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

Why is THIS such a problem....

For some reason, it has recently been a common theme that it is illegal/unethical/immoral - make your choice of evil - to purchase a property and sell it for a profit. I do not know why this has suddenly become an issue. Investors have been buying property and selling for a profit for years.

Ironically enough, many lenders and the federal government have loosened restrictions on "flipping" or "wholesaling" real estate. So, I am at a loss to explain why this is happening.

Additionally, investors who buy and re-sell for a profit, make up a significant number of homes being sold today. Numbers vary from 17%-30% of homes sold are by investors who seek to make a profit. Without them, the current housing market would be exponentially worse than it is now. When you consider that shadow inventory currently is 30 months, it would be catastrophic for investors to leave (or be regulated out of) the real estate market.

Flipping and wholesaling will be a reality as long as real estate is bought and sold and there are many ways to flip or wholesale properties legally. Unfortunately, many have abused the system and given such practices a bad name.

Shadow Inventory Portends Slow Housing Market Recovery

The shadow market is coming out of the shadows, and the numbers are staggering. According to a report released yesterday by LPS (Lender Processing Services), “foreclosure inventory levels [stand] at 30 times monthly foreclosure sales volume.” As a result of this massive backlog, real estate analysts expect more downward pressure on U.S. home values as most of these homes are likely to reenter the market as REO properties rather than being sold in another more profitable manner. The statistics on the foreclosure backlog are also staggering, with LPS reporting that the average U.S. loan currently in foreclosure has been delinquent for 537 days, and 30 percent of loans in foreclosure have not made payments in more than two years.

Thanks to slower processing times on foreclosures, it is unlikely that this backlog will disperse any time soon. In fact, although total U.S. loan delinquency has fallen nearly two percentage points over last year and foreclosure starts are down 14 percent from last year, the actual foreclosure rate is up as banks struggle to keep their books in order and intact. With the “non-current inventory” logging in at nearly 7 million, the backlog is likely here to stay.

Many analysts have been predicting that 2011 will be the beginning of a recovery for many sectors of the real estate market, though most agree that the residential market has a long way to go. With news such as this it is hard to see the beginning of a recovery.