Awaiting a ‘lost decade’ for housing market

NEW YORK – The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.

Shadow inventory – the supply of homes in default or foreclosure that may be offered for sale – is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics, Fannie Mae, Morgan Stanley and Barclays. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.

“Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand,” said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. “Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year.”

Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez, a New York economic forecasting firm.

Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. unemployment remained near a 26-year high. The median price of a previously owned home in the month was $182,600, about the level it was in 2003, the National Association of Realtors said.

There were 4 million homes listed with brokers for sale as of July. It would take a record 12.5 months for those properties to be sold at that month’s sales pace, according to the Chicago-based Realtors group.

“The best thing that could happen is for prices to get to a level that clears the market,” said Shapiro, who predicts prices may fall another 10 percent to 15 percent. “Right now, buyers know it hasn’t hit bottom, so they’re sitting on the sidelines.”

About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody’s Analytics in West Chester, Pa. He estimates prices will drop 5 percent by 2013.

After reaching bottom, prices will gain at the historic annual pace of 3 percent, requiring more than 10 years to return to their peak, he said.

“A long if not lost decade,” Zandi said.

Troubled markets take toll

The national declines likely will be weighed down by more troubled markets. Working through the inventory depends on variables such as local employment and the amount of homeowner debt, said Sam Khater, chief economist for CoreLogic, a Santa Ana, Calif.-based real estate and financial information company. Nevada has the highest percentage of homes with mortgages more than the properties are worth, while New York state has the lowest, according to CoreLogic.

Douglas Duncan, chief economist for Washington, D.C.-based Fannie Mae, the largest U.S. mortgage finance company, said in a Bloomberg Radio interview that 7 million U.S. homes are vacant or in the foreclosure process. Morgan Stanley’s Chang said the number of bank-owned and foreclosure-bound homes that have yet to hit the market is closer to 8 million.

Sandipan Deb, a residential credit strategist for Barclays in New York, said prices will drop another 8 percent – to 2002 levels – before beginning a recovery in 2014.

“On a national level, you have never seen a decline of this sort,” Deb said. “I would caveat that by saying you also have not seen an increase on a national level like we saw from 2002 or 2003 to 2006.”

In addition to the as many as 8 million properties vacant or in foreclosure, owners of another 3.8 million homes – 5 percent of U.S. households – said they are “very likely” to put their properties on the market within six months if there is improvement, according to a July survey by Seattle-based Zillow.

“This has the potential to create a sawtooth pattern along the bottom,” Stan Humphries, Zillow’s chief economist, said in a telephone interview. “Homes begin to sell and a few sidelined sellers rush into the marketplace and flood the marketplace.”

If the market doesn’t fall to its natural bottom, price gains in the next five to 10 years won’t keep pace with inflation as the difference is made up “on the back end,” said Barry Ritholtz, chief executive officer of FusionIQ, a New York research company. Price increases that fail to at least match inflation are the same as reductions in value, Ritholtz said.

The Obama administration’s effort to help mortgage holders, the Home Affordable Modification Program, or HAMP, is another source of future inventory as owners with new loan terms re-default, Ritholtz said. About half of the modifications done in 2009 were behind in payments by the first quarter of 2010, according to the Treasury Department.

“The belief has been, if we stimulate sales with a tax credit and delay foreclosures with modifications, the market would stabilize,” said Ritholtz, author of “Bailout Nation.” “We’re just putting off the day of reckoning and drawing out the pain by not letting the housing market hit its bottom.”

Government policy contributed to a recent stabilization in prices that may have been an “illusion,” said Zach Pandl, an economist at Nomura Securities International. The S&P/Case-Shiller index of home prices in 20 U.S. cities rose 4.2 percent in June from a year earlier. The measure is a three-month moving average, which means data in the month were still influenced by transactions that may have benefited from the tax incentive.

Even if modifications fail, keeping foreclosures off the market is worth the risk of a delayed recovery, Pandl said.

“It’s too painful and too damaging to let it happen all at once,” Pandl said from New York.

Millions under water on loans

Owners of about 11 million homes, or 23 percent of households with a mortgage, owed more than their property was worth as of June 30, according to CoreLogic. Another 2.4 million borrowers had less than 5 percent equity in their houses and probably would lose money on a sale after paying broker fees and closing costs, CoreLogic said Aug 25.

In Nevada, 68 percent of homes were underwater in July, with mortgage loans statewide totaling 120 percent of home values, according to CoreLogic. Only 7.1 percent of properties in New York state were underwater, with the total loan-to-value equivalent of 50 percent, the company said.

Brandi Miner, director of marketing for the Georgia Association of Realtors, is holding back on selling her one- bedroom condominium in Atlanta’s Buckhead district because she has an underwater mortgage. She paid $155,000 for the property in 2005.

“I’m stuck,” Miner said. “I thought it was a stepping stone to a house.”

Miner pays about $1,100 a month for her mortgage plus $225 in condo dues, a higher price than she would spend for a three-bedroom house in a good Atlanta-area neighborhood at today’s prices, she said. Selling now would cost her $10,000 to $15,000, Miner estimated.

“I’m not $200,000 in the hole, thank God,” she said. “But the quarter of the country that’s underwater – that’s me.”

Detroit, Las Vegas and Fort Myers, Fla., will take until at least 2020 to return homeowners to positive equity, CoreLogic said in a March report that compared prices in 10 metro areas. Atlanta, Dallas and California’s Riverside and San Bernardino counties will need until 2016. The Washington, D.C., area will take the least amount of time, with negative equity disappearing around 2015, CoreLogic said.

Some indicators show the real estate market has begun to turn a corner. Pending sales of existing houses increased 5.2 percent from June to July, the National Association of Realtors reported Sept. 2. Economists had estimated a 1 percent decline, according to the median of 37 forecasts in a Bloomberg survey.

“The market is starting to show some signs of stabilization,” Nicolas Retsinas, director emeritus of Harvard University’s Joint Center for Housing Studies, said during an Aug. 31 interview on Bloomberg Television’s “InsideTrack.” “But a robust recovery is a long time away.”