This shadow inventory could reach as high as 7 million homes by some estimates; other analysts reckon it will take 103 months (about 8.5 years) to clear this gigantic inventory of foreclosed, distressed and defaulted homes.

To put these numbers in context: according to the U.S. Census Bureau, 51 million households have a mortgage and 24 million own homes free and clear (no mortgage), and about 37 million households rent.

Consider a fact that might be considered staggering in an environment in which "obvious" isn't quite so manipulated: the total number of vacant dwellings in the U.S. increased to a record 19 million in the first quarter of the year, up from 18.9 million in the fourth quarter. As new homes continued to be constructed, the housing inventory rose last year by 1.14 million to 130.9 million, while occupied homes increased by 1.07 million to 111.9 million.

The Census Bureau reckons about 4 million of those vacant housing units are vacation or second homes. Even if millions more of these vacant homes are in undesirable areas few or suffering from severe structural issues, that still leaves well over 10 million vacant dwellings in the U.S.--a truly monumental overhang of supply.

This inventory of vacant and/or defaulted dwellings is not static: as this chart illustrates, the inventory of defaulting loans reverting to Fannie Mae, Freddie Mac and the FHA is rising.

Then there is the looming surge of mortgage re-sets which will continue through 2012:

Given the imbalance between supply and demand, some housing observers are issuing forecasts of 50% declines in housing values.

As I have noted here many times, the intervention in the nation's mortgage market by the Federal Reserve and the Federal government via its GSEs Fannie and Freddie and its housing loan agencies FHA and VA, is absolutely unprecedented in size and scope.

Government-backed loans accounted for 99%, or $1.5 trillion, of mortgage securities in 2009. Banks and other private firms have issued a mere $15 billion. In addition, the Federal Reserve and Treasury have spent nearly $1.25 trillion buying those bonds to support the housing and broader credit markets. "The government is literally plowing trillions of dollars into the U.S. mortgage market to keep it afloat," says Guy D. Cecala, publisher of Inside Mortgage Finance.

And what has been the result of this complete Federal/Fed absorption of mortgage risk? A very modest blip up in home valuations, in certain highly desirable areas of the nation. This is marginal returns writ large:

The Federal Reserve's exit from buying mortgages (if in fact it has actually ceased propping up the nation's mortgage market) will eventually cause mortgages to either rise in cost and/or become less readily available. Some analysts see this unprecedented Fed intervention in what were once largely private mortgage markets to be a development with highly negative consequences going forward.

It is an understatement to say that the Fed, the Federal Housing Administration (FHA) and the government-sponsored housing agencies, Fannie Mae and Freddie Mac, have not managed mortgage risk very well; FHA problem loans have risen to 24% of all loans originated in 2007, and taxpayers face $1 trillion in losses on Fannie and Freddie alone in the years ahead.

The U.S. housing market is one defined by a rising supply and faltering demand, and a total dependency on a mortgage market propped up by government or quasi-government agencies which have shown poor risk management in service of sustaining or reinvigorating an unsustainable credit bubble.

These stupendous government interventions have simply staved off the consequences of the supply-demand imbalance for the past two years. At some point these interventions will fail and the returns on the investment will go negative: all the trillions of dollars committed to propping up housing prices will fail to boost prices at all.

At that point public support for the prop-job will evaporate and the market will finally get a chance to clear the imbalance between supply and demand.





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