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Why the Housing Market Will Not Recover in the Near Future

Today, I am going to play Devil’s Advocate.  This is part 1 of 2 for a blog series reporting on opposing views of the direction of the housing market.  Next up – a post on ‘Why the Housing Market Will Recover in the Near Future’.

Here are five reasons why the housing market is in for a long recovery period:

1. Defaulting Prime Mortgages
2. Inventory Supply
3. Restricted Credit
4. Sale Prices Don’t Cover What Sellers Originally Paid
5. Another Round of Adjustable Rate Mortgages are Scheduled to Reset

Each one of these reasons is damaging to a housing market in itself.  However, when combined, we could be in for a much longer road to recovery than some think.

Defaulting Prime Mortgages

It is an obvious statement that the growing number of defaulting mortgages are a problem for our housing market.  But did you know there are various types of mortgages defaulting, and that each one has their own impact? One type of mortgage causing a heap of trouble is the number of subprime loans that have defaulted over the last year and a half.

A second type is the recent flood of Alt-A loans that have defaulted. For those of you who may not know, this loan product is a class between prime and subprime loans. In most cases, it does not require strict documentation of a borrower’s assets or income.  These two loan types factored into helping set the housing meltdown in motion.

The item that may keep us in a housing predicament for longer than some expect, though, has to do with the prime mortgage. Prime mortgages are starting to default at an alarming rate. According to LoanPerformance, a company that analyzes residential mortgage statistics, the delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier. Delinquencies for prime loans of more than $417,000 (jumbo loans) exploded to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

Inventory Supply

As a Realtor, one statistic that I closely watch is the number of homes available for sale.  For my area of expertise, the Tri-Valley in Northern California, inventory numbers have remained relatively the same over the last year.  This indicates that even though the market may be transacting, inventory is quickly being replenished with new active homes.  If we start to see more foreclosed properties enter into the market, this will only add to an already large supply of homes on the market.

Restricted Credit

The third component that may play a role in a slower housing recovery is the ever-changing lending world.  Lending standards have been tightening over the last few months and a tightening effect will make it more difficult for new borrowers to find loans.  The result will be less demand for homes and, in turn, inventory may increase.

Sale Prices Don’t Cover What Sellers Originally Paid

More homeowners than ever are selling at a loss. Zillow.com reports that nearly 25% of all homes sold nationwide (in the last year) sold for less than sellers originally paid. Homeowners are walking away with less in their pocket when they sell.

“It’s stunning what’s happening out there,” said Stan Humphries, Zillow’s vice president of data and analytics, who looked at statistics that date back to 1996. “The numbers are the worst we’ve seen and it’s not just the magnitude of the problem but the scope – so many markets are affected.”

Here are some other statistics from Zillow that magnify the problem in certain areas: Over 60% of sellers in Stockton, Calif., lost money during the same period,  about 60% in Modesto, Calif., 55% in Las Vegas and 38% in Phoenix.

Another Round of Adjustable Rate Mortgages are Scheduled to Reset

According to the National Association of Realtors, more than $200 billion in adjustable rate mortgages are scheduled to reset during the second half of 2008. The change in the adjustable rate on consumer’s mortgages may put some in a position where they may not be able to afford their monthly payment.  This may lead to even more short sales and foreclosures entering in to the market.

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