Wednesday, February 6, 2013

Is the Housing Downturn Over?

Where have I hidden my crystal ball?

The crystal ball that will tell me exactly what the future holds for the economy and the local Twin Cities Real Estate Housing Market.   Is the news good or is the news bad?

Let's review.
Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008.  Of course the bottom continued to fall out from under wall street as the Lehman Brothers crisis hit in Sept 2008 and approximately $150 billion was withdrawn from the market in one 2-day session, where as an average was $5 billion.  Foreclosures hit an all time high, with over 1 million foreclosures in 2011, several million more in the pipeline, and 872,000 previously foreclosed homes in the hands of banks.    The crisis had a significant and long-lasting impact on U.S. employment.   During the Great Recession, 8.5 million jobs were lost from the peak employment in early 2008 to February 2010. 

Back here in Minnesota, prices dropped 35% from their peak in October 2006 of $231k to $150k in January 2012.   There were an estimated 192,000 foreclosures in four years (from 2009-2013) and housing starts came to a stand still.

However, now there seems to be talk of a rebound.   Right now we have about 13,000 homes on the market in Minneapolis and St. Paul.   What happend to those 192,000 foreclosures?    Did those homes show up back on the market again to be gobbled up by bargin hunters and landlords?   No.  And as a result, we're seeing the evidence of a hot market in the real estate community all over the 7-county metro area.  

Since there are only 13,000 homes on the market, that represents just 3.0 months of inventory.   When the market hits less than 6 months of inventory, a sellers-market is declared and today's sellers are seeing multiple offers and very low days on market.

However, the question still remains, where are the foreclosures?  What happend to all the homes that have been taken back by the likes of Bank of America, Wells Fargo, CitiBank and US Bank, the 4 main banks in town?   The answer walks you down a road of speculation and conspiracy theory.    It's common thought that as this Shadow Inventory grows, someone is doing something with that inventory.  The houses are sitting vacant but don't every make it back to the MLS (Multiple Listing Service).  Therefore, what is going on?

There are answers to these questions.  Some theorize that large hedge funds are buying up packages of houses.  For what purpose?   To rent them, commoditize the income, and package and sell that commodity to Wall Street.    Does that sound plausible    Maybe, but we'll see more failure with that strategy than success.    There are a list of pitfalls with that plan - and it will certainly pose problems ahead for the housing market.   However, I am looking forward to the real bargins that will come out of that downturn as a result.