Rabbit in a Hat

With banks holding back on selling homes they have repossessed, the housing prices appear to have hit bottom.

However, the current inventory of Bank Owned homes not coming on the market continues to grow. We call those houses not listed for sale but owned by the banks, Shadow Inventory.

The supply of homes for sale in July of 2008 was about an 11 month supply. Now in July of 2009 we have about a 3.5 month supply. It appears that the number of buyers is greater than the number of sellers.

The difference is the Shadow Inventory, homes owned by the banks but being held off the market. In the Inland Empire the best number I can come up with is 13,000 to 14,000 homes that make up the Shadow Inventory. When will they be released and placed on the market? I think they’ll start coming on the market in October, perhaps at a measured release rate to help insure we try to avoid a return to the 2% per month price decline like we had for almost 2.5 years. You can only have a 2% monthly decline for so long.

There are 3 things to watch as we get close to 2010. First: The Number of Foreclosures. But more importantly, the rate the banks place them for sale. Second: Interest Rates. I would not be surprised to see home buyers paying 1% or more for a mortgage. 1% on a $200,000 mortgage is another $166 per month. The third thing to watch: The Unemployment Rate. An unemployment above 15% or even 20% is not out of the question for the Inland Empire. If all three of these come together (numerous bank owned properties on the market, high interest rates, high unemployment rates), the prices will continue to fall.

The question is, “Can the Fed’s pull a better rabbit out of the hat??”

We need a better solution than loan modifications. Loan modifications will not work. The re-defaults will be almost as many as the original number of loan modifications.

The only answer I can see is Short Sales. Lenders need to take it on the chin and streamline Short Sales, maybe for a long time. It’s the only Rabbit left in any Hat!!