Most Americans are likely to cringe at the thought of accelerating the pace of foreclosures. Steep drops in home prices and property values, along with uncertainty about the exact number of homes in foreclosure, continue to stifle consumer confidence.
Still, U.S. housing leaders are tasked with implementing policies that will stabilize the nation's housing sector. Recovery in the market hinges on capital investments in real estate, which is lacking because would-be homebuyers are scared. So, how do we reinvigorate the residential real estate market?
Some real estate industry leaders have said the Federal Reserve and banks should ramp up foreclosures throughout the nation. This in turn brings the looming shadow inventory-homes that have been repossessed or in the process of being repossessed, but have yet to hit the market-to the surface.
It's difficult to measure the shadow inventory because these mortgages are no longer classified as "past due loans" on the bank's income statements and the value of the real estate isn't reflected on balance sheets.
In comparing real estate listing, auction listings, real estate owned listings and notice of defaults, the top five cities with the highest shadow inventory are Las Vegas, San Diego, Los Angeles, San Francisco and Phoenix.
Roughly two million homes account for the shadow inventory. However, if one were to include loans that are in default or those delinquent and have not been foreclosed, the inventory would surge 250% to seven million, respectively.
The real estate market functions with the same supply-and-demand forces that drive other markets. The market's already flooded with millions of foreclosed homes, which makes the millions that are lurking in the shadows a credible threat to stabile prices.
If the goal is to stabilize the sector, theses properties need to move through the system at an appropriate pace. A clog in the system, which would include a foreclosure moratorium, will only lead to a pent-up release, potentially resulting in more damage to residential real estate prices.
The near-term impact is already evident. A RealtyTrac report indicates that sales of foreclosed properties to third parties were down nearly 26% in the third quarter. According to the Mortgage Bankers Association's vice president of research and economics, Michael Fratantoni, "The foreclosure paperwork issues announced by several large servicers in late September and early October are unlikely to have had a large impact on the third-quarter numbers, but may well increase the foreclosure inventory numbers in the fourth quarter of 2010 and in early 2011."
In a research note, Fratantoni also noted that a decline in foreclosure sales over coming quarters could reduce the inventory of homes on the market. "However, these foreclosed homes are likely to come on the market in the medium term, so it is only a delay rather than a change in the underlying economics," Fratantoni wrote.
Growth in the housing market, along with aggregate economic gains, will not be sustained if there are foreclosure delays.
Bringing real estate owned inventory held by the banks to the market makes sense from the micro-economic level. But it must be done prudently. Any moves taken to stabilize the housing market require a delicate balancing act between addressing the foreclosure process, while fostering greater investment in U.S. real estate. Job creation and retooled immigration policies will be key in achieving this. Unemployment has a direct correlation to real estate values.
For example, North Dakota has the lowest unemployment rate of 3.7%, with a foreclosure rate of 1 in 6,295.The state's real estate values have increased substantially, as some areas are experiencing a 31% increase from levels in the previous year. Nevada, however, has the highest unemployment rate of 14.4%. As 1 in 79 homes are in foreclosure, property values in Nevada are down an average of 6%-certain areas are down 20%.
In looking at how immigration policy can help, foreign investment capital is a viable solution. In Hong Kong, foreigners are encouraged to invest in property in return for residence status, which has contributed to growth in Hong Kong markets.
Under current U.S. policy, in order for a foreign investor to obtain residency status, he or she must invest at least $1 million in a domestic company that creates employment for at least 10 people. In contrast, in 2003 the Hong Kong Capital Investment Entrant Scheme called for an investment of approximately $836,000, and qualified real estate purchases without an employment quota as a permissible asset investment class. The U.S. would attract more capital by creating a three-year window, in which foreign investors could achieve residency status with a $500,000 equity real estate investment that is not attached to a hiring restriction. The Hong Kong CIES has met with such success that the government recently suspended the qualification of new real estate investments as a method of combating accelerating foreign speculation in the Hong Kong real estate market.
People around the world view U.S. real estate as attractive investments, but we do not have incentives to lure investment. It is imperative that U.S. housing leaders take action. Without a solution to the issues surrounding foreclosures, downward pressure on home prices will continue.
Stan Wong is the president and CEO of Wong Diversified International Investments.
