The House Market Gets Prepared For A Second Drop

I recently uncovered this story that was a little buried in the news amongst all of the Olympic talk and concerns regarding the European Union. It posed the concept housing price is poised to decrease another 20%.

Could It Happen This Year?

After studying this article, I must admit that while it seems crazy to think housing prices could drop that much farther, it really is a possible chance.

The reason that a potential significant drop may occur is due to something called “shadow inventory”. Shadow inventory refers to many of the houses out there that are scheduled to be foreclosed on, but haven’t yet gone through the process. Using the number of shadow inventory, Gary Shilling of A. Gary Shilling shared the examples below:

As Shilling sees it, the banks have three options to get the bad mortgages off their books:

~ Flood them onto the market

~ Institute a home loan modification plan

~ Try to convert the properties into rentals

He states the second and third options are much less likely because mortgage modifications rarely work and rental properties are extremely difficult to maintain on a large scale, which can detract institutional inventors.

Therefore, he believes the more likely scenario may very well end up being option number one, which might possess a negative influence on home prices. The latest National Association of Realtor’s survey shows foreclosed properties are likely to sell for a 19 percent discount to the market.

Too many foreclosures flooding the market simultaneously could drive down prices of the surrounding homes.

“It would take a 22% house price drop to return to the long-run trend going back to 1890,” he writes in his research note. “Since corrections of bubbles often overshoot on the downside, our forecast of a further 20% decline may be conservative.”

In Conclusion

Is he right? Will housing price fall another 20% if not more? Or is this all just a fascinating mental exercise?

My crystal ball might be a murky with this topic, nonetheless can certainly state that each time a bubble of any type collapses, history tells us that it requires many years for things to “get better”. You are very likely housing to remain to have difficulty for a time to come.

Matt Golab

Matt is an Investment Advisor Representative as well as the Chief Advisor of Aaron Matthews Financial Resources headquartered in Elk Grove, CA. To learn much more about Matt please click here.

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