Another writer speculated that the real estate market might recover by mid 2011, according to what he'd read. Let's look at that idea a little more closely.
The problem now has several parts. First, a much higher number of people are out of work than in past recessions. The official numbers hover in the 9.6% range, but estimates of the actual numbers range up to nearly 20%. These people cannot qualify for a loan. Second, there isn't a stated income loan product available currently and this means that any self-employed person, including Realtors, will probably not be able to buy. Then there are the people trapped in negative equity situations. They may be making their payments and they may have jobs, but they're stuck and cannot sell or move up without dropping a bundle of cash to make up the lost equity.
These factors lead to an inability in the market to absorb excess volume and this has created what is commonly called "shadow inventory" consisting of REO and other distressed properties. Shadow inventory also may be considered to include owners who want to sell, but cannot and new home inventory which is being rented by the builder because it cannot be sold. If the market begins to show signs of recovery, all of these properties will come on the market and create a huge oversupply.
Any foreclosure moratorium might cause a back-up in the REO market which will lead to a large number of foreclosures hitting the listing inventory as things start to look up.
The delinquency rates are increasing as we go further into the economic slowdown and the government attempts to modify loans have proven to be failures for the most part. Both of these factors increase the shadow inventory.
Existing home sales for last November were progressing at a seasonally adjusted rate of 6.5 million according to NAR. Sales in September, 2010 (the most recent available statistic) show that the rate is 4.5 million. That's a decline of 2 million. The September inventory from the same report was 4,040,000 or a 10.7 month supply if one is optimistic (as NAR always seems to be).
The principal balance of distressed homes is about $460 billion which is a 41 month supply per a recent news release from S&P. Let's assume that 10% of the distressed homes cure themselves by some miracle. That gives us a 37 month supply which needs to be absorbed. If we add this to the September 2010 supply, we've got 47.7 months of supply again. Let's be conservative and assume that there is an overlap between the two numbers. Obviously some of the distressed properties are in the current inventory. That might bring us down to a 42 month supply. That's three and one half years of supply.
Assuming that these numbers are correct and that the rate of absorption remains the same and nothing else happens to the mortgage mess and the economy doesn't get worse, we've got until roughly July of 2013 before we'll see the existing inventory absorbed.
Now, I'm not holding these calculations out to be very accurate, but, based on the raw numbers alone, IMHO I can't see the real estate market recovering by next summer or any time soon.
Does this mean that the market is dead and everyone should apply to be greeters at Walmart? Not necessarily. When life gives you lemons, you can make lemonade.
For example, one of the results of the growing inventory is that it negatively pressures existing home prices. This means that it's a good time to buy. Agents who are prepared to work and be innovative should do just fine.
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