adamantly stuck to that policy, with all but one member of the Fed's policymaking committee voting in favor of keeping rates "exceptionally low" for an "extended period"

Yes, I think the housing market with addition of the affordability products are key example of the bubble.  If mortgages go back to the historical 8% to 10% range can you honesty expect prices not to drop again.

On a side note, the Fed will meet in November 3rd and they are looking for ways to push interest rates even lower.  And some experts are worried that we are creating a new inflation bubble.

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Harvard Professor to Fed you can't grow the economy by printing money

If it was that easy wouldn't we print money every year to grow the economy?  What people like him are worried by printing money the Fed will cause inflation with high unemployment, like in the 1970's.  This means higher mortgage rates and pressure on home prices.

More Fed purchases of financial assets is "good for the bank," says Jeffrey Miron, a Harvard economics professor and a senior fellow at the Cato Institute. "But I don't see it having a very big affect in tricking down in terms of getting more investment, more lending."

And criticism on the Obama Administration

Policy Missteps: Like many conservatives, Miron believes the Obama administration is more focused on "redistributing the pie" vs. growing the pie. "You never hear ‘we need to do things like keep tax rates on capital income low,' and other incentives to keep people productive," he says. "That's part of what the private sector is missing and why we're not going to see growth for a while."

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Will the Fed cause higher interest/mortgage rates?

Generally, when interest rates increase, so do mortgage rates.

The Federal Reserve is planning to purchase more bonds and mortgages on November 3rd.  They do this by printing money and this can lead to interest rates.

Higher rates could lead to a host of problems, like making business and consumer loans more expensive. And it would hurt the value of the Fed's huge asset holdings.

"When the Fed buys long-term government debt from the private market, it shifts interest rate risk from bondholders to taxpayers," Minneapolis Fed President Narayana Kocherlakota warned last week.

 And why interest rate will increase...inflation.

So lowering rates feeds the risk of inflation down the road without solving the problem today.

"We are following policies that unless changed will eventually lead to lots of inflation down the road," said Warren Buffett at Fortune's Most Powerful Women Summit Tuesday. "We have started down a path you don't want to go down

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Farmland the next bubble? - WSJ

We just had a housing bubble, so we in a farmland bubble?  Or we seeing the result of a population boom.

Famously, land has also proven a terrific hedge against inflation. It has boomed when prices skyrocketed—such as during the two world wars, and the 1970s. There is a serious risk that we will see a surge in inflation down the road: You could argue the governments need it. No wonder investors have been bidding up the prices of other inflation hedges, such as gold and inflation-protected bonds. Why not land?

Typically, investment assets in the U.S. are more expensive than their counterparts overseas. But not when it comes to land. Insight Investment's Ms. McBride says U.S. farmland is well down the global table in price per hectare. Average prices are about $5,000 per hectare. In Europe they can sometimes go as high as $24,000. U.S. prices are closer to those of lesser-developed countries. One reason? We have so much of it. Among big countries, America, unusually, also has far more arable land than it needs to feed its own population.

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Inflation rate increases 0.3% in August

Interesting, food and energy prices are increasing.  Look how the Core CPI is calculated.

Rising energy and food prices were the biggest drivers, with gasoline rising 4.1% over the last year and food rising 1%. Overall, the entire energy index -- which includes fuel, electricity and gas utilities -- rose 3.8%.

Stripping out the volatile food and energy component though, the so-called core CPI remained unchanged, showing prices rose 0.9% over the last year.

 So, the inflation rose at a very slow rate only if you stripped out food and energy.  Another reason why the core is decreasing is that rent has been decreasing.  Housing costs are determined by rental rates not mortgage costs.

For the month of August, overall prices were up 0.3%, in line with the 0.3% increase in July. Economists surveyed by Briefing.com were expecting a 0.2% increase during August.

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European Debt Crisis not over

Is what is happening in Europe going to happen here?

The dollar's reserve status is an "exorbitant privilege" for the U.S. and should give us time to work out our debt woes, he says. "But we don't want to take that too far and keep fiddling while our fiscal accounting burns."

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China's inflation edges up, driven by food costs

Inflation has a huge impact on housing.  Inflation generally leads to higher mortgages rates, which in turn increases the costs of financing a home purchase.  These increased costs will push home prices down if salaries are not keeping up with inflation.  China is now experiencing increased energy and food prices.  This might spread as global reasouces are now exchanged in the international maket place.

Overall, the country's Consumer Price Index, increased 2.8 percent year-on-year in the first eight months of 2010, said Sheng Laiyun, the NBS spokesman. The Chinese government had set a target of trying to keep inflation within 3 percent for the year.

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China is now consuming and importing energy

I posted this because, China is consuming more energy resources and that has an affect on the energy prices in the global market place.  This will possibly lead to higher CPI as energy is a large component of the CPI and food production uses a lot of energy also. Again, this shows we probably won't deflation more likely stagflation in the long run.  Which increase mortgage rates.

Energy is politically sensitive for Beijing, which is trying to clean up the battered Chinese environment and rein in growing demand for imported oil and gas, which it sees as a strategic weakness.

Booming China passed the United States last year as the world's top energy consumer, according to the International Energy Agency -- a report that Beijing angrily rejected

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China orders action to cool food prices

In this global market place, is this an indication that inflation not deflation is the issue?  And with underemployment being so high, is this really an indicator of stagflation. We could be looking at increased prices for food, energy, and capital (interest rates).  All that will have impact on housing prices and rents.  If fact, housing costs (as measured by rents not mortgage costs) is one of the few CPI elements that have been decreasing.

China's food price inflation spiked to 6.8 percent in July over a year earlier, pushing overall inflation to 3.3 percent, its highest level this year, according to government figures.

Elsewhere, a jump in food prices triggered deadly riots in Mozambique this week and the poor in Asia, the Middle East and Africa are under strain after global prices jumped 6 percent in the past two months alone.

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