Why the 2008 Housing Crisis Recovery Is Just an Illusion (w/ Keith Jurow)
KEITH JUROW: There are very dangerous circumstances today that you have to think about, in terms of making decisions concerning houses… The first is that there are still millions of these redefaulting, modified mortgages… If you add to that the fact that you have millions of homeowners defaulting or in long-term delinquencies who have no intention of repaying the mortgage… This is a real shocker-- many of these subprime mortgage borrowers haven't paid a nickel in the last five years…And you think that you can stay as long as you can. And isn't that just great? The only ones who lose are the lenders. KEITH JUROW: Hello, my name is Keith Jurow. I'm an analyst. And I'm the real estate columnist for MarketWatch. Since 2010, I've been trying to educate my viewers and readers that the socalled housing market recovery is really nothing more than an illusion. Let me start by making two claims. The first, I don't think it's a wise decision to buy a house-- either to live in or for investments-- right now. And the second is that some homeowners should consider selling their house now before they lose whatever equity is in it. KEITH JUROW: At the end of the housing bubble, prices began to level off in 2006. And then, in 2007, they started to decline around the country. Things got really bad quickly. And in 2008 and 2009, prices were falling everywhere. Nowhere worse than in places where the speculation was greatest, like Phoenix, Las Vegas, Los Angeles, most of California, and much of Florida. Foreclosures just kept rising as prices were tumbling. And then, by early 2010, the lenders and their mortgage services panicked. And they said, we have to do something to stop the bleeding. So they decided to sharply reduce the number of foreclosed properties that they would put on the market. If you take a look at this first graphic, you'll see that in the left column, for these 10 metros, there were plenty of homes in foreclosure in July of 2010. But if you take a look at the middle column, you'll see that very few of them were actually put on the market. And then if you take a look at the right column, you'll see that almost none of those put on the market were priced over $300,000. They just decided they weren't prepared to take the losses on these expensive homes. So most of the foreclosures were $200,000 and under. And the other expensive properties were simply left to sit. The question is, what finally turned the housing markets around the country around? Things were really bad in 2010. And did this solution work? Not really. Because throughout 2010 and 2011, foreclosures continued to grow. They actually peaked in 2010 with over a million foreclosures. Nowhere was this worse than in California and in LA. So throughout 2010 and 2011, foreclosures continued to rise. Prices continued to drop. And the services decided that we need to do something more drastic than what we've been doing so far. So starting in early 2012, what they did was actually reduced the number of properties that they repossessed and put into foreclosure. This really began to make a difference, especially in Los Angeles, which was, you might say, the epicenter of this whole madness. And by 2012, at least in LA, prices began to turn up. But that wasn't the case for the rest of the country, especially in the rest of California and Florida, which was just a mess. But they continued to close the spigots, so to speak, so that for example, in LA in 2012, there were only 25% of the foreclosures that there had been in 2008, which was really the peak of foreclosures in California. By 2013 and 2014, the foreclosures almost stopped completely. And the services began to see that this was actually working. If we keep these properties off the market, and we don't foreclose on them at all, then this could turn around prices. And very gradually in 2013 and 2014, around the country, prices slowly began to increase. The important thing that I want to point out is that this had nothing to do with any kind of economic recovery. The housing market turnaround was done because of these actions taken by the lenders and servicers to do something about this foreclosure mess. KEITH JUROW: I should mention the New York City metro, because it was a really special and unique case. It's the largest metro in the country, with almost 20 million people. And what happened there was just extraordinary. The lenders and the servicers never put very many properties into foreclosure, and sold very few. If you take a look at the next graphic, you'll see on it in this table that in the first row, there were hundreds of thousands of properties in the New York City metro that received what were known as pre-foreclosure notices telling them that they were in danger of foreclosure, these delinquent homeowners. But then if you look at the second row, you'll see that very few of them were actually foreclosed between 2010 and 2014. Almost none. And that continues to this day. And that was the only reason why prices in the New York City metro-- and I mean the entire metro, New York, Long Island, Connecticut, and New Jersey-- prices never really dropped very much at all. And that was entirely because of these actions taken in terms of, we just won't put them into foreclosure or sell them. KEITH JUROW: Now what about these strategies taken by the lenders and the servicers? Did they work? Have they worked? I would say, yes and no. They did keep a lot of these properties out of foreclosure. They didn't put them on the market, so it had that kind of a positive effect in terms of prices. But there was another big problem. There were so many delinquent homeowners that hadn't been put into foreclosure that they had to decide, what do we do about them? Just reducing the number of properties that you put into foreclosure wouldn't be sufficient, because new delinquencies were rising all the time. And so, for them, the