Fire Sale on Real Estate? There May Be More to Come

September 28, 2010
Shirley M. Mueller, M.D.

Home sale prices sank in July, and one expert believes that may be the most encouraging news we'll see from the housing market for a while. The decline in home prices is being driven by huge inventories, already depressed prices, and the increasing number of distressed sales.

Home sale prices sank in July -- and that may be the most encouraging news we'll see in the housing market for a while, according to Michael Feder, President and Chief Executive of Radar Logic, a housing data research firm.

"We believe that 2010 will prove to be a transition from government support for housing to further price declines fueled by a huge supply overhang and weak housing demand,” he says. “A decline in prices could increase the number of underwater borrowers, which in turn could lead to increases in the number of defaults and foreclosures and ultimately add to the housing supply, prolonging price declines and pushing prices to new and possibly severe lows."

Feder says three factors support his forecast: 1.) a huge housing supply; 2.) already depressed prices; and 3.) forced sales are increasing as a percentage of the overall market.

Large inventory is a serious concern. Much of it is real-estate owned (REO) by banks, mortgage companies and other financial firms as a result of record foreclosures. REOs are traditionally sold at deep discounts. As a result, homebuilders and homeowners who want to sell existing homes have a hard time competing. Needless to say, lack of demand due to high unemployment, tighter credit and other factors do not help.

Home prices have already declined. Radar Logic’s “25-MSA RPX composite price” index declined in July on a month-to-month basis, as well as year-over-year.

Distressed sales are increasing as a percent of the total. Distressed sales are defined by Radar Logic as “sales to third parties at foreclosure auctions and sales of foreclosed homes by financial institutions.” According Radar Logic, the composite price for this kind of sale was 40 percent lower than typical sales -- the highest discount in recent time. This is due in part to the federal government’s home buyer tax credit expiring and demand softening in its absence. Without this sweetening for property sales, unsold homes are swelling the market and financially strained sellers that are forced to get rid of their homes do so at diminished prices.

One area this analysis doesn’t address is upper-end housing which most people assume is not distressed or certainly less so than its polar opposite. This may not be true. A frequently published author about the housing market, Michael David White, has suggested that accelerating jumbo mortgage delinquencies will diminish high-end property values as well.

If all of this glum crystal-ball gazing does come true, there are rumblings that the government may come in again to buoy up real estate. If so, the Radar Logic and Michael David White predictions could be thrown off