Real estate crash: The Sequel
You think the real estate crash is over? Guess again. The decline from 2005 to 2009 was just an appetizer for what is to come. As always, let’s not make this about my opinion. Let’s take a look at the numbers. In 2007, the inventory of homes for sale was about 4.4 million. According to an article written at the time, “The current level is approximately 2 million units above normal, a figure that glaringly illustrates the housing market’s biggest problem,” wrote Tony Crescenzi, chief bond market strategist for Miller Tabak & Co. That figure has been reduced down over two years to 3.6 million units, largely due to the government home buyers credit program.
So what is the problem then? Even at 3.6 million, the inventory is still 1 million above normal, but what is worse is the
shadow inventory creeping over the horizon. Between 6 – 8 million homes, depending on whose count you use, are currently in some form of foreclosure. These homes need to be absorbed by the marketplace at some point. How will that affect home prices and the economy? Well if 2 million extra houses in 2007 had the devastating effect we already have seen, what will 8 million extra homes have?
Let’s see what the experts think:
“Eight million homes with delinquent mortgages represent a staggering 300% of the normal supply of existing homes for sale. With 3.63 million units now on the market, one million above the long-term average, an inundation of foreclosures represents a fatal death blow capable of inflicting brutal damage on the largest financial market in the world,” says Seeking Alpha.
Pete Flint, CEO of Trulia.com, predicts that home prices will drop, inventory levels will creep back up, and mortgage rates will increase _ all leading to the continuing struggle of the housing market. “I hate to be a naysayer but we still have a long road ahead of to reach a healthy market,” Flint said.
Next year “government interventions will start to disappear, shadow inventory will hit the market and mortgage rates will start to rise” to around 6 percent from under 5 percent, he said. “We’re in a false state of stability,” Reuters added. The result? “A continued drop in demand for the glut of foreclosed properties would add a fresh layer of pain to a housing market just emerging from a three-year nosedive.”
The San Fransisco paper runs this piece: “A vast “shadow inventory” of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.” Rick Sharga, vice president of RealtyTrac, says ” It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.”
“There is a real danger that there is much more (foreclosure) inventory than we are measuring,” said Celia Chen, director of housing economics at Moody’s Economy.com in Pennsylvania. “Eventually those homes will have to be dealt with. If they’re all put on the market, that will add more inventory to an already bloated market and drive down home prices even more.”
CNBC notes that banks are using several techniques to mask the number of foreclosures in the pipeline: “Shadow inventory should be seen not just as homes the banks are holding on to or that are still in the foreclosure process, but homes where borrowers have stopped making payments and have not heard from the banks.”
This trend is not exclusive to residential property, but is extensive in the commercial property market. “Banks in the U.S. “are slow” to take losses on their commercial real-estate loans being battered by slumping property values and rental payments, according to a Federal Reserve presentation to banking regulators last month,” according to the Wall Street Journal.
Like I always say, don’t take my word for it, keep being aware of the news as it comes out, and let’s see where we stand next year. Maybe there is some magic bullet of market forces that can overcome these obstacles. If not, we should not forget what effects a further decline in real estate will have on the overall economy. We only need to look back over the past 24 months to see that.
[...] The real estate market about to turn around? Nope, an avalanche of shadow inventory from foreclosures are about to hit the market. [...]
This is coming soon, it is like a hidden crisis waiting to happen
[...] real estate will improve nationwide anytime soon? There are 4 million homes for sale already, and 8 million more foreclosures in the wings. Still, some homeowners are making important financial decisions based on waiting for the market to [...]
[...] from the previous quarter and more than double a year ago.” This means that on top of the already looming shadow inventory, there is an avalanche of prime mortgages now going into [...]
But this article, admirably chock full of data though it be, does implicitly ask the reader to accept “Your Opinion.”
The numbers are all undeniably bad, but at the end of the second paragraph you state:
“…if 2 million extra houses in 2007 had the devastating effect we already have seen, what will 8 million extra homes have?”
Unless I’m misreading you, the implication here is that excess inventory was sole — or even just decisive — factor behind the “devastating effect” that passes for the US economy post-2007. Is that your stance, or do you perceive a wider, more complex chain of causality to the crisis?