by guest contributor Peter Fugiel, Ph.D.
As the U.S. home markets begin to improve, it is clear that realtors and buyers alike are looking for more middle-market inventory. A few years ago, the hot topic was that the markets were too fragile for a major distressed unit sell-off. That was not a good time to sell distressed inventory. But in 2013, with home sales volume up, and with for sale inventories at their lowest level since before the bubble, the question is: Where is the middle-market distressed inventory? There are buyers looking for more of the better kind of lender units.
Recently, the National Association of Realtors reported there is a four-month supply of units for sale, or, about 1.7 million units. Normally, the supply of units it takes to have a balanced market is six months, so the 2013 market is now a seller’s market. However, the number of units for sale has kept on dropping since the height of the bubble. It is now comparable to the level in 2005, when the number of for-sale units also equaled a four-month supply.
Where might that additional inventory be? It appears that many lenders, including the federal mortgage pools, are holding back units. They would be facing more booked losses if they began to dispose of additional distressed properties at market prices which are still largely unrecovered.
Local Markets Stabilizing, but With Big Price Adjustments
With constrained supplies of for-sale units, there is evidence in some markets that price stabilization is finally setting in. As a matter of fact, the S&P/Case-Shiller 20-Market Home Price Index is up 10% in the past twelve months. But the index had already ’improved’ once, back in 2010, only to fall back in most index markets to new lows in early 2013.
[Lenders] would be facing more booked losses if they began to dispose of additional distressed properties at market prices which are still largely unrecovered.
Many markets remain very fragile, with an offset between high-end and cash sales. While non- bubble markets like Charlotte and Austin have regained most of their former value, bellwether metro growth areas like Tampa, Phoenix, and Miami have barely recovered after posting huge price adjustments.
Even more ominous, six years after the crash, very big markets like Chicago, Atlanta, Boston and New York, are struggling to move substantially away from their price bottoms. Los Angeles is still down 34%, Chicago 35%, Atlanta 30%, and New York 25%. The twin collapse in prices, first from the bubble in 2006, and then from the credit contraction that set in by June of 2010, still has the S&P 20-Market Index down a third from its high in May of 2006.
Lenders Are Waiting for Higher Prices Just like Non-Distressed Owners
In whatever categories of ’distressed units’ lenders are keeping their non-performing assets, it is evident. Just like non-distressed households looking at low price levels, it appears that lenders don’t want to take additional big hits on their holdings. The only difference between the two kinds of potential sellers is that a non-distressed household can wait, and keep its unit in good repair so that it shows well. Some lenders may not be maintaining distressed assets to the same level of buyer appeal.
Unsold Inventories Up One Million Units
In addition to lender distressed inventory that is occupied, according to a recent 2012 HUD report, unsold inventory has increased as well. The increase has been 400,000 units since the third quarter of 2000. The total is now four million units. It is not clear what condition these units are in, but now is a good time to test the market to see what they are worth. All of these occupied or empty units could add to the supply of units for sale. The question remains: at what cost to the lenders?
While non- bubble markets like Charlotte and Austin have regained most of their former value, bellwether metro growth areas like Tampa, Phoenix, and Miami have barely recovered after posting huge price adjustments.
Lenders Can’t Afford to Take Principal Losses
Lenders have taken huge operating losses over late mortgages, both first and second loans. When they move to sell the units financed after 2004, they face an estimated 30% write-down. Bank capital will be at risk and the GSE’s would have to consider additional Treasury subsidies if their current profitability proved insufficient. It is widely thought in that many of these cases, the lenders have begun foreclosure proceedings but not finalized them. As one market commentator has suggested, it is “extend and pretend.” In that way, the paperwork has been done, but the lender has not had to book the loss.
Current Market Size Has Fallen Back to Pre-2004 Volume
One of the most striking features of the bubble was that sales volume soared from five million to over seven million before it crashed back to four million. This year’s five-million sales mark is almost a ’normal,’ pre-2004 volume, with equal representation of cash buyers and first time owners in the recent market. What is missing in the reviving 2013 market are re-purchasers. There are buyers looking for middle-priced, middle-market units. But because non-distressed sellers cannot afford to write down their unit’s value, their units are not being listed. In a country that has gained 44 million persons in the past 15 years, market volume ought to be at least another 100,000 sales, if not substantially more. Only lender inventory can fill the gap.
Providing for Additional Capital Losses Will Help Lenders Dispose of Their Inventory
If ever there were a case of needing to improve something, it is the U.S. home markets in early 2013. Non-distressed homeowners are not going to take big hits on homes they may want to sell. So instead, buyers are going to have to wait on lenders with distressed units to start taking bigger losses and move their depreciating assets into the for sale category. Without lenders taking the hit and disposing of their middle-market inventory, 2013 will not be the year for a full market recovery.
About the Author
Peter Fugiel, Ph.D., a housing and public finance consultant in Chicago, is a frequent contributor to MuniNetGuide.com. His firm, PMN Community Services, provides research services to Chicago-area communities based on platform that combines real estate market analysis with municipal bond research.
PMN Community Services recently launched its public finance/housing research website, at USAPublicSectorMetrics.com.
Editor’s Note: The opinions expressed within this article are those of the author, and may not necessarily reflect the views of RICIC, LLC or MuniNetGuide.