An alternate analysis on the accuracy of the call of a bottom in housing

Below are excerpts from an article by Michael Panzner of Panzner Insights,

There’s plenty of debate about—and money riding on—the question of whether we are in the midst of a sustainable recovery in the housing market. Nobody knows for sure, of course, but there are plenty of reasons to be pessimistic.

For one thing, the supply of homes, in terms of what is currently on the market and what is potentially for sale whether or not prices rebound further—the so-called shadow inventory—remains significant relative to demand, even though data from the National Association of Realtors (NAR) shows that inventories of existing homes are back to where they were eight years ago.

Aside from the question of whether developments that have occurred since then—including the fact that their are more ways to sell property than by going through a broker—have distorted the inventory calculation, the composition of sales has changed from what it was. Nowadays, a much greater share of transactions are in the “distressed” category than before the bubble burst. Given that more than 20 percent (about 30% so far in 2012 here in Palm Beach County) of sales are foreclosures and short sales makes the current ratio look healthier than it is in comparable terms.

Needless to say, shadow inventory is far greater than it was during the go-go years, when people were happy to remain long despite a booming market. With prices having fallen sharply since then, we now have a situation akin to those seen in other post-collapse markets: Holders can turn seller on a heartbeat as prices move closer to what they paid or owe on their mortgages. Given that more than 20 percent of mortgagees are underwater (about 45% here in Palm Beach County), that represents a sizable overhang.

The tide of past, present, and future foreclosures—actual and de facto—has also left lenders with substantial holdings of “real estate owned” (REO) properties that will undoubtedly be offered for sale at some point. These are not voluntary investments being held for the long-term; they are unwanted assets that are costing money by the day to finance and maintain. According to HousingWire, nearly half of mortgage giant Fannie Mae’s REO holdings are unable to reach the market at present. (I would add that there can only be one reason for such a huge number of properties with loans in default that "can't" reach the market -- the federal government doesn't want them to reach the market. Might that have something to do with an upcoming election? Banks file foreclosure and/or get a short sale application but they cannot get approval from Fannie/Freddie and so nothing gets done. Here in Palm Beach County thousands of homes are occupied by owners who haven’t made a mortgage/tax/insurance payment for years).

(This does not even take into account all of the currently delinquent loans…recent stats reveal that, in this market, when a homeowner gets 90 days past due, there is less than a 5% cure rate…those other 95% have to eventually end up as short sale, deeds-in lieu, or bank owned…all negatively impacting the market)

It’s not just about supply, however. Demand is significantly less than it used to be for a variety of reasons, most notably because it is much harder to get financing now than it was when the property market was booming. Despite some recent loosening of credit conditions and ultra-low mortgage rates, anecdotal and other reports make it clear that lenders are generally unwilling to grant loans except on stringent terms to the highest quality borrowers.

But even if you discount the fact that traditional home buyers are having a difficult time borrowing the money they need to buy a home, it’s apparent that other factors, including societal shifts, are undermining demand—and will likely continue doing so for the foreseeable future.

Number one among them are economic conditions in the post-crisis era, which are having an adverse affect on prospective homeowners’ willingness and ability to take the plunge. A structurally weak employment market, (especially here in South Florida) where temporary and low-paid services jobs comprise the lion’s share of the jobs being created and where the odds of finding another, better paying, and more secure opportunity are low, is not the catalyst for people to step up and make what could be the biggest investment of their lives.

Perspectives about what really matters are evolving as well, especially among the younger generation. Whereas in the past the milestones of getting married, buying a car, and acquiring a home represented the natural progression of things when children reached adulthood, priorities have changed. A recent Bloomberg report noted that 4G wireless telephones trumped V-8 cars for the 80 million U.S. consumers born from 1981 to 2001. Meanwhile, the still-ailing post-crisis economy has convinced a growing number of young people to embrace “the age of frugality.”

In addition to shifting preferences, many of those who are at the lower end of the demographic scale already have a big financial burden hanging around their necks, which precludes them from taking on other big commitments like a mortgage—that is, student loans. Aside from the fact that, for many graduates, these obligations are far higher than they were, proportionally speaking, even a decade ago, the prospect of being in the hole for as far as the eye can leave a lasting impression on impressionable individuals…

Lastly and perhaps most importantly, demand is being undermined by broader-scale mood swings. People are beginning to accept that it isn’t necessary to own your own home, nor is it necessarily a long-term goal. That might seem like heresy in a country where property ownership has been viewed as a God-given right, but when you consider that in economic powerhouse Germany the share of residential property accounted for by rentals is more than 60 percent in most states and 90 percent in the capital, Berlin, it’s not all that strange.

In sum, while it is easy to focus on the traditional indicators of supply and demand and start believing that the long-awaited recovery in the property market has arrived at last, the fact is that much has changed in the wake of the events of the past decade, a development that is likely to weigh on prices for many years to come.

In a related article from Reuters, on October 5th, Federal Reserve Board Governor Elizabeth Duke said “The housing bust has saddled the United States with an "extraordinary" level of abandoned properties that inflict heavy costs on the wider community and government aid may be needed to tackle the problem…Duke noted that although unsold home inventory levels have declined as real estate has picked up, the number of abandoned homes remains stubbornly high.

Quoting Census Bureau data, Duke said vacant homes for sale had fallen to 1.6 million in the second quarter of 2012…but pointed out there were still 2-1/2 times as many vacant homes out there, they are just not for sale.

If you’ve read this far…I congratulate you! If you are contemplating buying or selling…we should talk, soon.

Thanks for reading…Steve Jackson

561.602.1258