solution that they decided on was to modify their delinquent mortgages. And the shocking number is that between 2008 and 2018, some 25 million mortgages were modified. Or they had another term for things that weren't permanent modifications, they called it workouts. I won't get into that. But 25 million of them were modified, so that the servicers wouldn't have to foreclose on them. And the question is, well, did that work? Yes, in the sense that it stopped-- it prevented the mortgage servicers from having to foreclose on millions of additional mortgages. That wasn't the end of the problem, as we'll see. KEITH JUROW: Here's another problem that they had to deal with. During the bubble, there were some-- there was over $2 trillion of subprime mortgages that were originated. These were poorly underwritten. And they were really a disaster. Very quickly, they started defaulting in droves. And several million of them have already been foreclosed. There are something like roughly $800 billion worth of these subprime mortgages still outstanding. And the problem is, if you take a look at this third graphic, is that-- this is a real shocker-- is that many of these subprime mortgage borrowers haven't paid a nickel in the last five years. Take a look at the column. You'll see that just a year ago, in some of the worst states, half of these hadn't paid a nickel in the last five years. And this problem continues. And if you take a look at the states, yes there are the usual suspects. But you'll see on the bottom that there are some states you wouldn't think that they had such a delinquent problem, but they do. I have seen-- I have seen reports where some of these folks have not paid for seven, eight, nine years. And the servicers simply let them sit. We're talking about several million of these mortgages still outstanding. Now, you may ask, well, wait a minute, Keith. How can a couple of million mortgages take down major housing markets? That's a fair question. And my answer is simply that the problem that we're facing today goes well beyond just the subprime mortgages. KEITH JUROW: The problem is far greater than just the delinquent subprime mortgages. During the craziest period of the bubble, some 20 million homeowners refinanced their first mortgage. But it wasn't you-- you might say, big deal. What's the-- people refinance all the time. But these-- what became known as cash out refinances were different. The homeowner wanted to tap the equity, the growing equity in their home. So what they did was they took out a new first mortgage. They refinanced the old one with a larger first mortgage. And they took the difference between the two in cash. And that became known as a Cash Out Refi. And it was, if you think about it, it was like money falling from the sky. And in California, nothing was crazier than there. You could pull out $100,000, $200,000, $300,000 in cash because of the growing value of your property. The lenders were more than willing to shovel it out, because they thought the prices would go to the sky. And what happened when home prices leveled off? Millions of these homeowners, especially Californian and some of the larger metros-- New York City and Chicago and around the coast. But it was nationwide. They found themselves with a much larger mortgage. And when prices began to turn down very quickly, the property was underwater. They were underwater and they started defaulting in droves. And that was one of the main reasons why the mortgage servicers decided, we have to modify these millions of mortgages. Otherwise, this price collapse will just continue. KEITH JUROW: You would think that with all of these solutions, that would solve the problem. But it didn't. Because almost from the beginning, millions of these modified mortgages started redefaulting. The homeowners, for some reason, whatever, they decided that my house is underwater and I can't really afford the mortgage. Or I have no intention of repaying. And so they started redefaulting. Some of them have redefaulted two or three times. If you take a look at this next graphic, this is from Fannie Mae. You can see that the number of redefaults, as quickly as a year after the modification, is increasing between 2012 and 2016. So the situation with the redefaults is getting worse. A second redefault, the chances of redefaulting a second modification, is greater. So this problem, you have to understand, is getting-- is getting worse as we move forward. My view is that there really is no solution to this massive problem of redefaulting modified mortgages. We're talking about millions of them. If that's the case, then at some point, many-- if not most-- of these modified mortgages that are redefaulting will eventually have to be foreclosed and liquidated. And when that happens, then it will really hit some of the major metros hard. And prices could actually begin to decline. I hate to use the word, but, again. KEITH JUROW: So the question that you're probably thinking about is, where are we now, in terms of housing markets, with all these problems that you've discussed? The first thing you need to understand is that everybody believes that home prices have gone up around the country the last four or five years. But if you take a look at this last graphic, you'll see that it's been very uneven. Take a look at those metros that are listed. And you'll see-- with the exception of those three west coast metros-- the profits of homeowners who sold just a year ago is really pretty paltry. New York City, 25%. Some of them, the last one is still-- those who sold actually lost money. But keep this in mind. The average length of time that these people who sold a year ago owned the property was more than eight years. So the annual rate of return over that period of time with at least half of these metros, I would say, just stinks. You probably could have got more if you just put it into a good US government note or bond over the same period