“Public policy is delaying the pig in the python,” Zelman told an auditorium full of real estate types. “The pig has lipstick.” Zelman is referring to the shadow inventory of foreclosures (the pig) that is making its way through the nation’s financial system.

The average number of days from when a borrower stops paying on their mortgage to when the bank sends out the first foreclosure notice is 417, Zelman notes, and the final foreclosure can take up to a year more.

Let me just first give a little background for those of you who don’t know Ivy Zelman. She’s the former Credit Suisse analyst who called the housing crash, even before the boom had peaked.

She’s famous for a simple excel chart that showed the timing of subprime mortgage resets, and while she got plenty of criticism for being a big bad bear, she was right.

So even though Zelman’s now making boatloads of consulting cash at her own firm, I still like to hear her latest musings, so this morning I headed over to the Urban Land Institute’s Washington Real Estate Trends Conference, where she was keynoting a session.

“Public policy is delaying the pig in the python,” Zelman told an auditorium full of real estate types. “The pig has lipstick.” Zelman is referring to the shadow inventory of foreclosures (the pig) that is making its way through the nation’s financial system.

The average number of days from when a borrower stops paying on his/her mortgage to when the bank sends out the first foreclosure notice is 417, Zelman notes, and the final foreclosure can take up to a year more.

…What….can you please repeat that one….did she just say, the average number of days someone can live in their home PAYMENT FREE before the foreclosure notice is filed….is….417. Wow…just plain WOW!..

….and then they can stay in the home for up to a year more due to massive backlog of foreclosure filings. So, lets assume these numbers are correct..and the average Mr and Mrs. Joe can live in their homes for 800 days…agents, that is over 2 years. Now, lets add a short sale into the mix..and maybe an attempted loan mod…..Realistically, someone can live payment free for literally..years.

What does this mean now..what does this mean to you?

…if the literally millions of upside down sellers caught wind to the fact that they can live in their homes and pay nothing…not a cent…for over a year (let alone 2-3 years)….what do you think would happen?

PLEASE…wake up. This is happening now. If you think we are anywhere near the end of this real estate cycle…think again.

The government’s Home Affordable Modification Program, which today the Inspector General for the TARP wrote, “has made little progress in stemming the onslaught” (tell me something I don’t know), is simply delaying the inevitable and in some cases kicking the can and the cost down the road for borrowers who will inevitably redefault and for taxpayers who will foot the bill.

Zelman did a simple exercise of adding shadow inventory to the seemingly improving inventory numbers. In DC for example, she cites a 5.1 month supply of homes for sale, well below the nation’s 8 month supply. But add the shadow inventory of foreclosures, and you get a 13.2 month supply. She claims builders “underwriting ground are unaware of these headwinds.”

She also raised an interesting policy question, which we brought up on the blog yesterday. What exactly is so wrong with renting? The Administration, she notes, is pushing the limits of the FHA for low-income borrowers, touting historically positive affordability.

I too have been reading that the Obama administration may pull the plug on the home ownership tax credit. YES, the tax credit most American’s get for simply owning a home may go poof….bye-bye.

But Zelman counters that while we may be 6 percent undervalued as a nation, even markets that have overshot affordability are not moving because there’s a lot more to consider now, like supply, values, mortgage availability and jobs.

On the low end of the market, that is homes priced below $150,000, investors comprise 2/3 of the purchasers, according to Zelman. Another study out today from Campbell Surveys also found that 50% of sales in March were of distressed properties (foreclosures or short sales).

OK, a quick recent history lesson….in Jan 2010 29% of ALL Sales in the US were…Short Sales and REOs. NOW, only 2-3 months later…50% of ALL Sales in the US are…Short Sales and REOs. See the trend?

Tim and Julie Harris predicted for well over a year that by the end of 2010 70% of ALL sales would be…Short Sales and REOs. If anything, they were too conservative. It appears we will hit out prediction by mid-2010.  The implications of a national housing market that is so dominated by the so-called distressed sales is rule changing. WHY? Who controls those listings…BANKS. The BANKS are the new sellers…the BANKS control the real estate industry.

Rental yields are pretty strong: 6-12 percent, says Zelman. So the market is good for investors and they’re eating up distressed inventory, which is a net positive for the housing market and the economy, and perhaps more beneficial than pushing more low-income Americans into home ownership.

The trouble of course is the higher end, over $400,000 where investors can’t buy with all cash and the mortgage market is closed. Zelman cites a 45 month supply of homes between $400-600,000.

Unfortunately, the government is ignoring the higher end of the market, and ignoring higher end borrowers who may be in trouble due to unemployment. Jumbo loans are excluded from the federal mortgage bailout. So where does recovery shake out under all this analysis?? Zelman says it will not be a “V” or a “W” but a canoe. Slowly floating sideways, I imagine.