It's like Deja-Vu all over again...

Yogi Berra said it best. The media keeps explaining why the housing market is getting better, even going so far as to say it has hit bottom nationally. Maybe  "Housing is Bottoming", but only in the Headlines.

Kind of like saying the stock market has turned around and will go up forever from here. Should we be excited about relative increases in July Home Sales? I think not, for very fundamental reasons.

Housing Foreclosures Still on the Rise
Foreclosures in the bubble states are still increasing. The inventories of foreclosed properties are increasing and a growing percentage of those properties were purchased by Prime or Alt-A borrowers on larger and more expensive properties. The lack of Jumbo loan programs and the loss of exotic financing programs has all but guaranteed that the upper mid-section of housing in the bubble areas (CA, NV, FL and AZ) will have continued downward pressure on pricing.  This is because would-be buyers with sufficient income cannot find loans for the amount of the purchase over the conforming loan limits, or cannot find them on acceptable terms. A natural result of these conditions would be price deflation until prices are affordable under available loan options.

To me, this means that prices will continue to deflate, unless some form of exotic financing can be found to re-inflate the bubble pricing. I suppose you could describe the Loan Modifications under HAMP as a form of exotic financing, since many involve a temporary reduction in rates with an extension of the loan term and even a balloon payment of the difference between the outstanding loan amount and the current market value at the end of the extended term.  Almost none of these modifications include principal reductions.  In other words even with 16 million homes underwater nothing is being done about the fundamental problem of negative equity, except to attempt to push the problem down the road with government help through programs like HAMP.

Assuming that they can sell the property they are currently in for more than they owe, new buyers of higher priced properties have the option of paying cash to the purchase price over available loan limits for a new property, but how many new buyers, (even if they had the cash) would buy a property for $1.4 Million and fork over almost $700,000 in cash over the Conforming loan limit to get it? According to the DailyReckoning.com , existing Jumbo Mortgages now have the highest default rate of any mortgage class. What does this say about the ability to of current owners to sell these properties at break even or better?

Housing Stocks Have made a Comeback?
Housing stocks have bounced back from the depths in what has been described as a "False Dawn" at Moneymorning.com . How this is possible as anything other than "excess liquidity seeking a return" is beyond me.

Loan Modification Programs aren't Working
The corporate loan modification programs at lenders and servicers are not working and re defaults are in the 50-60% range. The jury is still officially out on the effectiveness of the Obama programs, but early indications are that the numbers of people being helped are no where near the numbers projected by the administration. This makes sense because HAMP does not address negative equity and only helps those who can show W-2 income sufficient to sustain a HAMP modification that typically does not include any principal reduction. HAMP refinances are only available to people who are not in arrears.

Existing modification programs under current legislation are not working and will not end the deflation in residential housing. Lack of meaningful modifications may even be having the opposite effect due to "Strategic Defaults" by more sophisticated higher end buyers who purchased larger properties with ARM or other exotic loans and now realize that they are simply too upside-down to recover in any meaningful time frame if their $2.5 Million Dollar purchase with $2.1 Million in outstanding loans is now selling for $995,000 and the lender has no interest in taking part of the hit while leaving the borrower in the property.

Commercial Defaults on the Rise
Commercial Defaults in Retail (strip malls) and Multifamily projects that only made sense in a rising market or never really made sense but got built anyway are accelerating. While the aggregate dollar amounts in commercial real estate are far less than the aggregate amounts in Prime and Alt-A Single Family real estate, the size of the loans involved and the probable discounts required to entice new investors to buy the defaulted notes or the properties make the problems in commercial very real and significant.

The only people that can take advantage of these conditions are very wealthy individuals or consortium's of very wealthy individuals.  A great recent example of this type of taxpayer backed, deeply discounted transaction is the sale of the Corus Bank Loan Portfolio, which was purchased on terms that substantially guarantee (through taxpayer subsidies and guarantees) that the investors will make heavy returns, well in excess of 20% per year and potentially much higher, with little or no downside to investors.

The Bottom Line
So, we are not at the bottom yet for either commercial or residential real estate, except perhaps in local markets that did not inflate with the bubble. We still have to deal with the failed government and corporate loan modification fiascoes and see what is in store for commercial real estate. The good news for cash investors of any size is that there will be opportunities to buy real estate at prices supporting strong cash flow or reasonable debt loads for the long term. The bad news is that out of work or underemployed middle-class people that might otherwise take advantage of home prices they could have afforded and sustained when fully employed must sit and watch those properties get snapped up as strong cash flow vehicles for "buy and hold investors" with cash.