housingcrisisMy wife is a real estate agent in Charleston, SC and last month she actually sold a house. “Hooray, the housing crisis is finally ending!” she said. But that’s not likely. In fact housing is probably going to get worse, or at least that’s the conclusion of a pretty grim but convincing white paper on the subject from Amherst Securities Group LP, a leading dealer and market maker in mortgage-backed securities.

Home prices are being buoyed somewhat right now by the $8,000 first-time homeowner tax credit, but there are only so many first-time homeowners available to buy houses, say the boys and girls from Amherst. What happens when every first-timer who can afford a house owns a house? Trouble.

Home prices have also been buoyed by the simple fact that more people tend to buy homes in the spring and summer and those are the numbers we’ve been seeing – numbers that will seasonally drop in the fall and winter. We tend to annualized these seasonal numbers, too, making them look bigger, even though we know they are likely to drop.

Federal programs to help homeowners avoid foreclosure: forget about them, according to Amherst. The number of mortgages that will actually be saved by this supposed $75 billion program won’t even amount to a rounding error, they claim. And sure enough, it is easy to look through recent claims by the Obama Administration and see the awful truth: with 7 million mortgages in default right now averaging six months from liquidation, the idea that the Administration will modify (and thereby “save”) four million of those mortgages over the next two years, well that’s laughable. By the time the paperwork is finished for the 25 percent who MAY qualify for modification (that’s 1.75 million – nowhere close to four million) most of those homes will have been auctioned, IF buyers can even be found.

If there is a positive side to this I suppose it’s that the full $75 billion won’t have been spent.  Or is that a negative, given the outcome?

Another positive (a very negative positive at that), is that foreclosures will go slower than they historically have simply because the banks won’t be able to get rid of the extra houses – about SEVEN MILLION extra houses, Amherst estimates.

The number of mortgages in trouble is increasing faster than homes can be foreclosed or mortgages can be modified. That’s 300,000 homes per month — homes we haven’t even talked about — or worried about to this point — going under. Starting soon this shadow excess inventory of seven million homes – 1.35 times the number of homes that are usually for sale – will push prices back down in many communities. That’s a true inventory of almost 13 million homes for sale in a market that can, in a good year, handle a little over five million.

When supply goes up, prices go down. And supply is about to go dramatically up.

But this bubble, too, will decline in time, though to make it do so may require further federal effort. There’s little political stomach for a second bailout, but with the government having an equity position in so many banks there may be the moral suasion to change bankers – at least for awhile – into landlords. Because just are there are seven million families losing their homes, so too there are seven million families looking for places to rent.