1) Inventories of unsold homes remain very high. There are presently 8 months worth of housing on the market, and another 12.9 months housing still OFF the market, not being actively listed for sale. This is two years worth of inventory that remains unsold.
2) If that were not reason enough, there is another huge "shadow inventory" of housing in foreclosures that have been held in abeyance by the banks. There are numerous stories of people who receive initial foreclosure notices, but end up remaining in their home for months, many over a year or more, making no payments and living essentially rent free. The bank is reluctant to foreclose and go to the short sale because of the fantasy accounting system they use which allows them to carry the home as an asset at its initial loan value, even if the loan is in default. The moment they complete the foreclosure, however, the house reverts to its real market value, which creates a big loss on the bank's books. For this reason, there are some seven million homes being held off market in some stage of unrealized foreclosure. This extra bad inventory of unsold homes will all hit the market at rock bottom prices, dragging comps down in the process and further depressing prices.
3) The "Pain Pipeline" that has caused all these foreclosures is far from over. In fact, we are presently in a convenient trough in the Option ARM reset cycle, which is a key factor that has been supporting these better housing number Case Shiller reports. Look at this chart. The months ahead will see us return to loan resets equal to or greater than the big sub-prime resets that nearly swamped Wall Street and pushed the banking system to insolvency. The reset cycle will begin increasing from this point, and not peak until 2011.
4) The real housing market is flat out dead. Current sales are being driven by the $8000 government tax credit for first time buyers, and bottom feeders with cash who mistakenly think real estate has indeed "bottomed." It has not. Withdraw the government tax credits, or the FHA guarantees for housing loans these days, and you would have virtually no real mortgage activity in this country. The government cannot continue to underwrite the entire housing market. At some point the patient has to be taken off life support. The very fact that this government support is essential now tells you that the real market for housing is not recovering at all.
This, added to the fact that banks are very reluctant to lend these days, means we will not see a return to a robust real estate market for years to come. In fact, houses are now at 1999-2001 price levels. Expect housing values to decline further in 2010 and through 2011.
