US Housing market 09-15 zt

The slide in U.S. home prices mayhave another three years to go as sellers add as many as 12million more properties to the market.

Shadow inventory -- the supply of homes in default orforeclosure that may be offered for sale -- is preventing pricesfrom bottoming after a 28 percent plunge from 2006, according toanalysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanleyand Barclays Plc. Those properties are in addition to housesthat are vacant or that may soon be put on the market by owners.

“Whether it’s the sidelined, shadow or current inventory,the issue is there’s more supply than demand,” said Oliver Chang, a U.S. housing strategist with Morgan Stanley in SanFrancisco. “Once you reach a bottom, it will take three or fouryears for prices to begin to rise 1 or 2 percent a year.”

Rising supply threatens to undermine government efforts toboost the housing market as homebuyers wait for better deals.Further price declines are necessary for a sustainable reboundas a stimulus-driven recovery falters, said Joshua Shapiro,chief U.S. economist of Maria Fiorini Ramirez Inc., a New Yorkeconomic forecasting firm.

Sales of new and existing homes fell to the lowest levelson record in July as a federal tax credit for buyers expired andU.S. unemployment remained near a 26-year high. The median priceof a previously owned home in the month was $182,600, about thelevel it was in 2003, the National Association of Realtors said.

Record Supply

There were 4 million homes listed with brokers for sale asof July. It would take a record 12.5 months for those propertiesto be sold at that month’s sales pace, according to the Chicago-based Realtors group.

“The best thing that could happen is for prices to get toa level that clears the market,” said Shapiro, who predictsprices may fall another 10 percent to 15 percent. “Right now,buyers know it hasn’t hit bottom, so they’re sitting on thesidelines.”

About 2 million houses will be seized by lenders by the endof next year, according to Mark Zandi, chief economist ofMoody’s Analytics in West Chester, Pennsylvania. He estimatesprices will drop 5 percent by 2013.

After reaching bottom, prices will gain at the historicannual pace of 3 percent, requiring more than 10 years to returnto their peak, he said.

“A long if not lost decade,” Zandi said.

Variances by Market

The national declines likely will be weighed down by moretroubled markets. Working through the inventory depends onvariables such as local employment and the amount of homeownerdebt, said Sam Khater, chief economist for CoreLogic Inc., aSanta Ana, California-based real estate and financialinformation company. Nevada has the highest percentage of homeswith mortgages more than the properties are worth, while NewYork state has the lowest, according to CoreLogic.

Douglas Duncan, chief economist for Washington-based FannieMae, the largest U.S. mortgage finance company, said in aBloomberg Radio interview last week that 7 million U.S. homesare vacant or in the foreclosure process. Morgan Stanley’s Changsaid the number of bank-owned and foreclosure-bound homes thathave yet to hit the market is closer to 8 million.

Sandipan Deb, a residential credit strategist for Barclaysin New York, said prices will drop another 8 percent -- to 2002levels -- before beginning a recovery in 2014.

“On a national level, you have never seen a decline ofthis sort,” Deb said in a telephone interview. “I would caveatthat by saying you also have not seen an increase on a nationallevel like we saw from 2002 or 2003 to 2006.”

Likely to Sell

In addition to the as many as 8 million properties vacantor in foreclosure, owners of another 3.8 million homes -- 5percent of U.S. households -- said they are “very likely” toput their properties on the market within six months if there isimprovement, according to a July survey by Seattle-based Zillow.

“This has the potential to create a sawtooth pattern alongthe bottom,” Stan Humphries, Zillow’s chief economist, said ina telephone interview. “Homes begin to sell and a few sidelinedsellers rush into the marketplace and flood the marketplace.”

If the market doesn’t fall to its natural bottom, pricegains in the next five to 10 years won’t keep pace withinflation as the difference is made up “on the backend,” saidBarry Ritholtz, chief executive officer of FusionIQ, a New Yorkresearch company. Price increases that fail to at least matchinflation are the same as reductions in value, Ritholtz said.

The Obama administration’s effort to help mortgage holders,the Home Affordable Modification Program, or HAMP, is anothersource of future inventory as owners with new loan terms re-default, Ritholtz said. About half of the modifications done in2009 were behind in payments by the first quarter of 2010,according to the Treasury Department.

‘Day of Reckoning’

“The belief has been: if we stimulate sales with a taxcredit and delay foreclosures with modifications, the marketwould stabilize,” said Ritholtz, author of “Bailout Nation.”“We’re just putting off the day of reckoning and drawing outthe pain by not letting the housing market hit its bottom.”

