Tuesday, June 29, 2010

Government owns 46 percent of foreclosed inventory

Cross posted at Mises Economics Blog

The latest data for the S&P/Case-Shiller Home Price Index were released today. The home price index for April is still down considerably from the July 2006 peak:

As of April 2010, average home prices across the United States are at similar levels to where they were in late summer/early autumn of 2003. From their peak in June/July of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%. The peak-to-date figures through April 2010 are -30.5% and -30.0%, respectively.

To paraphrase Donald Rumsfeld from a different context, it is close to impossible now to deny that the housing markets are in for a long, hard slog. Well, the places that have hit bottom are in for a slog. Some places, such as Las Vegas, are still on their way down. Comparing year over year, Las Vegas home prices actually fell 8.5 percent. April of 2009 was a disastrous month for home prices, but Vegas is now below even that.

This all assumes an owner's perspective, of course. It's a nice buyers' market out there right now for some people.

This is April data, so it doesn't compare directly to the May data I commented on here a few days ago, but the data continues to drive home the fact that home prices simply aren't going to bounce back. Thanks to bad public policy and perennial but unwarranted bullishness about real estate, lenders assumed that prices were going to bounce back. Consequently, mortgage servicers and investors have been dragging their feet on approving short sales and the liquidation of foreclosed properties.

Nevertheless, the holders of REO properties (foreclosed properties returned to the bank) are going to have to do something with them sooner or later. And worse yet, almost half of those REOs are held by the government:

Based on Radar Logic’s analysis, the federal government’s REO inventory — including homes owned by Fannie Mae, Freddie Mac, HUD, and the Department of Veterans Affairs (VA) — has increased steadily for over 24 months and now accounts for approximately 46 percent of the nation’s total REO supply.

Looking at information from the GSEs and HUD, Radar Logic says the government currently owns 209,500 homes as a result of foreclosure, and the company estimates there could be an additional 9,560 homes held by the VA, for a total of 219,060 government-owned foreclosed homes.

This will create additional downward pressure on prices for the foreseeable future.

In a larger context, the protracted growth of non-performing loans will likely continue to have a deflationary effect as lender portfolios contract with the value of residential real estate.