June 25th, 2008 4:49 PM by Lehel Szucs
So What Happened - How Low Can We Go?
In the initial stages of a Recession (yes everywhere people are now referring to the "R" word) sellers remain under an illusion of inflated home values regarding the real value of their property, while around them this false impression of value leads to a drop in sales as buyers respond by pulling out of the market.
At some point (about now) reality sets in and some owners reduce prices fueled by a growing financial crunch. There is an increase in the number of short sales, foreclosures rise and banks start taking back many unwanted properties, dropping cash flows lead to losses that force property auctions and a downward spiral of home prices is the result.
Prices are driven price down, developers are stuck with new homes and banks are bulging with foreclosed properties. So who are the largest sellers of homes today? Most likely Countrywide, US Bank, Deutsche Bank, Wachovia, Downey Savings and Loan, Wells Fargo and Washington Mutual.
As a matter of fact, the median sales price of a bank-owned property ranges between 15% to 45% lower than the median listed price of homes for sale in the same neighborhood.
So how far and how long will this go?
Well I’m no economist and I don’t have a crystal ball, but what I can share with you is that statistics indicate that a normal recession is around 10 months (but who knows what normal is). It seems that predictions are running everywhere from 10 to as many as 24 months before we turn the corner.
This is largely founded on the fact that we already have a national "house-for-sale" inventory of around 11 months. U.S. foreclosure filings jumped 57% and bank repossessions are up 129% from a year ago. We can expect some 2.5 million foreclosed properties to be on the market this year and in 2009.
In short - too much stock and too few buyers.
Add to that are mortgage rates, the mother’s milk of the housing market, that seem to be on the rise
On another note, the Mortgage Reform and Anti-Predatory Lending Act of 2007 bars banks from steering any consumer to a loan for which the consumer lacks a reasonable ability to repay, does not provide a net tangible benefit or has predatory characteristics. A predatory loan has never been defined and will surely mean, to a trial lawyer, any loan that a marginal buyer cannot afford anytime in the future. Analysis performed for the Consumer Mortgage Coalition concluded that because of the subjective standards the House bill "will likely generate significant litigation" and lenders will "rarely, if ever, be able to dispose of even frivolous lawsuits".
So, during these complex and difficult times, this legislation adds a further incentive for banks to stop lending to all but the best qualified individuals. Therefore it would appear that for the foreseeable future, low-income home buyers without stellar credit scores will find it nearly impossible to get any home loan - which compounds the downward pressure on home values.
As if this isn’t already enough "bad news" another growing concern is the rapid build up of household debt in the U.S. According to Business Week, U.S. households now owe almost $14 trillion, nearly equal to the annual output of the U.S. economy. Regrettably these two are interwoven and one financial crisis feeds off the other.
On the optimistic side: The current housing recession, sub prime mess and the foreclosure explosion won’t last forever. The years 2006