Housing Recovery May Take Five Years-Plus: Report

By John Melloy
|  Friday, Jan 28, 2011  |  Updated 1:45 AM CDT
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Housing Recovery May Take Five Years-Plus: Report

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It’s taken three years to process $1 trillion in foreclosed homes. At that rate, it will take more than five years for the amount of each individual’s mortgage debt, relative to their income, to get back to levels that were the norm in this country before the housing bubble, according to a report from TrimTabs Investment Research.

“For the debt-to-income ratio to return to 65 percent, mortgage debt needs to fall from its current level of $8.9 trillion to $6.4 trillion to $7.4 trillion,” Madeline Schnapp, TrimTabs director of economic research lays out very clearly in a report to clients today. “At the current pace, it could take four to six more years to work through the current and expected backlog of delinquencies.”

 

One problem with this math could be that Schnapp assumes there will be very little income growth because of high unemployment so the only way to get back to normal is to lower the debt side of the equation through foreclosures. However, she’s also assuming 60 to 65 percent is the “sustainable” amount of debt to income an average homeowner can handle and many believe that will still have to come down even further. Either way, you’re left with at least a five-year slog, according to many economists and investors.

“It may take longer than 4-6 years in my opinion to work through the delinquencies,” said Simon Baker, CEO of Baker Avenue Asset Management. He cited the stall in the foreclosure process taking place in the court system as banks are forced to prove they actually own mortgages that changed so many hands during Wall Street’s securitization process.

Earlier this month Massachusetts highest court called seizures of two homes by U.S. Bancorp and Wells Fargo invalid because the banks didn’t have the proper documentation at the time of the of the foreclosure.

“Sloppy paperwork and government policies that slow foreclosures and allow banks to postpone losses are only delaying the necessary adjustment in the housing market,” wrote Schnapp in her report. “The faster home prices reach a market clearing level, the faster the housing market will boost the economy.”

Several banks halted foreclosures temporarily last year over the so-called robo-signing scandal where delinquency records were not properly analyzed but instead processed in mass quantities by computer. Bank of America said this week that it had not only halted foreclosures back in October, but also notices of default (the first part of the foreclosure process) as well. This means that the foreclosure process is even more backed up than previously feared.

“The era of deleveraging is still in first half,” said Steve Cortes of Veracruz Research. “For this reason, the Fed's efforts to inflate the economy are not working. The effects of rising commodity prices are more than offset by the deflationary forces of deleveraging, especially in property arena, where a double dip is already a reality in many cities, and soon will be nationally.”

The latest Standard & Poor’s/Case-Shiller data showed that housing prices fell again across most of the major cities, with eight markets such as Las Vegas and Miami setting new lows since the housing crisis. Data released today showed a much higher than expected jump in weekly jobless claims, dampening hopes of an increase in wages anytime soon.

“We do not expect a true turn in home sales to occur until it becomes clear that the unemployment rate has peaked and is on a steady downtrend,” said Michelle Meyer, an economist for Bank of America Merrill Lynch, in a report to clients. “In addition, the turn in new home sales should be slower than that of existing homes given the lure of deeply discounted foreclosures.”

 

* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

 

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Trader disclosure: On Jan. 27, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Joe Terranova is short Gold. Joe Terranova Owns (VRTS), (C), (UPL), (GM), (PEP), (TLT), (MS), (POT), (AAPL), (ARUN), (LTD), (PVH), (CVI), (CVE), (CPX), (CNQ) and (FCX). Karen Finerman owns (AAPL), (BAC), (MSFT), (GOOG), (HPQ), (C) and (BP). Karen Finerman owns (JPM) and (JPM) leaps. Jon Najarian owns (FRO), is short (FRO) calls. Jon Najarian owns (F), is short (F) calls. Jon Najarian owns (GM), is short (GM) calls. Jon Najarian owns (GS), is short (GS) calls. Jon Najarian owns (MOS), is short (MOS) calls. Jon Najarian owns (WMT), is short (WMT) calls. Jon Najarian owns (VZ), is short (VZ) calls. Jon Najarian owns (SNDK), is short (SNDK) calls. Stephen Weiss owns (PZN), (SMCI), (MWA), (AGU), (FAS), (JPM), (DVN), (COP), (DZZ), (MSFT), (QCOM), (HPQ), (FWLT) and (V). Stephen Weiss is Short (GDX). Stephen Weiss is short (GLD).

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JOE TERRANOVA
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
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Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (LPHI)
Virtus Investment Partners Owns More Than 1% Of (NCRI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLI)
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Virtus Investment Partners Owns More Than 1% Of (SUBK)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of (CLB)

KAREN FINERMAN
Finerman's firm is short (MDY)
Finerman's firm is short (SPY)
Finerman's firm is short (IWM)
Finerman's firm is short (IJR)
Finerman's firm is long S&P puts
Finerman's firm is long Russell 2000 puts
Finerman's firm owns (AAPL)
Finerman's firm owns (BAC) leaps
Finerman's firm owns (BBY)
Finerman's firm owns (BP)
Finerman's firm owns (HPQ)
Finerman's firm owns (IBM)
Finerman's firm owns (JPM) and (JPM) leaps
Finerman's firm owns (MCD)
Finerman's firm owns (MSFT)
Finerman's firm owns (WMT)

COLIN GILLIS
BGC Financial LP and/or its affiliates, expect to receive, or intend to seek, compensation for investment banking services within the next three months from (MSFT)
BGC Financial LP and/or its affiliates, expect to receive, or intend to seek, compensation for investment banking services within the next three months from (AMZN)

RON SHAH
Ron Shah has no disclosures

BRIAN STUTLAND
Stutland Securities is a Market maker holding positions in VIX futures and options
Stutland Securities is a Market maker in SPX
Stutland Securities is a Market maker holding positions in VXX options and stock

DAVID MILLER
Miller has no disclosures

JON NAJARIAN FAST FIRE 12/17/10
Jon Najarian had no disclosures for (COH) or (PFE) on 12/17/10

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