What Do We See In The Shadows?

The economy is on the road to financial recovery. It will be a long and hard road, but we are on our way. There are many obstacles that could cause us to break down on this road. None is more important than the concept of "shadow inventory." What is that? These are homes which the banks are not foreclosing upon because they are trying to work out solutions with present homeowners or frankly they don’t want to flood the markets all at once and depress prices. How many homes are casting a shadow over the markets? Projections vary, but suffice to say that there are several million homes that will be foreclosed upon in the next two years. That is a lot of homes. It is also good news that at least one forecaster says that investor demand is so strong that home prices will not be affected by these homes coming upon the markets.

We keep saying this and it bears repeating. Real estate led us into recession and it must lead us into recovery. There are many factors that can help "soak" up shadow inventory. The weak dollar is increasing demand from foreign investors. The tax credit is bringing more first time buyers into the market and now move-up buyers as well. Low rates are keeping homes affordable, especially when compared to renting in many markets. Government efforts at modifications are also expected to keep many in their homes. Even builders are helping by bringing less homes to the market. Not one of these is by itself enough to absorb several million homes. But if we put all these factors together, it very well may happen as the John Burns Real Estate Consulting Company has indicated. Keep in mind that all the while the population of this Nation is rising. This means that sometime in the future, there will be growth in the real estate market and our economy. In the meantime, we will navigate the long and winding road.

Some Good News

Sales of existing homes posted an unexpected increase last month, closing out the worst year for the U.S. real estate market in more than a decade.The National Association of Realtors said Monday that sales of existing homes rose 6.5% to an annual rate of 4.74 million in December, from a downwardly revised pace of 4.45 million in November.

The results were better than expected. December's sales had been forecasted to fall to a pace of 4.4 million units, according to Thomson Reuters.Buyers were taking advantage of dramatically lower prices, especially in distressed markets like California, Florida and Nevada, where foreclosures have swamped the market.The nationwide median sales price plunged to $175,400, down 15.3%pe from $207,000 a year ago. That was the lowest price since May 2003 and the biggest year-over-year drop on records going back to 1968.

"The economy just simply cannot recover as long as home prices continue to decline," said Lawrence Yun, the trade group's chief economist, who called on lawmakers to include tax credits for home buyers in the economic recovery package being considered by Congress.For all of 2008, there were 4.9 million existing home sales, down more than 13% from a year earlier, and the lowest total since 1997.

And another encouraging sign -- the number of unsold homes on the market in last month fell nearly 12% to 3.7 million. At the current sales pace, it would take 9.3 months to sell all the properties, down from 11.2 months in November.

-Wall Street Journal