Olick – fewer foreclosures mean lower prices?

“For years now we have been harping on how distressed home sales
put downward pressure on home prices all around them.  Close to
twelve million borrowers are now in a negative equity position on
their homes because so many other borrowers were unable to afford
their mortgages. The logical assumption would then be that as
foreclosures ease, organic home prices will rebound.  But what if
the current, unique state of the housing market turns that
assumption on its head?  Foreclosure sales now make up a full one
third of the market nationally and far higher percentages in
states like California, Florida, Nevada, and Georgia.  The supply
of these properties has actually been dropping, pushing prices
higher, even in the distressed category. There is huge investor
and first-time home buyer demand for distressed properties at the
low end of the market, and that has helped stabilize prices.  ‘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.  Why?

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.  Okay, so what about the fact that banks are
ramping up the process now, which could put more properties on
the market? That could boost supply, were it not for a new
government program to sell foreclosures in bulk to large
investors.  Chang says over $1 billion in investor capital has
been raised over just the past six weeks to take advantage of
this new program, and he claims this could add up to 1.8 million
jobs. Property managers, renovators, rental agents, he says would
benefit from these bulk rental investments.

Mortgage analyst Mark Hanson, however, disagrees.  He claims that
individual investors will likely spend more on
upgrades/renovations than bulk investors and will then sell to
owner-occupants at a higher price, thereby not only stabilizing
but increasing overall home values, while also juicing jobs.
‘Due to epidemic effective negative equity (not having enough
equity to pay a Realtor and put a down payment on a new house)
the repeat buyer cohort has been cut in half since 2007. They now
make up the minority of national resales,’ says Hanson.
‘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.
The existing home market is much the same, with the bulk of sales
and demand in the very low price tiers. It just goes to show that
in the historic recovery from an historic housing crash, the
usual rules just don’t apply.”