Posted By: CFP&WM On: Nov 4th, 2009 In: General info

Residential real estate may not be at the bottom

Newspapers have reported increasing house sales during several of the last few months. Real estate industry has taken this as a sign that we are at the bottom of the housing market and that things are improving.

Some experts feel this is more of a mirage than the real bottom. Real estate prices are dependent upon supply and demand. There are several indicators to point that the supply is, and will continue to be, far greater than the demand in the near term.

The first-time buyer tax credit of $8000 (which reportedly increased the sale of lower-priced homes) is set to expire at the end of November. Without a continuation of this program, it’s likely that home sales will drop in the lower-priced section.

At the beginning of the financial crisis there were $1.5 trillion of subprime loans that were outstanding. As the defaults in this subprime market have subsided, we are now seeing increased defaults in more traditional loans due to job loss and instability of the economy. The same is true of jumbo loans and those homes with home equity lines of credit.

Currently approximately one in four homeowners with mortgages are “underwater.” This means that their home is worth less than what they owe on it. Most people don’t like to think of defaulting and walking away from one’s home but unfortunately many people will feel the need to do this in the next year, which adds more homes available for sale, increases the supply, and serves to depress home prices.

There is reportedly a glut of “shadow inventory” that are not being represented in the published statistics. In other words there are a number of banks that have mortgage holders that are behind in their payment but are not being foreclosed on and taking the property back because the banks don’t want to flood the market with these properties at one time and force housing prices even lower.

At the end of July, there were about 4 million existing homes that were for sale. There are another million and a half homes somewhere in the foreclosure process and will comeback to the market soon. However another million have payments that are at least 90 days in default, yet foreclosure has not begun.

Housing prices escalated so fast in such a short period of time with questionably qualified buyers getting into the market as well as others borrowing money to buy investment properties. These combined to flood the market with “demand”. With the current lending requirements, the instability in the economy, and job loss, the demand will not be adequate in light of the supply of homes for sale. It is not reasonable to expect house recovery to be anytime soon.

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