LOCATION, LOCATION
Molony's comments bring up a crucial point about housing prices. National data may be interesting, but it's not very helpful for planners advising clients who want to buy or sell a house on a specific lot. Lately housing price movements have varied enormously from place to place. The chart, "Regional Differences," on page 76, shows NAR's regional data on median sales prices of existing single-family homes.
As these numbers show, price declines in the western states over the last two years have been far steeper than in other regions of the United States, reflecting the huge boom in certain markets in previous years. Prices in the West plummeted 37% from 2007 through 2009. In many areas of the South and Midwest, however, prices did not go through a boom and bust in the early years of this century, so they may already be at or near the bottom of this cycle. Prices in the South fell 13.3% over the last two years, while prices in the Midwest were only down 11.5%
The shadow inventory threat will be most ominous in the areas with the greatest portion of distressed homeowners. RealtyTrac reports that California and Florida alone accounted for about 37% of all national foreclosure filings in August 2010. In areas with less speculative building and fewer distressed homeowners, the shadow cast by future housing supply might not be as long.
BALANCING ACT
The question is whether today's buyers should wait, for fear that shadow inventory will drag down prices even further in the next few years. Yun points to a hopeful indicator on the supply side.
"One aspect of the shadow inventory that people aren't talking about is the lack of inventory of newly constructed homes," he says. In a normal year, Yun explains, there is always a flow of new homes hitting the market that needs to be absorbed. But in today's market, the low level of housing starts has cut off the normal flow of new home inventory. "So the low number of new homes will help offset shadow inventory, providing some help in the overall inventory picture."
Luschini concurs that weak housing starts are good news for home prices. "We don't need more inventory now."
What's more, it may be unrealistic to expect millions of homes will be dumped on the market in the next few years, driving down prices. Lenders who find themselves overstocked with real estate-owned (REO) property are being cautious. "On the front end, seriously delinquent loans are rolling into foreclosure at an unusually slow rate," Saccacio says. "On the back-end, the dammed-up inventory of properties already in foreclosure is moving to REO in a steady stream rather than a flood-presumably to prevent further erosion of home prices."
Luschini also sees evidence of efforts to keep housing supply and demand on an even keel. "Many homes are owned by banks, ready to come back on the market," he says. "Banks don't want to be in the business of owning homes. At the same time, they are reluctant to bring too many homes to the market, for fear of exacerbating weakness in home prices."
Thus lenders may be both reluctant home owners and reluctant home sellers. "We see a tug-of-war," Luschini explains. "As the economic recovery continues, more homes will come to market from banks and other owners. This increased supply will keep prices down." On the other end of the rope, when excess supply threatens to pull prices down, banks may rein in the supply of foreclosed properties so that prices can firm up. Arnott agrees that such activity is "clearly going on" and will put a damper on housing prices.
Luschini concludes that home prices are likely to stay "flattish" for several years. The inventory will find its way onto the market, and there will be some continued softness. "Home prices might drop 5% or so, nationwide, but the price drops won't be anything like we've seen in the past few years," he predicts, adding that because the housing market is highly regionalized, some areas of the country may see higher prices while others suffer steeper drops.
What might put housing prices on solid footing? "The answer to price stability is more jobs," Luschini says "When more people are working, more people will be able to commit to service the debt that comes with home ownership." With unemployment still well over 9%, it may be awhile before housing prices can resume an upward surge. In the meantime, the national housing price indexes mighty not stray far from current levels as lenders expand and contract the supply of REO properties coming onto the market.
How might a foreclosure moratorium affect housing prices? In the short term, it could stem further housing price declines because it would preclude new inventory from hitting the market, according to Luschini.
In the longer term, supply will surge once the moratorium is lifted, and prices will fall, says Feifei Li, director of research at Research Affiliates. "The moratorium won't make troubled homes disappear. They will hit the market eventually and cause a big spike in supply, driving prices down further."
By Donald Jay Korn
Catch the conclusion in Part 4 tomorrow!
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