There is a consensus forming that the U.S. housing market may finally be on the rebound. Home prices are up 4-straight months, according to the latest S&P Case-Shiller index and Zillow’s U.S. home value index increased for the first time since 2007 in the second quarter. But Gary Shilling of A. Gary Shilling is not convinced home prices have turned to the upside for good.
“The fundamental reason is there is a huge excess of inventory out there,” he tells The Daily Ticker’s Henry Blodget. “Some of it is listed but a lot of it is a so-called shadow inventory.” Shadow inventory refers to homes in foreclosure and waiting to be sold or properties that homeowners have delayed selling, likely to get a better price.
VIDEO: Housing Prices Could Drop Another 20%
In his latest Insights investment note, Shilling writes “excess housing inventories, the mortal enemy of prices, measure about 2 million over and above normal working levels. That‘s huge considering that housing completions averaged about 1.5 million in earlier balmy years.”
A CoreLogic report in June showed shadow inventory fell almost 15 percent from 2011 levels to 1.5 million properties. More than half of those 2.8 million homes were “seriously delinquent, in foreclosure or REO.”
“Since peaking at 2.1 million units in January 2010, the shadow inventory has fallen by 28 percent. The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices,” said CoreLogic chief economist Mark Fleming. “This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases.”
As Shilling sees it, the banks have three options to get the bad mortgages off their books:
- Flood them onto the market
- Institute a mortgage modification plan
- Try to convert the properties into rentals
He says the second and third options are a lot less likely because mortgage modifications rarely work and rental properties are very difficult to maintain on a large scale, which may detract institutional inventors.
As a result, he believes the more likely scenario could very well end up being option number one, which would have a negative impact on home prices. The latest National Association of Realtors survey shows foreclosed properties tend to sell at a 19 percent discount to the market. Too many foreclosures flooding the market at the same time could drive down prices of the surrounding homes.
“It would take a 22% house price drop to return to the long-run trend going back to 1890,” he writes in his research note. “Since corrections of bubbles often overshoot on the downside, our forecast of a further 20% decline may be conservative.”
View the Original Article and Video on Yahoo Finance! as written by By Stacy Curtin.