Arguably, the most important factor for the US economy is the number of shadow inventory loans, loans that are now or are likely to wind up in foreclosure.
Economists might argue the US debt matters more, or unemployment, or our trade deficit, but the US economy is driven by the middle-class and, for the overwhelming majority of that same middle-class, their house is their largest asset.
If the value of our homes is being artificially inflated by poor data the psychological effect once the invisible hand steps in to correct those prices could be devastating.
CoreLogic suggests there’s just over a million homes headed for the auction block. If they’re right, which I’m reasonably sure they are not, then we’ll probably be fine: it’d be a great time to buy a house. Laurie Goodman, of Amherst Securities, argues that figure is closer to 11 million homes. If Goodman is correct that same house becomes a terrible investment.
An increase by a factor of ten is referred to as an order of magnitude, so Amherst’s 11 million figure is about an order of magnitude higher than CoreLogic’s 1.2 million estimate. I’ve estimated, in coordination with others (especially Abigail Field), that there are about 9.8 million shadow properties.
As the size of a sample grows the amount of guesswork should shrink, especially if the sample is easily measureable. Estimates about the number of shadow inventory loans, from leading experts, should come nowhere close to differing by an order of magnitude.
It should be easy to compute the total number of houses with mortgages; these are large loans tied to real property. We’re counting elephants, not ants.
My shadow inventory analysis is based upon census data, which uses substantially different base figures than those released by other government agencies and relied upon by analysts as a base. According to the 2010 census, a $13 billion study, there are 76.4 million owner-occupied homes, and 52.2 million which have at least one mortgage.
While that sounds straightforward enough the Office of the Comptroller of the Currency (OCC) reports that there are about the same number of mortgaged homes total for first-lien residential mortgages.
During the real-estate boom it was common for ordinary people to become back-yard real-estate moguls; they’d buy and rent a house or condo or two while the loans were easy and cheap. Predictably, the census reports there are 37.5 million rentals. Further, there are 17 million vacant properties. Since it appears irrational that a person would abandon a property they own outright it’s fair to say that some number of those rentals and a large number of those abandoned properties are mortgaged.
If the OCC has been reporting only owner-occupied houses with mortgages as the total pool of mortgages, and if government agencies and financial analysts have been relying upon this figure, we’re in serious trouble.
When a property hits the auction block it does not matter whether the former owner lived there, rented it out, or even if the property was vacant. At auction, it’s just one more house vying for a limited number of buyers and a limited pool of capital. Increased supply and flat demand mean lower prices.
Something is profoundly wrong when government, consumers, and even the banks are left guessing about the most basic metrics used to gauge economic health.
Data is akin to a map, and the US continues to sail through dangerous waters. We can have intelligent and vehement debates about how we ended up here, and how best to navigate to a more sustainable place. However, the placement of rocks and the depth of the ocean should not be open for debate.
We know that the market for multi-family rentals is booming; constructions starts are up as investors rush to build apartment complexes, despite the high number of vacant properties. This rush to expand rental housing — the willingness of investors and bankers to bet money on an ongoing lack of willingness to purchase homes — speaks louder than the rosier forecasts.
Over the long-run the market is always right: the invisible hand is an unbeatable, unstoppable force of nature that can’t be tricked indefinitely.
Something is amiss if economists, bankers, and consumers have been using a map altered either by incompetence or politics while working in good faith to steer an already injured US economy to safer harbors. Conversely, there’s a different but probably equally dire problem if we spent $13 billion on the census and cannot accurately count the number of houses in the country.
This is a case where, for the sake of the economy, I hope that my analysis is incorrect, though I suspect that I am right. But since releasing those sky-high figures nobody has proffered any explanation, rational or otherwise, refuting the significantly higher figures or explaining the discrepancy.