Conventional wisdom would have it that as the number of foreclosures and short sales declines, then that should put a floor under prices as its these properties that have been bringing down overall housing prices.
However, as Diana Olick, the real estate reporter at CNBC, recently found out when she talked to some experts on this subject, the declining number of foreclosures may actually work to bring housing prices even LOWER.
“We believe the distressed part of the housing market has already bottomed,” said Morgan Stanley analyst Oliver Chang on CNBC’s Squawkbox. “The bid that we see from the investor is the reason for this bottom.”
He sees further declines in organic home prices.
Banks have been very slow to release their repossessed (REO) inventory onto the market, not to mention that foreclosure processing delays have literally millions of properties still sitting in foreclosure limbo.
There is a dwindling supply of foreclosures and rising investor demand. Analysts keep pointing to overall falling inventories, but the current existing home sales pace doesn’t account for that drop.
The fact is that with so much of the supply distressed, and so few organic sellers putting their homes up for sale, the inventory drop is artificially skewed to the recent lack of movement in foreclosures and a crisis of confidence among potential organic home sellers.
In January, 49% of the 1,094 sales in Chicago were REOs/short sales.
Sure, Clio argues that those sales aren’t “real”- as they are all cash investors buying the $30,000 condo in Albany Park or other neighborhoods outside the GreenZone.
But take out those 500+ sales, and what are you left with?
A housing market still in crisis.
Here are the percentages of sales in January that were REO/short sale in some of the GreenZone neighborhoods (thanks G!):
- South Loop: 55%
- Loop: 31%
- Near North: 34%
- Lincoln Park: 14%
- Lakeview: 28%
What happens if the investors can’t buy because the number of foreclosures begins to fall?
“Investors and first-time buyers ARE the real estate market,” he adds. “Investors and first timers want REO and short sales. Anything done to prevent the flow of distressed property will hurt the volume of existing home sales and all of the economic benefit that comes along with them. An REO-to-rent program will bring about record lows in monthly existing home sales volume. And volume precedes price.”
Hanson believes that when the distressed supply is choked off, by selling REO in bulk to rent, not re-sell, then the only thing you have left is meager organic sales.
“The housing market will implode,” he adds.
Yes, lower supply, in a normal market, would generally mean a return to home price appreciation, but that’s not the way today’s market is working because organic demand is still so weak and is hampered by tight credit.
There is even less demand for mid- to higher-priced homes.
“$200K to $300K is the new normal for home builders,” says Rick Palacios of John Burns Real Estate Consulting. “Since new home prices peaked in 2007, new single-family sales of over $500K have been more than cut in half, dropping from 13% to just 6% of all new home transactions.”
Is looking at the foreclosure rate a red herring for those looking for the “bottom”?
Fewer foreclosures could mean lower home prices [CNBC, Diana Olick, February 17, 2012]