Housing market diagnosis: Bipolar

By Les Christie, staff writer


NEW YORK (CNNMoney.com) -- Bipolar is what comes to mind when diagnosing the post-homebuyer tax credit market. There are two separate forces pulling it in opposite directions, and experts aren't yet sure which path the market will take.

On one hand, sales and prices are rising, indicating recovery. On the other hand, so are interest rates and repossessions, which most certainly do not. And then there are the millions of foreclosures that need to be sold but haven't yet been listed -- so-called shadow inventory -- that could derail a real recovery if they hit the market in floods.

The prognosis? Negative short term but turning positive by the end of 2010.

"In the short run, I see a mini-collapse," said Richard DeKaser, an independent housing market analyst and founder of Woodley Park Research who correctly predicted a downturn back in 2005 when he was chief economist for National City Corp.

One of market's biggest hurdles is getting beyond the lapse of the $8,000 homebuyer tax credit. Thanks to the incentive, buyers scrambled to beat the April 30 deadline, pushing new home sales up nearly 30% in March.

But that just borrowed buyers from later months. And now we face the hangover effect.

"In the months immediately following the expiration of the tax credit, we expect measurably lower sales," said Lawrence Yun, chief economist for the National Association of Realtors (NAR).

Industry insiders believe the hangover is worthwhile, however, because the credit helped stabilize housing when it most needed help. Home prices have been steadier in recent months, recently experiencing their first year-over-year rise in more than three years.

Still, there are some strong negatives dragging on the market.

1. Interest rates have been intermittently creeping up. Although nobody expects 6% until at least 2011, the days of 4.5% mortgages are behind us.

2. Bank repossessions are on track to surpass a million homes in 2010. But at least foreclosure filings fell in April, the first time since RealtyTrac began reporting.

3. More than a quarter of borrowers are "underwater," meaning they owe more than their homes are worth.

4. "Strategic defaults" -- where underwater homeowners walkway even when they can still afford to pay -- accounted for 31% of all foreclosures in March, according to a recent study.

But there is one factor that has experts really scared: homes that are ready to be sold but haven't been put on the market. Right now, there could be more than 4.5 million homes in "shadow inventory," according to a recent report by Barclays Capital.

This so-called shadow inventory is a recent phenomenon. In the past, inventory was either tight or it wasn't. But now, with home prices so low and so many foreclosures on the market, both homeowners and banks have been waiting to put properties on the market.

"These sidelined sellers closely watch the market for signs of a possible turnaround and rush in if there's a hint of good news," said Leslie Appleton-Young, chief economist for the California Association of Realtors.

But as more sellers put their homes up for sale, supplies increase, which will depress prices again. Rinse and repeat ad infinitum.

That vicious cycle could cause prices to bounce up and down for years. "I see a saw tooth bottom," Humphries said. "Prices go up; inventory rises, which sends prices down again. That plays out for three to five years of no appreciation. ... Without price appreciation, it leaves more homeowners in negative equity. That's toxic. Any setback, like a job loss, they go into foreclosure." To top of page


Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.