Friday, June 17, 2011

More Disturbing News for Real Estate Values

There is more disturbing news regarding the real estate industry and the anticipated turn around ion values. Many have predicted that the bottom has been reached and that prices will soon begin to rise – even by the end of this year. I have consistently maintained that values in certain areas will rise but that in general, values will continue to fall for quite some time. My opinion is based upon the realization that there is approximately 36 months’ worth of shadow inventory being held out of the market by lenders. This means that if not one new home comes into the market, there is sufficient inventory to satisfy demand for over three and a half years when you consider the current inventory and shadow inventory. It is simple supply and demand economic theory. How can prices recover when demand is somewhat constant (arguably) and supply is continuing to rise?? The only example of this NOT happening is oil prices where supply continues to rise and demand drops, yet prices rise. This is due to heavy manipulation of the markets and OPEC’s short sided view of making as much money as possible.
According to one prominent economist, 6.5 million new households will have to be formed before the excess housing inventory in the country will be absorbed. Brendan Lowney is a macroeconomist for Forest Economic Advisors in Massachusetts. He has estimated excess home inventories at 2.5 million, which is creating downward pressure on home prices and pushing more homes underwater. Lowey believes that the formation of an average 1.3 million new households per year will clear much of the excess inventory, and that this process will take about five years to complete. Only then, he says, will the housing recovery truly begin. Is it realistic to assume 1.3 million ne households per year??
This paints a bleak picture for sellers for the next few years. As one Fox Business columnist put it, “[the] housing recovery begins when foreclosures turn to closings”. Jay Butler, associate professor of real estate at Arizona State University, elaborated on that theme, pointing out that the key to the housing recovery is when “the housing market is driven by owner-occupants, not foreclosed properties. Other analysts add that jobs are the key, since high unemployment has made would-be homeowners reluctant to take on new payments – especially in a time when real estate is no longer perceived to be a “sure-fire” investment

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