In the initial stages of a Recession (yes people are everywhere now referring to the “R” word) sellers remain under an illusion of inflated home values regarding what their property is really worth while around them this false impression of value leads to a drop in sales as buyers respond by pulling out of the market. At some point (about now) reality sets in and some owners reduce prices fueled by a growing financial crunch. Short sales start occurring, foreclosures rise and banks start taking much unwanted properties, dropping cash flows lead to losses, that force property auctions and a downward spiral of home prices is created.
Driving the price down and developers flush with newly minted homes and banks bulging with foreclosed properties. So who are the largest sellers of homes today. Most likely Countrywide, US Bank, Deutsche Bank, Wachovia, Downey Savings and Loan, Wells Fargo and Washington Mutual.
As a matter of fact the median price of a bank-owned property often sells for between 15 – 45% lower than the median list price of homes for sale in the same neighborhood.
So how far and how long will this still go?
Well I am no economist and have no crystal ball. But what I can share with you is that statistics indicate that a normal recession (who knows what normal is) is around 10 months. It seems predictions are running everything from 10 to as much as 24 months before we turn the corner.
This is large founded on the fact that we already have a national “house-for-sale” inventory of around 11 months. US foreclosure filings jumped 57% and bank repossessions are up 129% from a year. Expect some 2.5 million foreclosed properties to be on the market this year and in 2009.
In short, too much stock, too few buyers.
Add to that that mortgage rates, the mother’s milk of the housing market, seems to be on the rise – internationally and locally and the “The 2007 Hangover” I wrote about back towards the end of 2006 in my annual Swanepoel Trends Report will provide the industry a headache well into 2009 and beyond.
On another note, the Mortgage Reform and Anti-Predatory Lending Act of 2007 bars banks from steering any consumer to a loan that the consumer lacks a reasonable ability to repay, does not provide a net tangible benefit or has predatory characteristics. A predatory loan has never been defined and will surely mean, to a trial lawyer, any loan that a marginal buyer cannot afford anytime in the future. Analysis performed for the Consumer Mortgage Coalition concluded that because of the subjective standards the House bill "will likely generate significant litigation" and lenders will "rarely, if ever, be able to dispose of even frivolous lawsuits".
So during these complex, difficult times, this legislation adds a further incentive for banks to stop lending to all but the best qualified individuals. So for the foreseeable future low-income homebuyers without stellar credit scores will find it nearly impossible to get any home loan - which compounds the downward pressure on home values.
As if aforesaid isn’t already enough “bad news” another growing concern is the rapid buildup of household debt in the US. According to Business Week US households now owe almost $14 trillion, nearly equal to the annual output of the US economy. Interwoven the one financial crisis feeds off the other, regrettably.
On the optimistic side: The current housing recession, subprime mess and foreclosure explosion won’t last forever. The years 2006 – 2009 will unquestionably leave a scar, but the American dream of owning your own home will return in all its glory. We may have to wait another year or more but keep the faith, real estate will once again create wealth and fuel the economy.
Till then, be astute, knowledgeable and remain positive. |
