Is Today’s Housing Market a False Market?

Could today’s housing market be a false market?

True or False Is Todays Housing Market a False Market?Between 2006 and the end of 2008, the market in the Washington, DC metro area and most of the US was horrible. But then 2009 rolled around and the market did an abrupt 180. Rates and points started falling. Inventory started plummeting. Buyer demand increased. And prices started rising.

Today, the market is insane. Buyers are fighting 5, 10, 15+ other offers when bidding on properties. Even being the highest offer doesn’t mean anything anymore because people are submitting all cash/non-contingent offers – even on properties priced above $700K. Prices in the Washington, DC area (and others) have risen 5, 10 even 20+ percent.

This makes little sense to me. The general economy is crap. Banks are still going belly up left and right. Foreclosure filings are hitting new records monthly. Unemployment is at a 26 year high.  Hyper inflation is just dying to come out of the bag. All the signs still point to a troubled economy and market.

So what’s behind such market conditions?

Supply

Inventory plummeted for a variety of reasons – one of the biggest being that banks are not putting the homes they have on their books up for sale on the open market. Rumors have it that over 70 percent of the properties that have been foreclosed on are not on the market (yet) and that it’s being done on purpose. I thought that a while back and had and off-the-record conversation about this with someone who confirmed my suspicions.



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What’s a possible reason for banks holding on to these properties and not selling them on the open market?

Here’s one…if they keep them off the market, they help inventory stay down and prices go up (as we’ve already seen in 2009). If prices go up in general, so do all the properties they have on their books. Voila! Instant money/profit for the banks!

Another possible reason…banks getting into the real estate business. Based on conventional thinking, those who hold the listings hold the power (and money). I don’t necessarily agree with this notion, but we all know that banks typically base their decisions on conventional thinking so it probably makes sense to them.

If banks end up holding the majority of real estate inventory in the country, imagine how much power they think they will have. In an economy based on profits and earnings, the idea of that much power and money is pretty attractive and makes you go, “hmm…”

Demand

Yes, prices being low has gotten a lot of buyers off the fence and into the market thanks to greater affordability. And yes, low rates have helped. But there have been a lot of artificial factors such as the $8000 first-time home buyer federal tax credit.

So what happens when these programs go away one day?

The artificial demand that the programs created will go away as well. And we all know what a drop in demand does to the housing market and values.

Mortgage Rates

Speaking of low rates, can anyone give me a good (and real) reason that rates are this low? Rates are supposed to a reflection of the level of risk in the marketplace. Not sure about you, but “risk” is a word synonymous with today’s market and economy on almost every level.

IMHO, one main reason that rates are still low is because the government has been buying up MBS’s left and right and bailing out banks. But the money they’ve been using was borrowed from you and I and the money will eventually run out (or the dollar will be worth 5 cents). Btw…don’t forget that we have to pay all that money back – with interest icon smile Is Todays Housing Market a False Market?

The government has effectively kept rates artificially low by placing the risk on them, but the risk they’ve taken on will ultimately come out and be passed on to consumers. Isn’t that just delaying the inevitable? Or is there some grand-master plan that passes the risk on to some really cool aliens that we’re playing Hold ‘Em with at Area 51 right now?

What’s the “real” deal?!

Am I totally off base (aside from the alien comment) or is there a legitimate reason the market is the way it is? Is it sustainable? Is it just a temporary blip up before prices plateau or go back down as some are predicting? Are banks trying to get into the real estate business?

So many questions yet, so few “real” answers that go beyond the first layer of the onion.

Danilo Bogdanovic is a Real Estate Consultant/REALTOR(R) in Northern Virginia and author/owner of LoudounScene.com and LoudounForeclosures.com. Danilo serves on various committees with the Dulles Area Association of REALTORS(R) and the Virginia Association of REALTORS(R).


  • http://thephoenixrealestateguide.com bficker

    Great post. I’m tired of seeing people in my area (Phoenix) get excited because the monthly median sales price is up 3 months in a row. Really? You’re excited that $ per square foot is up $.10? Because it’s still down $20 per square foot from last year. This market still has a long way to go, especially if you are over $150k (in Phoenix, that’s spendy)

    I might be mistaken, but I don’t believe that banks can hold on to foreclosed homes for too long. I remember reading that they are only allowed to own real estate where they do business (their office buildings and such). The foreclosed would be considered non-performing assets and would have less money to lend (which is how they make their money). What I believe is happening here is Phoenix is that they are delaying the foreclosures until they HAVE to take it back. I’ve talked with people owing over a half million and not making a payment in over a year. They got initial letter when they missed their first payment, but nothing since. Maybe they can be reported differently if they are not actually foreclosed on?