of time. So you need to keep that in mind. And these are real numbers. These are real-- these are real people, in terms of what profit they actually got. There's no indices that are involved here. No Case Shiller. And it paints a different picture than you might think. Second thing is that for many months now, home price-- home sales have been declining in the hottest markets. Denver, LA, Portland, especially Seattle, the number of homes sold has been weakening for almost half a year now. Added to that is the fact that the number of homes for sale, which for several years had been declining, is now soaring in these same formerly hot markets. Seattle, it's doubled in the past year. Portland, Denver, LA, most of California, this is the case. That is a very bad combination, rising numbers of properties for sale and home sales declining. If that continues, then what will probably happen is that the sellers will be forced to drop their asking price. And if that's the case, then we may start seeing price drops as well, something that was inconceivable. And in some of your own minds, you may think that can't happen. But the conditions are really there. KEITH JUROW: I've written about Case Shiller. And I don't use it, because I'm not a big fan of indices. I think they distort real markets. I don't use median prices as well, because that can be distorted by the mix of houses on the market. I like these-- the table that we just put up, because it shows it's a real picture of what's going on. If you sold your house for 25% higher than when you bought it eight years ago, average that out over eight years. And it's pretty terrible. Plus, remember, that's a gross profit. If you tack on a 5% or 6% commission and reduce that, it gets even worse. So that New York City average profit of 25% then becomes 19%. Over eight years, that's pretty terrible. But the important thing is to see that metros are very different. You have the hot markets in the West Coast, which get all the attention. But nobody takes a look at those other markets, where it hasn't been nearly as great. And that's the reality. A lot of people will face a situation where if they want to sell after eight years of owning a home, they may find that their house has only gone up 10%, 15%, 20%. And they then can trade up. KEITH JUROW: Off the record, I don't want to get too wonky. In other words, I try to focus on the reality of the situation for a homeowner. If your house, for example, has only gone up 10%, what can you do? You would like to trade up to a nicer house. But for many homeowners around the country-- with the exception of maybe LA and Seattle and Portland and some of the hottest metros on the west coast-- they can't do that. So I've written elsewhere that that trade-up market is still with us. The problem that a lot of people would like to trade up to a bigger house, not enough profit in the current house to be able to put down a bigger payment is just a crucial factor. I don't think there's anything that I said today that's a crystal ball prediction. Because a year from now, I don't know what's going to happen. It could be things coming out of the blue. So I'm hesitant to make any prediction. But I think if somebody is listening to what I'm saying, you put it all together. And this problem of delinquencies, of foreclosures not sold is a huge problem. And if you can picture millions of properties just sitting there-- some vacant, some not-- that haven't paid the mortgage in several years, that's the reality in many major metros, and some that aren't really major. And those who hadn't paid for five years, I picture them laughing at those people who are still paying their mortgage. Because they don't think they're going to get thrown out for years. And why should I pay if I don't have to? That's what's going on. And that's a reality that most viewers just haven't a clue about, that I think that they need to know. And to me, anyway, it's more important than peak the trough stuff. I've worked with a lot of economists. And I'm not an economist. And I don't like the way they talk about things. I don't learn very much, so I try to stay away from that wonky kind of stuff, if you don't mind. KEITH JUROW: I would just conclude by saying that there are very dangerous circumstances today that you have to think about, in terms of making decisions concerning houses. The first is that there are still millions of these redefaulting, modified mortgages that are growing, that are still a problem. And like I said, there's really no solution to that. If you add to that the fact that you have millions of homeowners defaulting or in long-term delinquencies who have no intention of repaying the mortgage, that's what you have to understand. If you haven't paid a nickel over the last five years, you have no intention of repaying it. And you think that you can stay as long as you can. And isn't that just great for them? The only ones who lose are the lenders, which we don't spend very much time talking about. We also have what I've mentioned before, home sales, which are declining. That's always a dangerous sign. And the last thing, as I said, is the number of properties on the market actively listed is growing. And shows no sign of turning around. If that continues, that's really big. So what does that mean for you? What would I do? There is no way I would consider buying a house either to live in or to-- as an investment with all of these circumstances and risks that I've been talking about. And the second thing is if I were a seller, if I were a homeowner, I would seriously consider selling before things get much worse. JUSTINE UNDERHILL: How far can you go in the next five years? As an investor, an entrepreneur, a thinker? We started Real Vision five years ago as four people who came together at a bar in Spain with a crazy idea. To get started, we began with only a handful of sit-down interviews. 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