The unending commentary on the state of the housing market continues with many “experts” expressing opinions on everything from the future of prices to the desirability of homeownership. Central to all the angst is an overriding impression that too much uncertainty and confusion exists to reasonably predict the future…and in the absence of certitude, we need to assume the worst.
The reality is that the housing market is depressed, and will remain so until a few fundamental issues are resolved, such as:
- Availability of Mortgage Financing: As a result of Dodd-Frank, the regulators are busy formulating rules that will determine the lenders’ retention of risk and underlying capital requirements. While lender balance sheets have improved over the last two years, until they know the rules of the road, their heightened underwriting requirements will make borrowing very difficult.
- Disposition of REO and Distressed Properties: It would surprise most people to know that resale properties have not witnessed the decline in average prices noted by national indexes. Lenders offering REOs at significant discounts have caused overall prices to show meaningful drops, but that is because those REOs are being priced at up to a 40% discount to market. Historically, incentives offered by lenders disposing of foreclosed homes typically ran from 15 to 25%. With heightened volume, those discounts have grown significantly. The result is a deflationary expectation that causes consumers to wait in anticipation of potentially lower asking prices.
- Unoccupied Homes: Finally, the glut caused by “over building” has created a tremendous inventory of unoccupied homes. This excess has resulted in the most profound price correction since the great depression. Fortunately, we are using up the excess unoccupied homes, and should achieve a closer to normal balance of supply/demand by the second half of 2013. Historically, unoccupied homes have run between 1.5 – 1.7% of the total housing stock. Right now unoccupied homes represent about 2.6%. As the economy gradually improves, household formation plus obsolescence exceeds new construction, and we come back into balance.
The point in detailing the three issues above is not to belittle its impact, but to frame the matters in functional terms. If there is a bright spot to our current circumstances, it is that the issues are understandable and will be resolved. Time will cure the uncertainty surrounding regulation, resulting in the disposition of REO properties and in doing so alleviating the glut of excess homes.
- Article submitted by Patrick F. Stone, President & CEO, Williston Financial Group