Despite record low interest rates, renewed affordability, and other positive factors, the housing market still faces problems that will prolong recovery, according to real estate economist, Bill Pittenger.
What are the problems. The fundamental are not there. What fundamental are we talking about, and what is the impact?
Inventories are too high. There are two types of inventory. Visible inventory which consists of properties currently on the market, including new construction, properties offered for sale by homeowners, and bank owned foreclosed properties, currently at a 10.5 month supply. Also to be considered is the shadow inventory. What is the shadow inventory? Homes that are more than 90 days late in payments, homes in foreclosure, and foreclosed properties not yet offered for sale. Reports of an increase from 1.9 million to 2.1 million in August, the most recent month for which data is available. The shadow inventory my be the biggest threat to the housing market. If banks quickly return large numbers of foreclosed properties to an oversupplied and fragile market, prices will further decline, causing more foreclosures.
Home prices remain unstable. The free fall appears to have ended (baring any unforseen economic shocks), prices are still fluctuating within a narrow range.
Foreclosures are continuing unabated. foreclosures have soared from 1 million in 2006 to 2.25 million this year and projected for 2011, with 2 million forecast for 2012. The foreclosure crisis of no oversite to the foreclosure process, which may result in legislation that may or may not help the housing market. strategic foreclosures are also a problem. Strategic foreclosures are homeowners who are underwater on properties choose not to pay, and walk away from properties that they could have paid for. These foreclosures may account for 25% to 35% of foreclosures with no end in sight.
Employment is a fundamental that is currently negative for the housing market. With not enough jabs being created, the unemployment rate still hovers just under 10% at 9.8% currently. The hardest hit sector is construction, fueled by the housing bubble, many jobs may not not be replaced.
The last fundamental to be considered in underwriting standards. These standards have returned to earlier standards with no exotic mortgage interments, cash down payments, and a clear and convincing ability to repay. This does not help the more than ever credit impaired borrowers with household wealth declining dramatically.
With the condition of all of these fundamentals, the current state of the housing market looks bleak.