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  • http://www.augustalistingexpert.com/blog Joe Loomer

    Danilo,

    I think you hit the nail on the head with the premise of banks not allowing foreclosures to go on the market.

    In the most densely populated county in my area – Richmond – there are 478 foreclosures, according to RealtyTrac. Only sixty of these homes are “listed.”

    On 31 December of 2008, a full 400 properties expired in our MLS, bringing our inventory down to just over 4,200 listings (all properties). To date, the active properties mark has remained in the low 4,300s (from a high in the low 4,800s in July of ’08).

    We are not, however, in your situation. Sellers are not getting multiple offers, appreciation remains flat (small pockets have depreciated), and a home in mint condition still takes over 100 days to sell. Only three months of this year have beaten 2008’s figures, and we remain down 48% on 2006’s totals (the best year ever in this area).

    I anticipate rates will creep higher, but foreclosures will only be dripped on to the market for an extended period (three years?).

    Navy Chief, Navy Pride

  • http://MoCoRealEstate.com Bruce Lemieux

    Danilo – Even though we’re both in the metro DC area, the real estate markets in Montgomery County MD and Northern VA have quite a few differences. Here’s my take on what’s happening here.

    Bidding Wars — With very, very few exceptions, we’re only seeing bidding wars for entry-level homes. Transaction volume for homes under $400K (esp for homes under $300K) has been on fire this year — volume two times higher than last year for some months. The drivers: low home prices, low interest rates. When a bank lists a single family home on the market in the $200s or $300s, there’s fierce competition from buyers and investors. For homes $400K to $800K (depending on the area) the market is more balanced. Over $800K and higher, demand starts to fall off the cliff in most areas.

    Prices — prices haven’t increased in all price ranges. The tide isn’t rising all boats here. We’re still seeing values go down for the higher end of the market.

    Supply — total inventory here has gone down every single month this year – down 30% so far this year. Why? We typically have a big move-up market which adds inventory and drives demand. Now, only the brave and hyper-motivated are moving-up. People are only selling if: 1 – distress/foreclosure, 2 – divorce, 3 – retirement, 4 – relocation, 5 – moveups. Move-ups are typically #1 here. Right now, if you don’t have to sell, you’re staying put. I don’t worry about a “flood” of new foreclosures. Distress inventory here is down 33% this year. Add more REOs – buyers are ready to jump on bargains.

    $8K Tax Credit – I don’t believe it’s having a tangible impact here. The $8K credit is a bug on the windshield of the locomotive of low prices + low mortgage rates. Let it expire IMO.

    Unemployment – The metro DC area as the lowest unemployment of any large metro area in the U.S. Lots of diversified white color and government jobs. Yes, retail and construction has been hit, but these jobs don’t drive our housing market. We’re fortunate. You can’t sell homes if people don’t have job.


    Mortgage
    Rates. The fed has pulled out the stops to keep interest rates at historic lows to encourage borrowing. They’re pulling a lot of levers that I don’t understand. I do worry about future higher rates once the hangover of deficit spending kicks in. Will this start in 2010? I don’t know. I believe our market is very sensitive to rates, so rising rates would be noticed immediately in lower transaction volume.

    The bottom line. You ask ‘what’s the real deal’? Our market — like most markets — is really choppy. To make sense of it, you must understand what’s going on by *location* and *price range*. We have both raging seller’s markets and strong buyer markets, so stay away from generalizations.

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  • liona

    This is a great article. Bravo! Based on the economy, even the best area like DC will not hold up. Housing is location specific to some level. If everything goes to crapper, there will be no government money to offer government jobs. Today a bill passed $8000 credit to first time home buyer and about $6000 to sellers until 4/30/2010. What’s gonna happen is the first time home buyer will run out, flippers will run out of buyers to sell the houses to, more debt will be added on middle income people, government prints more money, money becomes worthless. Hyperinflation comes, no jobs, anywhere, period.