Housing Market: Worse Than You Thought

housing market double dipRadarLogicGet ready for some more bad housing market news: For the past three months, both Radar Logic's Residential Price Index (RPX) housing values and RPX transaction count have declined significantly year over year. Prices have declined an average of 2.2 percent from the prior year.

That may not sound like a lot, but for values that are down as much as 40 percent from their peak, continued declines are meaningful. The Case-Shiller November Index release indicated a continuing decline, albeit somewhat modified. One expert observed that the numbers likely would cause economists to predict a "second leg down" in the housing market.

We at Radar Logic disagree. This is not a second leg. Rather it is a continuing deterioration of value which could continue for some years to come.

At Radar Logic, our goal is to discover the value of housing as a consistent asset -- in other words, to see through the specifics of individual homes and learn what the underlying value is really doing. To this end, we focus on actual transactions; the value established when a buyer and a seller actually agree, and, as importantly, the velocity with which buyers and sellers agree: the volume of transactions. Both are critical as the ultimate drivers of value are the balance between supply and demand and the volume of transactions in the market. Over time, these data allow us to identify trends and drivers in housing value. Here's the bad news: Both the trends and the drivers are negative; much worse than most will admit.

Stability would be a far more welcome trend, but clearly it is not there. Leaving seasonality aside (we are approaching the seasonal low point for housing values), the year over year declines suggest that values are under downward pressure and it is important to understand why. Over the same period, volumes, as tracked by RPX transaction counts have declined an average of 22.5 percent on a year over year basis and the rate of decline is accelerating. In
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other words, fewer transactions are occurring, and the pace is continuing to decline. This suggests that fewer buyers and sellers can agree on a price and the obvious reason for that is just that, price. Sellers are hopeful that values are stabilizing, or in many cases, cannot afford to pay back the loan not covered by the sale price and buyers clearly think prices should and will decline.

At best, this is a pause in the housing value cycle. At worst, it is a standoff. Either way, it would suggest that prices need to fall further to bring back the buyers.

But the one element that none of the pundits want to discuss is the inventory of unsold homes. And from our perspective, this is the key point. There are simply too many homes for sale, either listed or "available" and with so much inventory, any savvy buyer has to ask themselves the critical question: Will I get a better deal if I wait? As long as they feel that way, the cycle will only get worse. The more buyers hold back, the more prices fall. The more prices fall, the more homes go underwater. If we assume that defaults on mortgages are correlated to the relative value between the home and the loan, then this will only lead to more bad debts, more foreclosures and more inventory. And the cycle goes on. With due respect to the experts who do not see it this way, we pose one simple question: Can you name one market with a heavy imbalance of supply relative to demand where prices actually went up? We can't.

As this cycle worsens, it likely will lead to more foreclosure activity. The losers in foreclosures are the homeowners who lose their homes and the lenders who typically lose 50 cents on each dollar outstanding in loans. Too bad for the banks most people say. But it's not the banks this time. It's us, the American people. Most of the loans written during the boom were backed by some form of government guarantee. And while the government is trying to get banks to "buy back" loans that were originated improperly, the numbers are tiny compared to the overall problem.

In its monthly housing scorecard, HUD makes reference to "homes for sale, homes vacant but not for sale, delinquent loans, and homes worth less than their mortgages." When one adds all this up, one gets to numbers of 10 to 12 million homes for sale or potentially for sale. If those homes go into default and are foreclosed the losses to the lenders could approach $1.25 trillion at today's values. And the lender in a vast preponderance of cases is the U.S. government, meaning the American people. This problem is much worse than it looks.

There is hope, of course, as there is always hope. First, home prices are flirting with levels we have not seen since 2002. Making them very attractive to people who sat out the boom. Second, while employment is not getting better fast, at least it is not getting worse. Third, there are a number of ideas being offered to Washington as to how to help fix the problem. Some of them are pretty good, and some of them clearly would help. The question is: Is anybody listening?

In the coming weeks, I hope to explore some of these issues in more detail in this space. I encourage you to respond with your comments.

Michael Feder is president and CEO of Radar Logic Incorporated, a real estate data and analytics company.

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