The Impact of Residential Real Estate’s Shadow Inventory on Housing

The latest Case/Shiller report dominated Tuesday’s news for the real estate industry as its index rose 1.2% in July and indicated that home prices in 20 U.S. cities rose the most in 4 years. For investors bullish on recovery and real estate stocks, this is probably music to the ears. The XHB (S&P Homebuilders Index ETF) was up +1.79%.

This is all fine and dandy, but for the rest of the story, I encourage readers to defer to Laurie Goodman of Amherst Securities. In her video interview with Bloomberg television, she shares her analysis on the impact of residential real estate’s shadow inventory on supply and housing prices.

Here’s a bullet list of the most important points of her analysis:

• 7mm homeowners in the U.S. are currently not paying their mortgage
• Statistically once one is down 30 days, the probability for recovery shows a 25% chance if 1 payment is missed, a 5% chance if 2 payments are missed, and a 1% chance if 3 payments are missed
• Out of 56mm homes, the current situation exists where 13.5% of these have missed at least 1 payment which translates into a source of 7mm potential defaults
• Option ARMs (adjustable rate mortgages) are due to reset at the beginning of the year
• Bulk of subprime defaults have already occurred, but now the prime market is exposed to default risks
• Only actual listings of defaults are being accounted for, but missing from the puzzle are notices of default, bank owned REOs, and auction listings
• In the event that any of the above comes to fruition, the bottoming process for residential real estate could last longer than many economic cheerleaders are shouting

For the entire "rest of the story" in greater detail, check out the 4 minute video below and make your own conclusions.

Disclosures: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[tripleblack]

I agree. Like unemployment, this problem has yet to level out or hit bottom, and in fact I believe the two phenomena are closely linked.

The impact of the media darling politicians' attempts to "help" with foreclosures and the whole underlying mess has obviously been grossly unsuccessful. They have been focused on slapping bandaids on the burns of those who did not detect the hot stove, instead of correcting the causes of the fires, or even taking the obvious steps of putting out the fires in the first place.

With the news from Washington of another runup in 100% loans subsidized with the taxpayer's money, look for them to next seek a new supply of bandaids while pretending the roiling problems behind this mess don't exist.

2009 Sep 30 08:48 AM