Housing market diagnosis: Bipolar

By Les Christie, staff writerMay 18, 2010: 9:23 AM ET

NEW YORK (CNNMoney.com) -- Bipolar is what comes to mind when diagnosing the post-homebuyer tax credit market. There are two separate forces pulling it in opposite directions, and experts aren't yet sure which path the market will take.

On one hand, sales and prices are rising, indicating recovery. On the other hand, so are interest rates and repossessions, which most certainly do not. And then there are the millions of foreclosures that need to be sold but haven't yet been listed -- so-called shadow inventory -- that could derail a real recovery if they hit the market in floods.

The prognosis? Negative short term but turning positive by the end of 2010.

"In the short run, I see a mini-collapse," said Richard DeKaser, an independent housing market analyst and founder of Woodley Park Research who correctly predicted a downturn back in 2005 when he was chief economist for National City Corp.

One of market's biggest hurdles is getting beyond the lapse of the $8,000 homebuyer tax credit. Thanks to the incentive, buyers

scrambled to beat the April 30 deadline, pushing new home sales up nearly 30% in March.

But that just borrowed buyers from later months. And now we face the hangover effect.

"In the months immediately following the expiration of the tax credit, we expect measurably lower sales," said Lawrence Yun, chief economist for the National Association of Realtors (NAR).

Industry insiders believe the hangover is worthwhile, however, because the credit helped stabilize housing when it most needed help. Home prices have been steadier in recent months, recently experiencing their first year-over-year rise in more than three years.

Still, there are some strong negatives dragging on the market.

1. Interest rates have been intermittently creeping up. Although nobody expects 6% until at least 2011, the days of 4.5% mortgages are behind us.

2. Bank repossessions are on track to surpass a million homes in 2010. But at least foreclosure filings fell in April, the first time since RealtyTrac began reporting.

3. More than a quarter of borrowers are "underwater," meaning they owe more than their homes are worth.

4. "Strategic defaults" -- where underwater homeowners walkway even when they can still afford to pay -- accounted for 31% of all foreclosures in March, according to a recent study.

But there is one factor that has experts really scared: homes that are ready to be sold but haven't been put on the market. Right now, there could be more than 4.5 million homes in "shadow inventory," according to a recent report by Barclays Capital.

This so-called shadow inventory is a recent phenomenon. In the past, inventory was either tight or it wasn't. But now, with home prices so low and so many foreclosures on the market, both homeowners and banks have been waiting to put properties on the market.

"These sidelined sellers closely watch the market for signs of a possible turnaround and rush in if there's a hint of good news," said Leslie Appleton-Young, chief economist for the California Association of Realtors.

But as more sellers put their homes up for sale, supplies increase, which will depress prices again. Rinse and repeat ad infinitum.

That vicious cycle could cause prices to bounce up and down for years. "I see a saw tooth bottom," Humphries said. "Prices go up; inventory rises, which sends prices down again. That plays out for three to five years of no appreciation. ... Without price appreciation, it leaves more homeowners in negative equity. That's toxic. Any setback, like a job loss, they go into foreclosure." 

 

FHA Numbers Indicate Foreclosures Will Rise

By DOUGLAS MCINTYRE Posted 5:10 AM 02/02/10 Real Estate

The percentage of mortgages backed by the FHA that are in default has risen by a third over the last year. According to a report in The Washington Post, "About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show."

Many of the troubled mortgages were granted in 2007 and 2008. Mortgages that are two to three years old apparently carry especially high risks of default because of the high number of loans made during those years to people with extremely low credit scores.

The report adds to the confusion about the direction that the housing market is heading in 2010. RealtyTrac recently reported that forecloses this year may hit 3 million, up from 2.8 million last year. When the company released December 2009 data on January 13th, James J. Saccacio, chief executive officer of RealtyTrac said, "In the long term a massive supply of delinquent loans continues to loom over the housing market, and many of those delinquencies will end up in the foreclosure process in 2010 and beyond as lenders gradually work their way through the backlog."

Government data showed that home starts fell 4% in December, but building permits rose. The choppy federal data, which can change direction month by month, has been a hard set of indicators to use to forecast the real estate market in terms of sales and home prices.

The housing market's future will continue to be plagued by unemployment and over-leveraged consumers, and pressure will also be put on home prices by owners who have underwater mortgages. Some of these mortgage holders may believe that there will never be any equity value in their homes and that they are better off turning their house keys over to the bank. In addition, a wave of $47 billion in interest only loans will reset to full payments this year, according to credit agency Fitch. A portion of these home buyers will not be able to make their new, higher monthly payments.

The FHA news only adds to the probability that 2010 will not be any better for the housing market than 2009 was.