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| Andrew's Corner
U.S. Home Prices Face Three-Year Drop as Supply Gains Sept. 15 (Bloomberg) -- The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market. Shadow inventory -- the supply of homes in default or foreclosure that may be offered for sale -- is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody Analytic's Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners. Whether it's the sidelined, shadow or current inventory, the issue is there more supply than demand, said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year. Rising supply threatens to undermine government efforts to boost the housing market as home buyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez Inc., a New York economic forecasting firm. Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. unemployment remained near a 26-year high. The median price of a previously owned home in the month was $182,600, about the level it was in 2003, the National Association of Realtors said. Fannie Mae Forecast Fannie Mae, the largest U.S. mortgage finance company, today lowered its forecast for home sales this year, projecting a 7 percent decline from 2009. A drop in demand after the April 30 tax credit expiration suggests weakening home prices?? in the third quarter, according to the report. There were 4 million homes listed with brokers for sale as of July. It would take a record 12.5 months for those properties to be sold at that month sales pace, according to the Chicago- based Realtors group. The best thing that could happen is for prices to get to a level that clears the market, said Shapiro, who predicts prices may fall another 10 percent to 15 percent. Right now, buyers know it hasn't hit bottom, so they are sitting on the sidelines. About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody Analytic's in West Chester, Pennsylvania. He estimates prices will drop 5 percent by 2013. Lost Decade? After reaching bottom, prices will gain at the historic annual pace of 3 percent, requiring more than 10 years to return to their peak, he said. A long if not lost decade, Zandi said. Prices dropped in 36 states in July from a year earlier, CoreLogic Inc., a Santa Ana, California-based real estate and financial information company, reported today. Its housing index showed the biggest declines in Idaho, Alabama and Utah. Maine, South Dakota and California had the largest gains. Working through the surplus inventory varies by markets and depends on issues such as local employment and the amount of homeowner debt, said Sam Khater, chief economist for CoreLogic. Nevada has the highest percentage of homes with mortgages more than the properties are worth, while New York state has the lowest, according to the company. 8 Million Douglas Duncan, chief economist for Washington-based Fannie Mae, said in a Bloomberg Radio interview last week that 7 million U.S. homes are vacant or in the foreclosure process. Morgan Stanley's Chang said the number of bank-owned and foreclosure-bound homes that have yet to hit the market is closer to 8 million. Sandipan Deb, a residential credit strategist for Barclays in New York, said prices will drop another 8 percent -- to 2002 levels -- before beginning a recovery in 2014. On a national level, you have never seen a decline of this sort, Deb said in a telephone interview. I would caveat that by saying you also have not seen an increase on a national level like we saw from 2002 or 2003 to 2006. In addition to the as many as 8 million properties vacant or in foreclosure, owners of another 3.8 million homes -- 5 percent of U.S. households -- said they are very likely to put their properties on the market within six months if there is improvement, according to a survey by Seattle-based Zillow. This has the potential to create a saw tooth pattern along the bottom, Stan Humphries, Zillow's chief economist, said in a telephone interview. Homes begin to sell and a few sidelined sellers rush into the marketplace and flood the marketplace. Gains Versus Inflation If the market doesn't fall to its natural bottom, price gains in the next five to 10 years won't keep pace with inflation as the difference is made up on the back end, said Barry Ritholtz, chief executive officer of FusionIQ, a New York research company. Price increases that fail to at least match inflation are the same as reductions in value, Ritholtz said. The Obama administration's effort to help mortgage holders, the Home Affordable Modification Program, or HAMP, is another source of future inventory as owners with new loan terms re- default, Ritholtz said. About half of the modifications done in 2009 were behind in payments by the first quarter of 2010, according to the Treasury Department. Day of Reckoning The belief has been: if we stimulate sales with a tax credit and delay foreclosures with modifications, the market would stabilize, said Ritholtz, author of Bailout Nation. We're just putting off the day of reckoning and drawing out the pain by not letting the housing market hit its bottom. Government policy contributed to a recent stabilization in prices that may have been an illusion, said Zach Pandl, an economist at Nomura Securities International Inc. The S&P/Case- Shiller index of home prices in 20 U.S. cities rose 4.2 percent in June from a year earlier. The measure is a three-month moving average, which means data in the month were still influenced by transactions that may have benefited from the tax incentive. Even if modifications fail, keeping foreclosures off the market is worth the risk of a delayed recovery, Pandl said. It's too painful and too damaging to let it happen all at once, Pandl said from New York. Owners of about 11 million homes, or 23 percent of households with a mortgage, owed more than their property was worth as of June 30, according to CoreLogic. Another 2.4 million borrowers had less than 5 percent equity in their houses and probably would lose money on a sale after paying broker fees and closing costs, CoreLogic said Aug 25. Nevada, New York In Nevada, 68 percent of homes were underwater in July, with mortgage loans statewide totaling 120 percent of home values, according to CoreLogic. Only 7.1 percent of properties in New York state were underwater, with the total loan-to-value equivalent of 50 percent, the company said. Brandi Miner, director of marketing for the Georgia Association of Realtors, is holding back on selling her one- bedroom condominium in Atlanta's Buckhead district because she has an underwater mortgage. She paid $155,000 for the property in 2005. I'm stuck, Miner said. I thought it was a stepping stone to a house. Miner pays about $1,100 a month for her mortgage plus $225 in condo dues, a higher price than she would spend for a three- bedroom house in a good Atlanta-area neighborhood at today's prices, she said. Selling now would cost her $10,000 to $15,000, Miner estimated. I'm not $200,000 in the hole, thank God, she said. But the quarter of the country that's underwater -- that's me.
