In a Bottomless Shadow Market Economy, It's Time to Buy Your New Home
We’ve talked a bit here at Texas Lending Today about the Jacques Cousteau-like quest among many housing market economists to discover the “bottom” of the housing market — i.e. how low prices can reasonably go before inevitably bouncing back.
The key indicator in this search concerns what’s commonly known as “the shadow market” — the massive surplus of unsold houses being held off the market for various reasons. Due to laws of supply and demand, an abundance of available homes will lower home prices across the market. Lower home values make it difficult for families to sell at the price they need financially. Many families actually find themselves in situations where they owe more on their home than it’s actually worth. This leads more families into foreclosure, which adds to the shadow market.
The first few months of 2012 has produced plenty of optimism about this search, with several prominent economists predicting that we have, indeed, already hit bottom.
However, according to the National Mortgage News, the housing market may still have a ways to go before finally hitting bottom:
“… the oversupply of homes currently on the market will prevent sustained home price gains for an extended period of time, possibly for at least the next 18 months.
“Shadow inventory is overwhelming and will continue to be a weight on the market,” Feder said. “Looking at the market going forward, supply will overcome demand for years to come. The activity we continue to see is coming more and more from distressed properties which will lead the industry until the inventory situation is addressed.”
According to the report, in May, there were enough houses available (2.54 million existing homes and 146,000 newly constructed homes) to last six months in normal market conditions — a fairly healthy figure compared to recent years. However, if you factor in the 3.7 million seriously delinquent homes and the 4 million homes being held off the market (to, say, wait until prices recover before attempting to sell), inventory jumps up to 27 months.
In other words, while the country has successfully sold off a sizable chunk of its available inventories, the picture is still different than it would be in normal years because there’s a both a large shadow market and a overwhelming “shadow-shadow market” of seriously delinquent homes.
That speaks to the core of the housing crisis. When the bubble popped, nobody knew just how many of these “toxic assets” were out there — and that very uncertainty created even more toxic assets as people began to lose jobs and pile up debt. It’s going to take a long time to sort out.