We’ve talked a lot about the “shadow inventory” held by the lenders. According to RealtyTrac, lenders are currently holding back 600,000 properties. Foreclosures are up and those numbers have to be growing.
Back in the 1980s when the S&L crisis hit [It doesn't look much like a crisis given today's situation, does it?] the RTC dumped a lot of homes on the market at once, and a lot of properties went very cheaply. Today lenders are keeping a lot of properties off of the market, apparently in the hope of avoiding a similar price meltdown.
There is a price though for trickling the properties out slowly though- uncertainty. As long as foreclosures continue and the REO inventory is trickled out, there is going to be downward pressure on prices. This uncertainty keeps buyers on the sidelines. Investors (as well as potential homeowners) don’t like seeing a lot of downside risk to their purchases, and the future of housing looks pretty bleak at the moment. So what are our options?
Rick Sharga of RealtyTrac stated:
[B]ecause you have such a high number of distressed properties, had we seen them all flood into the market at once, the housing market downturn would have been even worse than what we’ve all experienced.
On the other hand, as Robert Benincasa of NPR stated:
[T]he long process means foreclosed houses will keep coming onto the market in large numbers over the next few years, which is likely to keep home prices low for a while.
So which is better for the market, the mother of all fire sales, or the continued Chinese water torture approach where the foreclosures come on drip by drip?
Whatever the solution, we are better off with a solution where the taxpayers are out of it. Government attempts to halt foreclosures and prop up home prices have been expensive and counterproductive. We are starting to see an increasing number of “double foreclosures”- foreclosures where some investor believed the propaganda back in 2007-2008 that said things were “stabilizing” and they jumped into the market. Now they too are being foreclosed on.
Government intervention has allowed lenders to foist their bad MBS back on the government and be bailed out for their poor decisions. If they knew they were stuck with their bad investments, they might do a better job of managing their marketing and keeping track of their paperwork. Either that or they are allowed to go bust, their assets sold, and the dead wood cleared out.
I believe we are in a situation where we can tear the Band-aid off all at once and have it hurt like crazy, or we can peel it off bit by bit and extend the pain. We’ve been peeling the Band-aid off of the housing market bit by bit since 2005 as the situation has gone from bad to worse. Maybe it’s time to bite the bullet and get the pain over with. Maybe then we can finally see some stabilization in the market and start to heal.
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I am under the impression that it is the suspension of mark to market accounting that allows them to do this. I think in the long run we would be better off to open the floodgates and get this over with then drag it out for years and years like Japan did.
Milan-
And Japan remains a mess- even after more than 20 years.
the longer it sits the longer the assets are unproductive.
we have 3 million homeless and 12 million vacant units.
bottom the market get taxes going and get them ocupied
rip that band-aid off, the banks are just leaving them so they don’t have to mark down the asset……….they would have MARKET TO MYTH ACCOUNTING……….
This is a very important debate.
I like to relate the post 2005 housing collapse to another historical collapse: The 1906 San Francisco earthquake. According to the Wikipedia Article (http://en.wikipedia.org/wiki/1906_San_Francisco_Earthquake), “It has been estimated that up to 90% of the total destruction was the result of the subsequent fires. Over 30 fires, caused by ruptured gas mains, destroyed approximately 25,000 buildings on 490 city blocks. …..In all, the fires burned for four days and nights.” Now think about that in terms of the post 2005 housing collapse and the foolish government housing market propping. We know that San Francisco was fairly rapidly rebuilt after these massive fires stopped several days after the earthquake. What would have happened, though, if there were much smaller fires which broke out over several years instead of several days. Would anyone in the right mind have begun rebuilding so quickly given that the fires would be popping up for years? I think the answer is clearly no. Therefore, no knowledgeable real estate investor or home buyer will be eager to jump into the housing market when they know that there are millions of “shadow inventory” homes (i.e. fires) that will be appearing on the market over the next several years. As a result, until this “shadow inventory” is removed we cannot have a real recovery in the housing market. This is yet another reason to just get this over with fast and find the real market bottom.
From a psychological perspective, I believe that people deal much better with rapid negative change (i.e. a sudden collapse, a sudden natural disaster, etc.) than they do with constant minor negative changes that drag on year after year (i.e. the “continued Chinese water torture approach” mentioned by the author). Again, another reason to be done with this mess sooner rather than drag out the inevitable for years to come.