Fewer Foreclosures The number of U.S. homes in default or foreclosure fell to 7.04 million as of July 31 from a high of 8.12 million in January, Lender Processing Services Inc., a Jacksonville, Florida-based mortgage servicing company, reported Sept. 2. Defaulted mortgages as of July took an average 469 days to reach foreclosure, up from 319 days in January 2009. That's an indication lenders -- with the help of the government loan modification programs -- are delaying resolutions and preventing the market from flooding with distressed properties, said Herb Blecher, senior vice president for analytic's at LPS. The efforts to date have been worthwhile, Blecher said in a telephone interview from Denver. They both helped borrowers stay in their homes and kept that supply of distressed properties on the market somewhat limited. To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net Kathleen M. Howley in Boston at kmhowley@bloomberg.net This post was written by Zillow's Chief Economist, Dr Stan Humphries. It was originally written on Zillow Blog. We got some encouraging news last week about March existing-home sales increasing almost 7% from their levels in February. Unfortunately, a deeper look at the numbers from the National Association of Realtors reveals that inventory of for-sale homes also increased. Despite the higher number of sales, more homes were added to the market in March than were sold. Figure 1 below shows the overall inventory of homes on the market. Figure 1 below shows the overall inventory of homes on the market.
Figure 2 shows the balance between homes sold each month, and the net of homes added or withdrawn each month (so, if more homes are added to the market than are withdrawn or sold, the number will be positive - see below for more detailed methodology).
While the fact that March sales numbers are increasing is undoubtedly a positive sign, the time series shown in Figure 2 does make one at least ponder whether the market is currently capable of clearing itself of inventory without paying people to buy homes (i.e., the homebuyer tax credit currently in place). Most of our traction in working down inventory levels came in the late summer/fall of last year when home sales were spurred by the threat that the tax credits were going to expire. Before and after that period, the addition of new inventory for sale usually outpaced sales, keeping inventory levels flat or rising. This dynamic is being driven by the significant amount of "pent-up supply" in the market right now, that is, the pool of homeowners who have wanted to sell their homes in the past three years but, because of market conditions, either didn't try or were unsuccessful. Our last estimates of the size of this group of homeowners were that 8% of homeowners indicated that they were very likely to try to sell their homes in the next twelve months if they saw signs of improvement in their local markets. These sidelined sellers closely watch the market for signs of a possible turnaround and rush in if there's a hint of good news. We'll very likely see another mini-frenzy in home sales as we approach June (when the current tax credits are set to expire), although I doubt the boost will be as large as we saw last fall. The ability of this purchased demand to push inventory levels down will be challenged by the flow of new listings into the inventory pool, something that happens each spring and summer. It will be bad if we don't make much headway in pushing down inventory levels through June, because we will undoubtedly see a reduction in home sales on a monthly basis in July and August (the "payback" of the tax credit seen from shifting demand that would have occurred in those months forward into the pre-July period). This mid-summer drop-off will likely increase inventory levels so, if we haven't been successful in pushing them down before then, we'll likely end up with more inventory on the market than we have now, even after what is likely to be a robust homebuyer season in the spring and summer. A few more details about how we arrived at the numbers in Figure 2: The formula used to arrive at the net number of homes added or withdrawn was: March inventory - February inventory + Number of homes sold in March If no new homes were added or withdrawn from the inventory in a given month, then the difference between the inventory levels in March and February would exactly equal the number of home sales in the current month and this net number would equal zero. Additionally, all statistics used in this analysis were from the National Association of Realtors March existing-home sales report.
Forbes.com has an interesting article: "Don't Sell, Rent!" Protecting Tenants at Foreclosure Act:
Leases will survive a foreclosure-Great news for tenants!!!
The only thing that could change this, for the tenants, is if the new owner wants the home for a primary residence. In that case, the lease is void and the tenant is given a 90 day notice to leave the home. New Federal Law Protecting Tenants
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