Housing Market Still In Trouble

We often hear that we are at or near bottom. The housing market will turn around soon. Sometimes it seems that the foreclosure levels has slowed somewhat - but most declines are due to the temporary moratoriums that just put off the inevitable. There are still many issues in the housing market that have not worked themselves through yet - yes the subprime bust is mostly over, and the ARMs issues will be resolved up until the interest rates rise again. But, as this article from the San Francisco Chronicle titled Signs of more trouble ahead for the housing market, there are still many more issues that have yet to be resolved. Let's take a look issues that are still unresolved (aside from the rising unemployment, lack of buyers, moving-up, tighter lending restrictions, and house values still in the decline mode) -

-- Foreclosure moratoriums end. Major lenders temporarily halted foreclosures late last year and early this year in anticipation of President Obama's housing rescue plan. In addition, California enacted a new law this fall that slowed down foreclosures. That means the foreclosure rate was artificially depressed over the past several months. The moratoriums have now expired.

...

-- Shadow inventory. Banks appear to be sitting on a vast inventory of homes that they have repossessed but not yet listed for sale. As previously reported in The Chronicle, this shadow foreclosure inventory could number in the hundreds of thousands nationwide. In addition, observers say banks appear to be deliberately delaying foreclosures, for example, not yet sending notices of default to homeowners who are months behind on their mortgages. All those properties eventually will have to hit the market, and, like all foreclosures, are likely to sell at cut-rate prices, driving down home values.

-- Walk-away underwater homeowners. The number of people who owe more than their home is worth continues to rise. Almost 22 percent of all mortgage holders were underwater by March, according to real estate site Zillow.com. That's spurring a phenomenon of "walk-away" homeowners - people who choose foreclosure because they don't want to pay off an upside-down asset.

...

-- Loan modification shortfalls. Modifying borrower's mortgages to make them more affordable is a cornerstone of foreclosure prevention. But to date, most such efforts have simply deferred foreclosure, rather than providing a permanent fix. An authoritative study by the Comptroller of the Currency found that more than half of modified loans end up delinquent again within months. However, the study was done before the Obama administration's mortgage mod plan came into play. The jury is still out on how effective it will be at preventing foreclosures.

-- Option ARM, Alt-A time bombs. Two categories of loans used for higher-end homes are emerging as the next trouble spots, as foreclosure contagion spreads beyond subprime. Delinquencies are rising for Alt-A loans given to people with good credit who could not document their income. Meanwhile, millions of option ARMs, or adjustable rate mortgages in which borrowers can choose to start off making minimum payments that don't even cover the interest, are expected to start resetting next summer. At reset, borrowers suddenly must make sharply higher payments, which can trigger foreclosures.

...

-- High end taking a hit. Until recently, most of the market activity and price drops have been among lower-cost homes. Homes under $350,000 have had the most severe price drops, while those above $750,000 have remained relatively stable. That appears to be changing, as foreclosure woes spread to the upper end. The difficulty of getting "jumbo" loans to buy pricey houses has exacerbated the situation to the point where unsold inventories of high-end homes are swelling.

In other words we still have a long, long way to go. Things first have to stabilize on their own - not with the foreclosure moratoriums or banks not bothering with foreclosure. We are getting closer to the Option ARM foreclosure wave. Hopefully the impact will not be as bad as the subprime foreclosure wave, but we doubt that...