The Government’s strategy of willing foreclosures away with well intentioned, but economically illiterate, Federal intervention has failed.  Moratoriums, increased red-tape and misguided programs such as HOPE and HAMP have tragically extended the housing downturn by delaying and stacking inevitable foreclosures. 

Recent RealtyTrac data highlights the tsunami of foreclosures rising to overwhelm the housing market.

• Foreclosures Filings, which include default notices, scheduled auctions and bank repossessions, set a new single-month record of 367,056 in March, an increase of 19% from February and 8% relative to March 2009

• During the 1Q Foreclosure Auctions established a new record of 369,491 increasing 12% sequentially and 21% over 1Q09

• First quarter Bank Repossessions (REOs) set a new high at 257,944 increasing 9% from 4Q09 and a whopping 35% relative to last year’s comparable period

Record foreclosures are presently combining with financing conditions that cannot support current valuations, changing perceptions of risk, and high unemployment to drive housing prices lower at an accelerating pace. 

The argument has been asserted we are in the midst of an economic recovery.  To paraphrase a political catch phrase: “It’s the Housing Market stupid”.

It was falling housing prices that created The Affordable Mortgage Depression.  And it is falling real estate prices which will continue to perpetuate it.

Eroding home values have been joined by burgeoning crises within the multi-unit and commercial real estate sectors.  Defaults, foreclosures and price declines are eradicating owner equity and lender capital on a highly leveraged basis.

Current sentiment is reminiscent of 2006 and early 2007.  The influential majority has declared that prosperity will reign in defiance of eroding housing conditions.  The stock market is at an indefensible valuation underwritten by unsustainable fundamentals.  Ignorance is truly bliss. 

If only the pesky real estate problem, responsible for 4 years of economic pain, would just go away we could all live happily ever after in a fantasy of perceived prosperity built on ever-expanding leverage.

Instead, housing prices will fall until valuations reach an equilibrium with sustainable market conditions.  Foreclosures will persist until overleveraged purchases have been resolved, ARMs have fully exploded and unemployment improves markedly.

Having extended the housing downturn with 18 months of misguided housing and foreclosure intervention, policy makers should (but won’t) adopt the following recommended mantra:

“Any government action should be undertaken with a design to facilitate [the housing market] clearing process and an understanding that substantial economic pain is unavoidable.” – 10/2/08