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Saturday, May 28, 2011

Home Sellers Wait For Rapture As Unsold Home Glut Shadows Market

A glut of unsold homes means there will be no rebound in the residential real estate market any time soon. 

As knowledgeable people -- myself and about five others -- have been warning since about 2004, there are a ton of houses, in all regions, in all price levels, waiting to be put on the market once the anticipated-but-likely-never-to-occur home price recovery (aka the Real Estate Rapture) occurs.

Many of these houses are vacant, and there is a glut of them.

In addition, the failure of the real estate market to revive in the face of historically low mortgage rates (but also increasing down payment requirements) indicates that the market could tumble when mortgage rates rise substantially to closer to the more historic norms of eight to ten percent. Check out what is happening now in Hong Kong for an example of the effect of rising mortgage rates on home prices.   

The glut of vacant homes represents unsold units (and often, on the market and left on the shelf for long periods of time), unoccupied homes in foreclosure (often in disrepair from neglect or vandalism), as well as many homes with reluctant sellers.  The reluctant sellers are often people who have the wherewithal to pay two (or more) mortgages and are waiting for the "right time" to sell. 

The cause?  This is not tongue-in-cheek commentary -- but  it's more often the men in couples who are waiting for Real Estate Rapture.  Women should take the bull by its horns; after all, women -- alright, most women --know that when a man says it's not the "right time," there will never be a "right time" and it's time to walk out the door. 

This goes to the related issue of investing psychology.  There is a time to be patient...and a time to acknowledge a loss on an investment and bail. 

Wait -- it gets worse.  That's for the next article.

Congress is debating a proposal to require that Federal Home Administration (FHA) loans require homebuyers have a 20 percent downpayment (i.e., upfront cash equal to 20 percent of the purchase price) for qualifying mortgages.  Should this pass, it means a New York-area homebuyer would need at least $60-75,000 for a modest house in a "marginal" or far-away suburb.  Easily, this will depress the number of prospective buyers, at all price points.  A new, and sharp, depression in demand will cause another plunge in prices, independent of the other factors like rising interest rates, a foreclosure glut, oversupply of vacant and never-sold homes and the shadow inventory of homes ready to be dumped on the market. 

Such a 20% requirement could be calamitious.  

It would also do nothing to stop a repeat of the abuses of the mortgage/housing boom.  The bubble was caused, first and foremost, by the government's easing of the money supply to drive down interest rates after the September 11th attacks.   

Real estate is not going to improve any time soon.  

Eric Dixon is a New York lawyer, strategic analyst and business consultant.  Mr. Dixon is available fo further comment or consultation at edixon@NYBusinessCounsel.com.

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