Each time new data is released on the housing market, you have the optimists on one side saying that the housing market has hit bottom and the pessimists saying that to prepare for a double dip.
The reality is that all housing is local, and the employment picture has a big impact on household incomes and the desire to buy and sell homes.
One of the arguments which the more pessimistic or doomsaying pundits make is that there is a “shadow inventory” of homes that are either approaching foreclosure or being held by banks but are off the market.
NPR first reported on this back in July, so it’s not exactly a new phenomenon. The Boston Globe had a post on it just this morning, saying Bank of America is looking to auction 500 homes per month in Las Vegas.
One would hope that Bank of America is going to auction these homes off in the hopes of making money, not flooding the market with underpriced inventory.
To me this is part of why the “too big to fail” argument made sense. If Bank of America has to dump all of their foreclosed properties at fire sale prices, then that would obviously depress prices. A smaller bank might be inclined to dump a few hundred or even a thousand properties.
Politically, it wouldn’t make a lot of sense for the big banks to do this, unless they are begging for these bank taxes and stricter financial oversight, so it may be more posturing than anything else.
At the same time, the vandalism we’ve seen on foreclosed properties is symptomatic of owners’ frustration with the process. Banks would be wise to offer either a short sale solution or to rent the home back to the owners if they can’t make payments.
Vacant, untended homes in large quantities are the worst case scenario for the housing market.
The number cited by the Globe is 1.7 million homes, contrasted with 3.7 million homes that are currently for sale. If all of those homes were dumped on the market, the inventory would effectively increase the for sale inventory by 50%, and that would depress prices by 10-20 percent.
But the vast majority of foreclosures are concentrated in California, Arizona, Michigan, Nevada and Florida, so the question, so the question really is, how much worse could things get in those five states than they already are.
Smart municipalities should be prepared for this, buying up homes that are underpriced and putting them to better use, whether it be tearing the properties down and rezoning or creating affordable housing, but that may be wishful thinking to the extent that states and towns are already under budget pressure.
Here in Northern Virginia, we saw a rash of foreclosures in the Manassas area, as high gas prices, unemployment and other causes popped the bubble at a fairly early stage. But, some new construction is starting up again, and the foreclosure numbers were mostly down from the highs of 2008.
I wouldn’t say it couldn’t happen here, but it certainly seems unlikely at this point.