Government policy contributed to a recent stabilization inprices that may have been an “illusion,” said Zach Pandl, aneconomist at Nomura Securities International Inc. The S&P/Case-Shiller index of home prices in 20 U.S. cities rose 4.2 percentin June from a year earlier. The measure is a three-month movingaverage, which means data in the month were still influenced bytransactions that may have benefited from the tax incentive.

Even if modifications fail, keeping foreclosures off themarket is worth the risk of a delayed recovery, Pandl said.

“It’s too painful and too damaging to let it happen all atonce,” Pandl said from New York.

Underwater Homeowners

Owners of about 11 million homes, or 23 percent ofhouseholds with a mortgage, owed more than their property wasworth as of June 30, according to CoreLogic. Another 2.4 millionborrowers had less than 5 percent equity in their houses andprobably would lose money on a sale after paying broker fees andclosing costs, CoreLogic said Aug 25.

In Nevada, 68 percent of homes were underwater in July,with mortgage loans statewide totaling 120 percent of homevalues, according to CoreLogic. Only 7.1 percent of propertiesin New York state were underwater, with the total loan-to-valueequivalent of 50 percent, the company said.

‘Stuck’ in Home

Brandi Miner, director of marketing for the GeorgiaAssociation of Realtors, is holding back on selling her one-bedroom condominium in Atlanta’s Buckhead district because shehas an underwater mortgage. She paid $155,000 for the propertyin 2005.

“I’m stuck,” Miner said. “I thought it was a steppingstone to a house.”

Miner pays about $1,100 a month for her mortgage plus $225in condo dues, a higher price than she would spend for athree-bedroom house in a good Atlanta-area neighborhood attoday’s prices, she said. Selling now would cost her $10,000 to$15,000, Miner estimated.

“I’m not $200,000 in the hole, thank God,” she said. “Butthe quarter of the country that’s underwater -- that’s me.”

Detroit, Las Vegas and Fort Myers, Florida, will take untilat least 2020 to return homeowners to positive equity, CoreLogicsaid in a March report that compared prices in 10 metro areas.Atlanta, Dallas and California’s Riverside and San Bernardinocounties will need until 2016. The Washington, D.C., area willtake the least amount of time, with negative equity disappearingaround 2015, CoreLogic said.

Time to Buy?

The slide in values and record-low interest rates may offersome bargains for property hunters. Prices have returned tohistorically affordable levels, said Karl Case, professoremeritus of economics at Wellesley College in Wellesley,Massachusetts, and co-creator of the S&P/Case-Shiller index. Heestimates a bottom for prices in six months.

“It doesn’t take a tremendous number of people to turn thehousing market, because only about 5 percent of the stock tradesin a given year,” Case said in a telephone interview. “There’sstill a lot of people who are employed, many of whom have beenlooking for the opportunity to buy.”

Case is an example of a homeowner waiting to sell becauseof low demand. He’s seeking to sell the A-frame on 15 acres nearCooperstown, New York, that he bought for $190,000 in 2005.

“I want to keep it if I can’t get what I want,” he said.“It’s a terrific little getaway and I’m not going to give itaway.”

Pending Sales Gain

Some indicators show the real estate market has begun toturn a corner. Pending sales of existing houses increased 5.2percent from June to July, the National Association of Realtorsreported Sept. 2. Economists had estimated a 1 percent decline,according to the median of 37 forecasts in a Bloomberg survey.

“The market is starting to show some signs ofstabilization,” Nicolas Retsinas, director emeritus of HarvardUniversity’s Joint Center for Housing Studies, said during anAug. 31 interview on Bloomberg Television’s “InsideTrack.”“But a robust recovery is a long time away.”

The number of U.S. homes in default or foreclosure fell to7.04 million as of July 31 from a high of 8.12 million inJanuary, Lender Processing Services Inc., a Jacksonville,Florida-based mortgage servicing company, reported Sept. 2.

Defaulted mortgages as of July took an average 469 days toreach foreclosure, up from 319 days in January 2009. That’s anindication lenders -- with the help of the government loanmodification programs -- are delaying resolutions and preventingthe market from flooding with distressed properties, said HerbBlecher, senior vice president for analytics at LPS.

“The efforts to date have been worthwhile,” Blecher saidin a telephone interview from Denver. “They both helpedborrowers stay in their homes and kept that supply of distressedproperties on the market somewhat limited.”