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Foreclosures – The Key To The Real Estate Market

Posted on | December 29, 2010 | 4 Comments

The key to understanding the real estate market is understanding the role of foreclosures. I believe that housing prices will not stabilize until the market bottom has been identified and achieved. Until the massive stockpile of bank foreclosures have  been cleared up and the US job market stabilizes we will continue to have price and sales instability in our real estate market. The U.S. housing market includes the construction, sale, and resale, of all single family residential properties across the country.

Looking Closer at REO's

Looking Closer at REO's

Clearly there is a definite need to fix the broken housing market.  Statistics, facts and real estate articles all massage the data released this past month, showing  home prices falling  month-over-month in the 2010 year.  In every state home price drops are widespread  and probably this is just the beginning and not the end or bottom of the housing price fall.  Some analysts attribute this to a glut of supply of foreclosed homes on the market, but the remedy for that is not to increase that supply by speeding through more foreclosures.

Single family home inventory is at  an 11-month supply.  Banks are holding foreclosed and distressed properties off the market, hoping to sell them in a stronger economy.  This stock of homes is called the “shadow inventory” because lenders have numerous ways to hide how many loans are in arrears and how many homes are foreclosed but not listed on the market.  Even with a lot of the bank’s “shadow inventory” off the market.  Truth be told, most existing single family home owners who are putting or have put their homes on the market have an over inflated price point based on figures remembered at the top of the housing bubble or on non-realistic values associated with home improvements they made over the numerous years they lived in the house.   Most readers know that the collapse of the housing market in south Florida has been more severe than anywhere except perhaps Las Vegas.  A recent REAL ESTATE CHANNEL article reported that banks have been repossessing south Florida homes at a rate of 4,000 per month in 2010.  That would seem to suggest that the foreclosure debacle might soon stabilize.  Still in all the massive sales of these foreclosed homes to real estate investors such as myself plays as a huge negative force when it comes to estimating home values for single family homes entering the housing market.    As the outlook has become uncertain, so the supply of homes coming to the market has begun to fall, the Hometrack report also shows.  The number of properties for sale fell by 0.4% in November, the first time in nine months that the survey has registered a fall in supply.

By other economic housing measures the single family housing market is badly bloated. One index of housing inflation is the difference between house prices and rents.  In a healthy market, driven by a healthy “working” population demand, rents and sale prices ought to track roughly together.  Even when sale prices have soared, rents have stayed flat; and in some of the most overheated markets, like San Francisco and Seattle, they have actually been declining.  This decline can be traced to demands by the Federal Government for landlord/investors to drastically  lower the rents on Section Eight housing they own.

While the US employment is slightly improved, the housing market is not and is safe to say that the expiration of the home buyers’ tax credit caused new home sales and construction to wither.  It remains to be seen whether the housing market can achieve stable growth without help from policymakers.  Booms in prices can only occur when the market cannot respond fast enough to an increase in housing demand for both rentals and ownership.

Finally, while analysts have recently focused on the impact these changes will have on the market for buying homes, it is important to note that renters will also be affected. Since renting is a substitute (though perhaps an imperfect one) for owning, market forces drive the prices of equivalent rented and owned units together.  As a result, ending the tax deduction for mortgage interest would change the price of all housing units, affecting everyone.  I am stating that houses are still too expensive when compared to median income in most communities.  Since most of us with mortgages would prefer housing prices not drop further, the preferred solution is to increase wages of working and middle class families significantly.  Over the past seven months luxury home sales helped to drive the latest home pricing gains.  The average price of a single-family home increased 11.8 percent from November 2009 to $219,560 while the November single-family home median price—the figure at which half of the homes sold for more and half sold for less—edged up 1.7 percent from one year earlier to $152,500.  In other words, prices need to come down further or incomes need to rise sharply.  With unemployment and underemployment at 23 percent there is little pressure for incomes to rise.


4 Responses to “Foreclosures – The Key To The Real Estate Market”

  1. baton rouge foreclosures
    January 9th, 2011 @ 10:38 pm

    There are two ways to reduce negative equity,’’ Fleming said in a telephone interview. “Price appreciation or disposition, which means people getting taken out of their homes. At the moment, there’s more disposition.’’ A further decline in prices threatens to increase the number of homeowners with negative equity, Fleming said.

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