Saturday, September 26, 2009

Ableson on Amherst

Barron's is reminding us this weekend, that Amherst research isn't Amherst College!
Amherst estimates this massive overhang at seven million units. That's the equivalent of 135% of a full year's existing-home sales and chillingly greater than the 1.27 million units that made up the overhang in early 2005, when the housing bubble had just begun its dizzying and more than a little lunatic ascent.

Put another way, of the 56 million units that the Mortgage Bankers Association says make up the mortgage universe, Amherst gauges 6.94 million units are in what it dubs the "delinquency pipeline" eventually headed for liquidation. And it reckons that another 300,000 mortgages replenish that unwelcome flow every month.

Essentially, then, this shadow inventory represents a massive furtive supply of future foreclosure. Amherst fingers negative equity as keeping the delinquency pipeline heavily stocked. Quite a reasonable assumption, we think. A home owner, saddled with a house that's valued at less than it cost him to buy or that he can reasonably expect to sell it for may lack the will and, more importantly, the wherewithal to keep making payments on his mortgage.

Homeowners' equity has declined from 58.7% back in '05 to around 43% today. What's more, nearly a third of households have no mortgages, which, of course, means that the equity percentage of the 50-plus million that do have mortgage loans is a good cut lower than 43%.

Homeowner's equity is 43.5%, and of this, over one third consists of those who own their house outright.

So what is the homeowners equity of those who have mortgages?

Since 33% have 100% equity, then 66% constitute those who have mortgages. So what equity rates changes the 33% from 100% equity, to 43.5% equity for all?

It's 15.3%

Because if 33% of the group has 100% equity, than 66% would have just 15.3% equity to equal total homeowner equity of 43.5%

.333 x 100% equity=33.33
.666 x 15.3% equity=10.19=43.5% homeowners equity

Because that then, is the average equity in a home. And remember, this rate will overstate homeowner equity rate. Because if you are already underwater on your home, how much equity do you have? You are in what Singapore's sovereign wealth fund calls "negative wealth added." Or worse than zero!

Thus, when you see these predictions that real estate can fall another 25%, what would that do to the average homeowner that has a mortgage?

If real estate would fall another 25%, it would be the single largest stimulus plan that the world would ever see. Because then, the masses would all just quit paying their mortgage, and the courts would be so backed up that no banks could foreclose, and then the banks would have to enact a massive forbearance program for homeowners, on the homeowners terms, and then the TARP money could rightfully shift from the hands of the bankers to the people.

Does that sound ridiculous?

It's only as ridiculous as they who say home prices would fall another 25%.

Because that would be the consequences.

Amherst would be Amsterdam!

Selling financial porn!

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