Shadow Inventory Of REO Homes May Cause Double Dip Housing Decline

Current stability in the housing market may be the calm before a perfect storm, driving prices lower with a wave of foreclosure liquidations. The illusion that inventories are …

Current stability in the housing market may be the calm before a perfect storm, driving prices lower with a wave of foreclosure liquidations. The illusion that inventories are decreasing results from homes entering the foreclosure pipeline rapidly, but leaving to enter the real estate market slowly. For more on this, see the following article from HousingWire.

Despite recent projections that the housing market reached its trough and will recover in as little as 24 months, observers should expect a second leg down in what may shape up to be a “W”-shaped recovery, according to John Burns Real Estate Consulting.

With some major declines behind the market thanks to increased demand in recent months, a second dive will ultimately depend on the level of continued government intervention, the consulting firm said in market commentary Wednesday.

John Burns Real Estate indicated another factor that will shape housing going forward is the volume of inventory in the foreclosure pipeline “that will certainly drive home prices down even further when they are sold.”

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According to recent Amherst Securities Group analysis, a shadow inventory of around 7m housing units, or 135% of a full year of existing home sales, is “destined to liquidate.” The backlog is due to high transition rates, low cure rates and a longer timeline for loan liquidation — in other words, loans continue to transition into the delinquency and foreclosure pipeline at a rapid pace, but are moving out at a very slow pace.

“For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resulted in very few distressed sales in comparison to the actual level of distress in the market,” John Burns Real Estate said. “This delay in [real estate-owned] REO sales, along with historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market – temporarily.”

Government intervention in stimulating demand through the tax credit and supporting government-sponsored enterprises (GSEs) Freddie Mac (FRE: 1.79 -1.10%), Fannie Mae (FNM: 1.48 -1.99%) and the Federal Housing Administration helped prevent a more drastic decline than the one already seen in the industry, the consulting firm said. But demand stimulation must continue in order to work through supply, especially as distressed sales enter the market.

“Without continued government intervention, home prices will plummet, banks and the GSEs will continue to lose money, and the economy has virtually no chance of increasing overall employment in 2010,” John Burns Real Estate said.

This article has been republished from HousingWire. You can also view this article at
HousingWire, a mortgage and real estate news site.

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