Archive June 2011
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Current Real Estate Depression
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With many home prices now at 50% of what they were just a few years ago, how can prices still be falling? And where will it end?
Home prices are always the result of supply versus demand. And markets have typical annual sales volumes based on population. So if supply somehow doubles, can that market double its buyers? No. Doubling supply without doubling buyers forces price declines, just as sidelining half the buyers with normal supply forces price declines.
Our markets now have an Extreme Over-Supply of homes for sale exacerbated by this year’s boom in short sales. Shorts now double or triple foreclosure listings. In some markets, over half the listings or more are distressed homes. Three years of price declines have pushed more and more owners upside down, who now have to sell short just to move. Or they worry their home will never again be worth the debt against it and have been given no reasonable method of keeping it. It’s hard to keep paying a $500,000 mortgage when the house just like it next door sold for $250,000 or less.
At the same time, our markets now have an Extreme Under-Demand of buyers. When sellers lose their homes to foreclosure or short sale, bank lending rules prohibit them from obtaining loans to buy other homes for three years. This artificially reduces the number of buyers available to purchase homes. For example, from 2008-2010, 81,408 sellers lost their homes in the San Francisco Bay area (9 counties), almost half of the 166,667 homes sold. That’s a huge number of sidelined buyers.
Every short sale and foreclosure forces Mark to Market on all comparable homes, systematically decimating equity. This increases the number of distressed owners losing their homes, adding to supply, and locks them out of buying for years, lowering demand.
This vicious cycle will not end until either most homes with loans have gone through foreclosure or short sale, or something is done to stop the cycle. If nothing is done to stop price declines, it is very likely banks will make loans even harder to get, further reducing available buyers and compounding price declines. Some homes have already gone through foreclosure once and are now again in short sale. This is devastating to bank loan portfolios. The longer we wait, the more drag falling prices will have on our economy, our morale, and our future.
The first step to stopping the cycle could be as simple and straight-forward as getting the banks to allow distressed sellers to get a mortgage again after one year instead of waiting for three years. In the Bay Area, that one rule change would allow over 57,000 buyers back into a market that currently has 30,024 active listings. All those additional buyers would quickly push the supply-demand ratio back into balance, stabilizing the market. This would begin to reverse the downward cycle the market is currently in.
This is a First Step Solution worth championing.
CJ Holmes, real estate investor since 1977, broker since 2005, and market analyst since 2007, has personally handled hundreds of transactions, viewed thousands of properties, and dealt with countless agents. She also owns a portfolio of income producing properties, and has developed unique market analyses to determine and predict price trends, which principles apply to every market nationwide. The buyer-seller motivations, the lender-bank restrictions, and the market dynamics are universal. She can be contacted at (707) 578-5727, cjholmes@cjholmes.com, or www.cjholmes.com
