There's a Pony In There Somewhere: 7.8 Million Homes Create a 3 Year Backlog

Do you know the story of the little boy digging through the room full of horse poop to find the source somewhere underneath the stinky mounds? Of course you do. And this little fable is how I'm going to think about the US housing market reports released over the last two days, so I think I need to accurately describe the type and volume of the poop.

Yesterday on Housingwire.com, Jacob Gaffeny published Economist Reports the Housing Market Double Dip is Beginning. Who could failed to be chilled by the line "the report finds that for every home currently on the market, there are two homes waiting to be sold."

There are about 3.9 million homes on the market and sales have slowed dramatically since the termination of the tax credit program in April. New home sales dropped 33% (month over month) in May, and pending home sales in June dropped 30% (month over month). Clearly the tax incentive pushed forward buyers but the hoped for continuation of the sales trend hasn't materialized.

The shadow inventory of 7.8 million homes is based on the current estimates of homes already foreclosed on but not released for sale into the market, plus the homes that will be foreclosed on because their owners are over 90 days delinquent on their payments. Economists estimate that at the current rate of sales, it will take over three years to absorb these homes in the marketplace.

With continued unemployment and tight credit the rate of home sales will continue to drop, while the increased inventory will continue to drive down prices for homes on the market. The tight credit markets will restrict mortgage approvals to only the best and most qualified buyers. The number of "buyable" home will decrease as fewer owners have sufficient equity to sell. The poop pile is getting larger and stinkier.

Honestly, what is a home buyer or seller to think and do? And what should real estate agents, loan officers, and the rest of the home sales industry folk be doing? Should we be looking into compounds up in the hills and stocking up on SPAM?

If you can't get your head around the changed realities of home values and home sales, then stocking up on canned food and 50 lb bags of rice might be in your future.

In all communities there will be willing sellers and willing buyers who will "get it together" in a real estate transaction. But an increasing number of these transactions will be distress sales of some type: either short sales before foreclosure or REO sales after the foreclosure. The discretionary buyer who can get credit will wait for the best deal when it suits his preferences and timing, further aggravating the unpredictability of sales rates. Those in the business of selling homes will have to have a big enough business to weather the ups and downs.

Another interesting contributor to the poop pile is that buyers will have multiple channels through which to buy a home. In addition to the traditional channel of real estate agent-managed sales, buyers can now choose to purchase homes through on-line auctions or large public auctions. The banks are lining up systems to push homes through these non-traditional channels, a decision that certainly makes sense. If part of the psychology of the investor or discretionary buyer is "the deal", then the arena in which he buys a home must appeal to that belief. Brokerages that can adapt to and incorporate the many sales channels will have a chance at survival. The agents who snort and huff "I don't do short sales" or "I would never buy an REO, why would anyone else?", might need to have a Plan B for their livelihood.

For me, there is a pony somewhere in here. I'm learning to be comfortable in dealing with all types of buyers and all types of sellers. I know can add value to any real estate transaction by providing great data and realistic advice. I can learn to love attending auctions with buyers and I can handle the tough business of listing with asset managers. And once I get my pony, we're going to have a nice chuckle over how long it took to find each other.

 

This post was written by Leslie Ebersole of Baird & Warner Real Estate.

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