Tuesday, September 21, 2010

Where does housing go from here?

The “housing crisis” in the U.S. has been a major blow to almost every homeowner, every real estate investor, every bank and financial institution writing mortgages and the financial system as a whole. Things are slightly more stable than six months ago. “Slightly” is the key word and the stabilization might well be only an illusion.

The federal government has done a lot to “help” through actions of the Federal Reserve, HUD, FHA, Fannie Mae and Freddie Mac, and direct bailouts to most of the mortgage lenders. Most of the changes seem to have allowed the pain to be less over a much longer time period. The bailouts let the financial institutions get back to profitability quickly without going bankrupt. All of the iterations of HAMP and other programs to help borrowers have instead also mostly helped the financial institutions. Changes to the way banks can report foreclosed and repossessed properties also benefitted the banks and not the homeowners.

Now homeowners trying to sell are still slashing the asking price to find buyers so prices are still falling in most parts of the country. Borrowers that were in trouble are still in trouble whether they were some of the lucky few granted rewritten mortgages or refinancing or not. Homes are still being foreclosed upon in record numbers. The inventory of REO residential properties for sale is growing and the “shadow inventory” of REO properties held by banks but not on the market is growing even faster. Buyers are going away to wait for better times or sitting on the sidelines waiting for even better prices. Private real estate investors are caught in the middle of the mess along with everyone else, getting “great” deals on foreclosure auction properties and seeing profit margins shrivel up before they can get the house back on the market.

There are a few bright spots though many would not see anything very good about them. Lenders, finally pushed into a corner by ballooning foreclosure inventories, are starting to seriously consider more mortgage rewrites and refinance packages to make existing deals realistically affordable for homeowners and avoid further foreclosures. Real estate investors are finding a large pool of takers for houses they are unable to sell for a profit by offering to rent, rent-to-own or lease-option instead.

Real stabilization and reduction of the REO inventory will only come when buyers agree that asking prices are fair and are not likely get any lower. This is classic free-market economics. When that point is reached it will still take several years for inventories of homes to reach reasonable levels again as many people who want to sell now are waiting for that time before listing their home. There is still some market for new-construction homes but it is small and remain that way until the existing-home situation is solved.

So, to the question asked in the title: “Where does housing go from here?” The sensible answer would seem to be: “Not very far and not very quickly.” This problem is just going to have to work itself out, almost certainly over the course of the next several years. It just is not going to matter very much what else the federal government does or the banks do or real estate investors do or anyone else does. The “housing crisis” was created by nearly everyone involved trying to get rich quick and the fallout and pain is going to last for a long time. Those who were prudent and kept the risks in mind have not been hurt nearly as badly as those who let greed drive the risks right out of their minds. Hopefully the one thing we can all count on after going through this is that lenders and borrowers will both learn important lessons from it. Don’t try to take that to the bank!

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