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The imploding housing market…and what to do about it.

October 13, 2011

We’re used to fast.  There will be nothing fast about the housing market turning around.  Here’s why.

  • Currently 10 million home owners owe more than their house is worth.
  • There are approximately 6 million distressed loans (loans that are 3 payments or more behind.)
  • Foreclosures are now averaging 599 days.
  • Estimated annual demand for housing is 1.2 million units.
  • 1Q 2011 home values saw the steepest decline since 4Q 2008.

So, simple math.  In the next 3-4 years (remember the 599 day foreclosures!) we have potentially 6 million distressed homes that will be coming to market.  Even if some of these loans recover, there will be A LOT of inventory hitting the market in the coming years.  If annual demand is 1.2 million units, we’re looking at another 4 years, give or take, where supply will be outpacing demand.

If you’ve taken ECON 101, you know that when supply is greater than demand, prices have to drop.  Don’t expect housing prices to increase anytime soon, I would anticipate a further drop in values.

To make matters worse, the federal government is doing everything they can to artificially inflate demand, but it’s not working. You can now find 30 year fixed rates less than 4%.  This is primarily due to a tremendous increase in government backed mortgages.  From 1990 – 2003, government backed mortgages accounted for 50% of originations.  In the last 3 years (2008 – 2010), it’s close to 90%.  Because very few of us are in a position to purchase homes, they’re trying to force us to buy.  They can’t sustain this, and one day, rates will have to return to fair market levels.

So, if you’re banking on a recovery in the next 24 months, sorry to burst your bubble (no pun intended).  However, there is hope. Tomorrow I’ll tell you what you can do about this not-so-great news…


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