What is happening right now is totally unprecedented. We have never had the global economy we have today and we certainly have never had the wealth destruction that is now taking place. These two factors along do not bode well for housing prices for many years to come.



I suspect with the pending home sales report out yesterday that we may see sales boost in numbers a nit in some areas. This will occur mostly in the massive bubble states such as CA, FL, AZ and NV. The large majority in that uptick is REO and short sales which do nothing to decrease inventory and typically move the market further downward as witnessed in past recessions. This is a direct result of the massive dumping that is now happening, and will continue to happen by lenders throughout the country. We have had over 3 Million foreclosures in the past 18 months and according to most estimates we will have roughly another 1 Million before the end of the year. This number is based on the recent numbers and trends taking place today. California alone has plummeted in price by 41% as of last month. California sales had a small uptick last month and so did there inventory. Inventory is one of the big problems right now and the problem is not going away anytime soon.



We have millions upon millions of empty homes in this country (17-20 million by most estimates) of which roughly 2.5 Million are for sale in some manner at this moment in time. The problem is all of the numbers are being skewed that we use to figure out where we are at. This makes the numbers appear to not make sense, but they do when you dig deeper into it. How can inventory be rising in CA when sales had an uptick and new build has crashed? The answer is what we refer to as shadow inventory and there is a lot of it. This inventory is held by lenders as foreclosures and they are working behind the scenes on bulk transactions to rid themselves of this over supply. The sales when they take place show up in the numbers, but this shadow inventory does not. The existing home sales market right now is… well pretty much non existent. REO and Short sales now make up close to 50% of the transactions nationally and that number will go higher. Through comps in these and all neighborhoods surrounding these sales we see massive dilution of household wealth being stripped literally overnight. This will also continue as lenders rid themselves of more and more of this shadow inventory.



Another issue on price is basic fundamentals and we are still pretty far off in many areas. Price to income is still way out of line in many areas around the country and pretty much nationally rents to mortgages are out of line as well. All RE is indeed local, but all localities are currently under stress. Prices will continue to fall until these fundamentals are put back into place. With the massive job losses we are encountering along with the massive inflation we have been experiencing (especially food and energy, which by the way does not appear in the actual Fed inflation figures) these figures themselves keep declining. That simply means home prices much fall even further in those areas most impacted by this. The other issue is typically corrections swing high meaning that we will probably over correct. That is why you see a small bump up after a recession nears its end. We are far from that point however. What we are seeing now is what is referred to as a suckers rally or premature bounce which will only lead to a further fall to the appropriate level the market deems necessary. Don’t buy into this hype as it is not real and based on any sound data. In fact it flies in the face of the data that we have been seeing come out.



The credit crunch and subsequent insolvency issues that now face so many companies is real and market stifling to say the least. It does not matter what the Fed and / or Treasury does right now, as it cannot stimulate a debt burdened society. No matter how much liquidity it tries to move into the system it just will not work. The issue is not about money, but rather it is all about debt. A large segment of the population (roughly 30 million by some estimates) is now, or will soon be, under water on their homes. That is wealth turned into debt instantly. You can’t borrow from your home (MEW) or even use it as collateral if it is not worth what you owe on it. Homes have now become no different than a car in terms of an investment. They are now a depreciating asset and should be viewed as such. When you trade your car in if you owe more than it is worth then you must pay the difference or tack it onto the new loan if you qualify to do so. The same thing is going on with housing right now, which is why lenders are finding it so tough to re-write mortgages for folks. They simply do not qualify for the new loan at the higher cost and in many cases they don’t even currently qualify for the original loan. These folks just simply cannot be saved by anyone and to try will only put off the inevitable. That is why we see so many defaults already on re-written loans from even earlier this year.



Resets are another huge issue yet to really take place like it is about too. Sure we had subprime loans defaulting in record numbers, but they are not nearly as large of loans and so the hit to lenders and the economy is not nearly as large as what is about to hit. Alt-A, Pay Option and Prime and Jumbo Prime loans are starting to see resets take place. Many of these loans were written with LTV reset ratios of 115% - 125% and those levels are being reached now on many of these loans. The peak of resets actually doesn’t take place until 2010 and ends around 2012. It won’t take that long however for many of these to reach their LTV kick in reset schedules. Many of these loans rush upwards by hundreds and even thousands of dollars per month. Many times it is clearly enough to make even the big boys rethink their up coming purchasing decisions. Until we get through the bulk of these resets nothing will really move in any large way.



With virtually no real buyers and first time buyers looking at the much cheaper shadow inventory there is little to no movement in new and existing home sales. Why pay 400K for a ranch when you can get a colonial for 250K in foreclosure? Many people have just taken their homes off of the market as a result and are either waiting to default themselves or simply walking away. This is just adding more shadow inventory. Also the tightening of what lending does exist is keeping the buyer pool very small. In many instances lenders now require 10% - 20% down and a credit score of 700 plus. Also no more stated income as you must now prove you have the resources to [ay back the loan. Many would be buyers simply cannot meet these requirements. Things will only get tighter in terms of lending requirements.



All in all I would anticipate a suckers rally to hit at some point soon and then a continued downward spiral for many more years. I think resets will probably move upward from the 2012 ending to most resetting by Q1 2011. Then I would anticipate a flat period of roughly 2-3 years followed by a gradual 1% - 3% rise in value, or traditional inflation adjusted home prices, over the next 20-30 years or more. I am looking at 2015-2017 for things to be back to normal and that doesn’t mean 2004. In other words a house is back to being just a home again. A place to live, eat, watch TV, garden, maintain and live in. Not an investment as it was never designed to be and not a way to get rich quick either. Those that did were part of a giant scheme that will not be repeating for many, many years from now if ever again…