4 Million More Foreclosures Could Be Coming

Just waiting on that other shoe

There is an intriguing article today by Jacob Gaffney at Housingwire.com regarding new attempts to measure shadow inventory.

A brief synopsis of the housing market shows that there could be big troubles ahead.  Currently there is a 12.5 month supply of excess homes (under normal market conditions the supply is usually under 6 months).  Foreclosures are increasing, and REO inventory is mounting.  At the same time demand for homes has cratered since the expiration of the first time home buyer tax credit.  As pretty much everybody knows, lots of supply + very little demand = bad times for prices.  To make matters worse, unemployment is still running north of 9.5 percent, and shows no real signs of improvement.

Many people fear that as prices fall, many more homeowners will lose equity in their homes and end up being underwater on their mortgages.  When people owe more money on their mortgage than their house is worth, they are far, far more likely to end up defaulting on the mortgage.  A drastic decline in prices could lead to a whole new wave of foreclosures.  I have seen estimates that say prices will decline anywhere from 5-20 percent over the next year to three years (there is a lot of disagreement and fuzzy math here, but the overall consensus is that home prices will fall).

As a result, people are attempting to measure what is being referred to as the “shadow” shadow inventory.  These are borrowers who are likely to default on their loan in the event of further price declines or further deterioration of the economy.  A quote from the article:

“The good news is that the US mortgage delinquency rate appears to be past its peak and will probably fall further from here,” said US economist Paul Dales in a report from Capital Economics. “The bad news is that the recent economic slowdown will limit the size of any future fall meaning that up to 4m households could still lose their home.”

It is estimated that if 4 million homes do turn into foreclosures, the number of homes on the market would roughly double.  This would be disastrous for housing prices and it would likely take years and years for prices to recover.  As always, the effect would vary from market to market, and some places would be better off than others, but make no mistake about it, some degree of pain will likely be felt across the board.

In my opinion, the takeaway is this: be prepared for housing prices to decline, and be aware that they may not totally bottom out for a year or more.