Shadow inventory sales for years to come – 1.6 million distress sales in 2010, 1.6 million in 2011, and 1.5 million in 2012. By summer of 2011 REO pipeline will rise to 536,000.
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Wall Street as usual enjoys denying facts until they become so obvious to the common person on the street. By then, it is too late to react. For example, subprime wasn’t a problem until it lit the fuse that set the global economy into a downward tailspin. Analysts at Barclays Capital are now coming out giving full attention to shadow inventory in the markets. Even though their report states that the pipeline for shadow inventory may be topping out, we have such a large number of distress properties in the pipeline that we won’t see any draw down of distress sales until 2012. And ultimately the sales end is what keeps prices lower because distress properties sell for less.
As we know from various reports over 7 million homes are currently 30+ days late or in a state of foreclosure. The new data from Barclays looks at severe distress:
Source: Barclays Capital
2.4 million mortgages are 90+ days late. Another 2.1 million are in the actual foreclosure process. Yet banks only have 478,000 homes listed as REOs today. In other words, we have a giant pipeline of distress properties that will be hitting the market, trickle or no trickle, for the next few years. What this also tells us is that pressure on housing prices will be the status quo for years to come with an already pre-built supply of cheap properties.
Barclays Capital also put out their projections of actual distress sales for the next few years:
If you assume that we sell 4.5 to 5 million existing homes per year, this amounts to over 30 percent of all existing home sales for the next few years will be distress properties. This is already in the bag. So even though you might hear that the pipeline is getting smaller I wouldn’t exactly take this as a vote of confidence for the housing market. I mean how much worse can it get? There are such a large number of homes in distress that it is simply clogging the inventory pipelines for years to come.
And part of this also jumps in directly with home building and housing starts:
Even today, after a supposed recovery housing starts are down by a record breaking 70 percent from their recent peak. The last time we saw anything resembling this was back during the Great Depression when home building came to a screeching halt. But if you look above at the multi-unit starts this hasn’t even moved. Why? Commercial real estate is the next major problem area for the markets. With a saturated market, vacancies are still sky high so the need for more housing units is going to be muted for years to come.
The problem with the shadow inventory pipeline is that it also guarantees that construction will not lead us out of this recession as it has in the past. Then again, never have we been so dependent on real estate and the financing from Wall Street to create a bubble of legendary proportions. This massive build up with inventory guarantees pressure for years to come and home prices will stagnant or drop short of middle class incomes going up.
Even Barclays understand that the only way we get out of this is if shadow inventory is liquidated in an “orderly fashion” and job growth comes into the picture. And we haven’t really seen much in that regard. Home sales for the moment are highly dependent on low mortgage rates and demand that was pulled forward by tax credits. Yet those programs are now coming to an end and the market will have to stand on its own two feet. Banks have been buying time hoping that miraculously prices would once again recover and they would be able to offload inflated homes onto the market with minor losses. Yet home prices have hit the wall even after obscene amounts of money to prop them up:
What can we gather from the above data and information with shadow inventory? Prices are likely to fall unless:
-Job growth comes back strongly (with good paying jobs)
-We bring back easy money no-doc mortgages
Short of that, prices will continue to drop to reflect the actual amount Americans can pay.