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Why Housing Will Remain Under Pressure

Posted by Larry Doyle on February 16, 2010 6:56 AM |

I have maintained and continue to maintain that unless and until we see a measurable decline in mortgage delinquencies, we will not truly experience a measurable turn in the tide for housing overall.

In this same vein, new studies project that measures taken to aid delinquent borrowers and to stem the tide of foreclosures are nothing more than fingers in the dike. These measures are merely temporarily holding back a new and eventual wave of foreclosures.

The Wall Street Journal highlights these new studies this morning in writing, Foreclosures Seen Still Hitting Prices:


More waves of foreclosures will keep downward pressure on home prices in parts of the U.S. over the next several years, two new studies project.

The studies—by John Burns Real Estate Consulting Inc. and Standard & Poor’s Financial Services LLC—both conclude that most efforts to modify loans with easier terms will delay, not prevent, the loss of homes to foreclosure.

The Treasury Department is expected to give its latest update this week on government efforts to avert foreclosures.

The John Burns study estimates that five million houses and condominiums on which mortgages are now delinquent will go through foreclosure or related procedures that put them on the market over the next few years. That would represent the bulk of the estimated 7.7 million households behind on their mortgage payments.

This “shadow inventory” of homes expected to hit the market is enough to last about 10 months, based on the average sales rate over the past decade, the Irvine, Calif., firm says.

The problem is largely concentrated in Arizona, California, Florida and Nevada. The shadow inventory is equivalent to 27 months of sales in Orlando, 24 months in Miami and 18 months in Las Vegas, the study estimates.

Over the past nine months, home prices as measured by the S&P/Case-Shiller index have increased modestly after a three-year plunge. That is largely because efforts to avert foreclosures have slowed the flow of foreclosed homes onto the market, temporarily constricting supply.

John Burns, chief executive of the consulting firm, said investor demand for foreclosed homes remained strong. Thus, he said, prices were likely to be about level over the next few years, despite the looming foreclosure supply, if the economy continued to recover and mortgage interest rates didn’t rise sharply. But if the economy slumped anew and interest rates jumped, he said, “that’s going to cause prices to fall further.”

The S&P study also says that the “overhang” of foreclosed homes expected to go on the market points to lower home prices.

Some borrowers are catching up on payments after having their loan terms modified, but S&P says current trends suggest that 70% of such borrowers eventually will redefault.

Loan modifications “may be helping marginally, but they are not going to solve the whole problem,” said Diane Westerback, a managing director at S&P.

Loan servicers, firms that collect payments and handle foreclosures, seem to have “nearly exhausted the supply of plausible candidates for loan modifications” and will find that many loans are “unredeemable,” the S&P study says.

As a result, servicers increasingly are looking to arrange “short sales,” in which homes are sold for less than their loan balances.

Add it all up and it strikes me that we can and should seriously discount the facts and figures reported on housing because this wave of supply is merely being forestalled . . . not eliminated.


  • coe

    Who among us have not subscribed on occasion to the principle of “a problem delayed is a problem solved” – hoping that time and change will make the problem go away…I think you are hitting the nail on the head by hammering on the problems of housing and unemployment as the twin drivers of any legitimacy for economic recovery…no doubt the various government programs mean well, but at best they are merely band-aids and the statistics you cite confirm that these measures are not enormously effective at all…I think we have entered a whole new paradigm of how we as Americans think about both our jobs as well as the housing finance equation…my sense is that those of us who are older expect to limp to the finish line and are regretfully becoming way more pessimistic and conservative about our country, its leadership, and the economic future, while those of us that are younger are less governed by the sentiments of our parents’ generation and the old world order – optimism, somewhat, but a sense of cynicism as well…somehow, the political leaders and business managers have to have the wisdom and courage to address both segments of the national demographic…the old techniques simply won’t work again in the short order…some things call for drastic measures – eg back to even tougher underwriting standards to qualify for a mortgage; new requirements to qualify for entitlement programs that are painfully underfunded; a whole rethink of our national budgeting and funding principles; tougher realities for the unions; and so forth…How can we continue to fund several wars (with lots of money and human costs), ridiculous levels of pension fund and social security liabilities, try to keep every American in a home he cannot afford, impose new taxes out the wazoo, provide enormous levels of humanitarian aid to troubled spots around the globe, introduce costly health and education reform, and subsidize failing industries that shot themselves in the foot with greed and mismanagement…simple, keep printing money! How stupid can we be, and what a cost to the next generation of Americans! Stop the madness!!!

    • LD

      I second it…all in favor say “Aye.”

      Well said….you’re elected!!

      In all seriousness, your sentiments are spot on.

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