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The Housing Market is About to Get Even More Oversupplied

While both the media and stock investors believe that housing has bottomed, they are unaware of the massive supply of homes that are already in the foreclosure process that will certainly drive home prices down even further when they are sold. We have been projecting a “W” shaped recovery for some time, and we are becoming even more convinced that we are right. The shape of the second leg down is almost completely dependent on the level of government intervention that will take place.

For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resulted in very few distressed sales in comparison to the actual level of distress in the market. This delay in REO sales, along with historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market – temporarily.

It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project what housing will be like in 2010:

  • 13.54% of the 44.7 million mortgages tracked by the Mortgage Bankers Association are delinquent.
  • Applying the same percentage to the 11.2 million mortgages not tracked by the MBA (55.9 million total mortgages in the U.S.), 7.57 million homeowners are delinquent. That means that 10% of all homeowners in the country are delinquent.
  • Based on historical trend analysis by Amherst Securities, 6.94 million homes that are already delinquent will be liquidated, which is more than a one year supply of distressed sales poised to hit the market sometime in 2010 and 2011. During Q1 2005, that figure was only 1.27 million.
  • Defaults continue to grow at the rate of approximately 300,000 per month, assuring that the number of distressed sales will grow and will continue through 2012.


2009 Government Intervention

Government intervention to date has been helpful in preventing an even more dramatic decline in home prices. As shown in the chart above, housing demand has only fallen to “normal” levels and stabilized there. Without historically low mortgage rates, support for Freddie Mac, Fannie Mae and FHA, and an $8,000 tax credit, how far would sales have fallen this year and what would that decline in demand have done to pricing?


Demand needs to continue to be stimulated to bring down supply, particularly while the country continues to lose jobs. Without continued government intervention, home prices will plummet, banks and the GSEs will continue to lose money, and the economy has virtually no chance of increasing overall employment in 2010.

What are your thoughts?

  1. November 18th at 10:14 am 

    I aggree I dont know why the banks are not foreclosing faster on these homes.

  2. Comment by Tom D
    November 18th at 10:23 am 

    The banks continue to hope that the crooked politicians will continue to bail then out with more TARP money. If the true values of properties were on the banks’ books, they would probably all be BK.

  3. Comment by David Wolfe
    November 18th at 10:24 am 

    Dont forget that along with government subsidies, this artifical demand is also inflated by a lack of supply. Between the huge impact amount of shadow inventory and state moratoriums on foreclosures, the amount of supply to actual reach market has been severely limited compared to what it should have been. At some point, those will flood the market, and combined with a lack of government stimulated demand, prices should fall far steeper than that graph predicts.

  4. Comment by Jay
    November 18th at 10:30 am 

    This shows that there will continue to be a tremendous opportunity for the savy investor.

  5. Comment by Marco Santarelli
    November 18th at 10:57 am 

    We expect to see this “window of opportunity” to continue for at least 18 to 24 months in most markets around the country. This is a great time to be buying investment property, especially with mortgage interest rates still near historic lows!

  6. Comment by Pat Liberati
    November 18th at 11:02 am 

    These statistics include national figures, I am interested in the New Jersey Shore, Ventnor and Haverford PA areas. I think that the Northeast is better than the national market. If anyone knows those numbers, it would be great to be able to compare them to the national numbers.

  7. Comment by IrvineRenter
    November 18th at 11:17 am 

    I think you are right on. These foreclosures will not disappear by magic. Each one will be processed through the system as both an auction and an open-market sale, unless they start doing many more short sales and the auctions are reduced. Either way, resale prices have to come down.

  8. Comment by Bill
    November 18th at 12:39 pm 

    I’ve been buying some investment multi-families and it’s true at this point banks are seemingly more willing to hold onto these properties if they can’t get their price which tells me that they are indeed waiting for you and I the taxpayers to bail them out while their top executives still get seven figure salaries, thy’re saying,”we can wait, uncle sam wants this problem to go away and ultimately the’ll pay up”.

  9. Comment by Marv
    November 18th at 12:48 pm 

    One item that lots of folks don’t realize is that any governor who has signed or will sign a ‘foreclosure moratorium’ or a similar piece of legislation is only going to ensure that the situation regarding an oversupply of homes will last just that much longer, pushing the day of reckoning farther & farther into the future.

  10. November 18th at 6:15 pm 

    Yup. I heard on National Public Radio that by next year more than 50% of mortgages will be underwater. That means that by next year, the loans on half of American homes will exceed the value of those homes. This may turbocharge the negative trends we see. And that does not take into account the additional impact of the disaster just beginning in Commercial real estate. Batten down the hatches! Also note that the mainstream media very often doesn’t even begin to get it right.

  11. Comment by Edna Terry
    November 18th at 7:23 pm 

    This is a great time for investors and the opportunity remains for at least 2 years. Yes?

  12. Comment by rod
    December 3rd at 5:36 pm 

    I have IRA money to invest. How do I get the great ROI with my IRA? Most lenders want 50% down as it has to be a non-recourse loan. Which limits my leverage potential. Any ideas or suggestions would be appreciated. Thanks Rod

  13. Comment by Marco Santarelli
    December 4th at 11:07 am 

    Rod: Some IRA administrators have greater restrictions than others. The lender typically is not the issue. Your IRA must own title to the property (directly or indirectly) and you cannot handle the funds personally. We can recommend a few real estate friendly IRA administrators if you call us. Click here for some basic IRA information.

  14. Comment by Tuan
    December 15th at 3:10 pm 

    I think the best is the government should created more job and think about to lower the home prices.

  15. June 2nd at 9:32 am 

    […] The Housing Market is About to Get Even More Oversupplied November 18th, 2009 by John Burns […]

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