Last November, I blogged about the then current state of the U.S. real estate market, and concluded that the available data indicated that it would take several years for the shadow inventory to be wrung out of the system, and that only when the supply of available housing dropped to meet demand would the general market find the happy price point in which supply and demand were in equilibrium and prices remain stable.
In today’s blog, I will look at some current legal and economic issues that might help employee mobility practitioners make necessary strategic business decisions which hinge upon real property sales. Such decisions include budgeting for carrying costs of existing inventory, estimating loss on sale benefits, estimating employee reluctance, and similar real property related decisions. This same analysis is also important in fine tuning those programs which include a guaranteed purchase, such as federal government relocations or fixed fee programs.
The critical pieces of data are location specific estimates of housing price changes and foreclosures, and changes in the rates of price fluctuations and inventory. While relocation appraisals can give a good guide for an individual house, market change and variability preclude single appraisals from supplying enough data upon which to base a business plan. Rather, macro statistics, as course as they may be, are the best metrics available, absent a professional economic analysis of each area in which inventory or potential transferees are located.
When real estate brokers talk about the “shadow inventory” they are referring to the amount of unlisted homes which are for sale but which are not yet offered on the market; primarily these are houses in the process of foreclosure, which have recently been foreclosed upon, or which are eligible for foreclosure yet not yet through the process. The larger the inventory, regular and shadow, the longer houses will take to sell, and the more downward price pressure will be found in the market. Determining normal inventory requires only looking at current local listings, and listings of equivalent listing in the relevant market area. Determining the shadow inventory is far more difficult, and is determined by interrelated economic, legal, and regulatory factors.
The effects of those factors can be broken down into two broad categories: the rate of real property purchases in the market area, and the rate of foreclosures in it. In the current market, as purchases go up, prices will tend to stabilize or increase, and days on market fall. However, even if purchases increase, the net effect is often offset by the increase in supply which results from increasing rates of foreclosure.
Let’s look at the current state of foreclosures.
There are two main forces keeping a flood of foreclosures from hitting the current market: the policy of the GSEs, and lingering legal issues. The former is likely the largest; both Fannie Mae and Freddie Mac own a huge backlog of foreclosed properties, representing about one third of all repossessed houses in the country. Placing all of these properties on the market simultaneously would further decrease the prices of all houses, something which these agencies are currently reluctant to do. That being said, there are rumblings in Congress that the federal government may fully privatize these institutions in the coming months, which could result in their dumping foreclosed houses more quickly. A good description of this is discussed in http://www.businessweek.com/magazine/content/11_06/b4214044575550.htm .
From the legal perspective, many of the factors discussed last November are still in play. Legal issues arising out of the paperwork foundation for mortgage backed securities are still prevalent, but not apocalyptic. The voluntary cessation that many of the major banks put in place is being gradually abandoned, and in many states, foreclosures are continuing at a good clip.
Substantial issues still exist, most turning upon the lax paperwork involved with combining mortgages into the security pools which formed the basis of the MBSs. The problems related to the MERS system and its documentation continue, but are being worked out, albeit fitfully. A recent Massachusetts case, U.S. Bank v Ibanez (http://www.scribd.com/doc/46472110/Ibanez-Case-JAN-2011 ) held, like most recent state cases, that a bank or trustee that forecloses on a mortgage must be able to prove it was in title as a proper trustee at the time of foreclosure. What makes this case significant is that Massachusetts is a nonjudicial foreclosure state, so that Massachusetts law now requires the foreclosing entity to internally ascertain the strength of its documentation before foreclosing and selling the property. One mistake, and the house goes back to the delinquent owner, at least until the process is repeated to a court’s satisfaction. In this case, the Massachusetts Supreme Judicial Court took aim at mortgage assignments in blank, where no assignee was ever filled in. A proper assignment, even after the fact, will likely suffice, but in the meantime, banks are being careful in foreclosures everywhere. In Massachusetts, and in other nonjudicial foreclosure states, it may become prudent to use the more costly and lengthy judicial foreclosure method in many cases, thus significantly driving up the cost of disposing of foreclosed property.
Even with the GSE policies and the spate of documentation issues, there was a significant number of foreclosures in 2010. The just released report of RealtyTrac (2010 Year-End Metropolitan Foreclosure Report) which breaks down foreclosure activity by standard metropolitan area (SMSA) shows that foreclosures increased in 149 of 206 metropolitan areas with a population of 200,000 or more. The report further shows that the trends were evenly split in the nation’s top 20 SMSAs, with half showing an increase in foreclosures over the previous year. According to the report, more than 2.8 million houses were the subject of default notices or foreclosure in 2010. The report can be found at http://www.realtytrac.com/content/press-releases/2010-year-end-us-metro-foreclosure-report-6317 and is a good source of data down to the metropolitan level.
Another useful metric is an economic projection done by Forbes magazine in which the top 10 best and worst metropolitan areas for foreclosures were ranked by projected foreclosures and project price increase/decrease. It can be found at http://blogs.forbes.com/morganbrennan/2011/01/26/the-worst-cities-for-foreclosures-in-2010/.
Most foreclosures are concentrated in the same states, including California, Nevada, and Florida, as expected. However, the recent inclusion of Boise City, Idaho is an indication that the problems have passed though the suspect mortgages and have begun to appear in those areas which did not experience the worst of the housing bubble economics, but that are now subject to the loss of jobs and weak economy which prevents persons with conventionally underwritten mortgages from keeping current. It is this group that will likely provide the next wave of foreclosures. Some experts have estimated that at the end of 2011, as these foreclosures reach their markets, prices nationwide will have fallen 30 – 50% since 2007. Ironically, there are several California and Florida on the Forbes improving cities list.
The bottom line for those in the employee mobility industry who deal with domestic real estate issues is that there appears to be no general uptick in housing demand or prices, but that each area will begin to show recovery at different rates and times. If the predictions are correct, some metropolitan areas may see a slight increase in prices and fall in foreclosures over the next 12 months, but the metrics do not now indicate that the general housing market will be in substantial recovery this year.