The April Case-Schiller report tells us very little. The 3.8% average rise reflects the end of home buyer tax credit. Sales and prices have evaporated since May 1. The CS index will tell us a much different story when the data is released 30/60 days from now. While the April report provides little insight as to where we are today there is some interesting information that is worth noting.

Of the 20 cities the CS index tracks 18 showed price increases. The two that fell were Miami (-.8%) and NY (-.3%). With that in mind consider this chart:

The information is based on April data and is therefore consistent with the CS report. Both New York and Florida are at the top of the list of states with the longest period between initial default and final foreclosure. For the nation as a whole the number of days has nearly doubled over the past few years. NY and Florida are 31% and 21% higher than the national average.

This is not a coincidence. This is cause and affect in action. I live in metro NYC and own property in S.Fl. I see what is going on. There are many middle to upper price homes on the market that have not seen an offer for more than a year. A good number of these are already in default. The borrowers are underwater and there is nothing they can do. A HAMP style ReFi accomplishes nothing. I know people in both areas who have contacted their lender and have been told to come up with an acceptable short sale or deed in lieu transaction. The borrowers have been told by the bank(s) that if they do not cooperate they will have their credit wrecked and be subject to default judgments. So the borrower puts the house on the market and hopes for an offer that is acceptable to the lender. In the mean time they stay in the home for up to two years and pay very little (if anything) on the old mortgage. There is substantial evidence that these people are buying IPhones and going on vacation with the money they are saving by not paying the debt. Some thoughts:

-This “extend and pretend” at its worst.

-The lenders will not let this continue forever. The day of reckoning is coming. It well be felt in all of the states. It will be felt hardest in the states that have the highest days to foreclosure numbers.

-As a former owner is foreclosed they will be forced to rent. Given that few in this category are paying any meaningful amount of their current monthly mortgage it is likely that they will have less disposable income post foreclosure.

-My conclusions:

(A) RE in Fl and NY is going to tank this fall.

(B) Consumer demand for things from clothes, gadgets and leisure is going to suffer an out sized decline.

(C) The extend and pretend policy is catching up with us. This approach was a “buy some time” idea in the hope that things would work out. They have not worked out. We are about to pay the price for that failure.

If we revert to more traditional levels in the ratio of initial default and foreclosure we are going to hit an economic wall. This is just one more thing stacking up against us.

This guest post comes from Bruce Krasting's blog >