Despite many economists predicting that home prices have bottomed out and the recovery process is underway for the housing industry, Michael Feder has a different opinion.
The president and CEO of RadarLogic said at the National Mortgage News Buying and Selling Distressed Mortgage Portfolios Conference in New York that the oversupply of homes currently on the market will prevent sustained home price gains for an extended period of time, possibly for at least the next 18 months.
The key drivers that lead the housing industry are supply and demand. Normal supply usually comes from new construction and household turnover, Feder said, but that is not currently happening in the marketplace.
In May, the supply of inventory for existing home sales (2.54 million) and new home construction (146,000 units) was six months, Feder said. However, he added that if seriously delinquent homes, which was 3.7 million through May and the shadow inventory of about 4 million properties, were accounted into this total, there would be 27 months of inventory.
“Shadow inventory is overwhelming and will continue to be a weight on the market,” Feder said. “Looking at the market going forward, supply will overcome demand for years to come. The activity we continue to see is coming more and more from distressed properties which will lead the industry until the inventory situation is addressed.”
Excess supply, including homes that are currently for sale and homes that will be put up for sale when prices increase, will prevent sustained home price appreciation, the New York-based analytic provider said. As buyers absorb the supply of homes for sale in a given market and prices start to firm as a result, homeowners who are eager to sell but have been unable or unwilling to do so at prior price levels will put their homes on the market. Supply will therefore increase and home price appreciation will stop, leading to more homes on the market than the current demand and eventually a decrease in home prices.
From June 2000 to June 2007, RadarLogic determined that home prices per square foot went up 106%. However, from June 2007 to January 2012, values fell by 41%.
“These are the prices that people are paying for houses that are bank-owned, Fannie Mae- or Freddie Mac-owned properties, and does not include short sales,” Feder said during his presentation at the conference. “This is a massively declining price and a massive discount.”
Sale transactions followed similar patterns to home prices. From 2000 to 2005, properties sold increased by 31%, but during the housing bust time period (2005 to 2008), transactions decreased 62%. Over the last four years, however, volume sales have gone up by 18%, Feder said.
But Feder said these figures don’t tell the “real” story because the main component that led to the rise in sale transactions was distressed properties. According to Feder, motivated transactions increased 333% from 2007 through 2011, while nonmotivated transactions were down 20% during this same time period.
Investors purchased only 5% of the distressed properties on the market in 2004, but Feder said that number has grown to be about a third of the overall activity happening today.
RadarLogic determined that there is a 35% price discount between distressed motivated sales price per square foot and all other composite sale properties.
“The growth we’re seeing in the housing market is being fueled by the sale of distressed real estate properties. The nondistressed marketplace continues to plummet,” Feder added. “The impact this will have on the industry going forward is to at-best stagnate and we will more likely begin to migrate toward that motivated segment. Our concern is that if you get an extreme shock to the housing market, like a Spanish debt crisis, it’s this motivated price and motivated buyers that are going to become the market and these prices will converge and housing will take a massive dip.”
