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Commentary on the Real Estate Market as of December 2010
by Peter L. Zachary, MAI, MRICS

I am sorry to report some bad news for the Housing Market. In the Business Day Section for the November 24, 2010 issue of the New York Times, there was an article entitled "Buoys Gone Home Sales Fall Sharply." The article stated:

Over the last few years, buyers have been lured into the troubled housing market by two unusual opportunities: cash subsidies in the form of government tax credits, and rock-bottom prices on millions of foreclosed homes.

The tax credits are now history. And the supply of foreclosed homes on the market is already falling as regulators, lawmakers and state law enforcement officials press to sharply reduce the number of foreclosures.

Now, buyers and sellers are getting an early taste of what the real estate market might look like without those twin pillars of support: sales of existing homes plunged 26 percent in October with the same period last year, the National Association of Realtors said in a report Tuesday.

In some parts of the country, it was the worst October in at least 20 years, according to separate regional sales reports. Sales were down 41 percent in Minneapolis, 28 percent in Massachusetts and 34 percent in Illinois. In Portland, Ore., (down 39 percent) and Seattle (down 32 percent), it was the worst October since record-keeping began in 1994. In California, it was the second-worst October since at least 1994. "People aren't buying houses - period," said Mark Fleming, an economist with CoreLogic, a data firm.

Analysts had been predicting that winter chills would arrive early, although the numbers turned out to be a little worse than they had anticipated. Last fall, sales were robust as buyers scrambled to take advantage of the government's $8,000 tax credit for the first-time home buyers, which was on the verge of ending. (Tax credits were later extended and expanded to include a broader range of buyers, expiring finally in April.) "The factors that brought people into the market have either disappeared, in the case of the tax credit, or their impact is lessening, in the case of foreclosures,' said Jennifer H. Lee of BMO Capital Markets. "I would certainly hope that housing can stand on its own two feet, but it will depend largely on the job market."

About 4.43 million homes were sold on a seasonally adjusted annual basis in October, compared with nearly 6 million in October 2009. In October 2008, at the height of the financial crisis, about 5 million deals were signed. In July, the first month without the credit, sales hit under 3.84 million, the lowest level in 14 years.

The tax credit inspired many people to accelerate planned purchases, just as administration economists intended. Meanwhile, the abundance of foreclosures offered millions of first-time buyers a chance to become owners. Misfortune for some yielded opportunities for others. Distressed sales, including foreclosures, have been about a third of the market, while first-time buyers have been as much as 50 percent. Both are high by historic levels.

If the supply of previously foreclosed homes continues to dry up, housing prices might stabilize or even rise. That would provide long-sought relief for sellers but it could keep many potential buyers out of the market and put sales in a permanent stump.

Foreclosures have been under fire for about two months now. All 50 state attorneys general are conducting a joint investigation whose goal is nothing less than to change foreclosure in America. While many earlier programs tried and failed to curb the number of foreclosures, the uproar and outrage over shoddy documentation procedures at some lenders make success much more likely. Further ammunition came Tuesday in a highly critical interim report by an interagency federal task force examining the problem.

Michael S. Barr, assistant Treasury secretary for financial institutions, told the Financial Stability Oversight Council that the task force found "widespread, and in our judgment, inexcusable breakdowns in basic controls." Mr. Barr said the mission of the task force included "providing alternatives to foreclosure and acting in a coordinated and comprehensive way to hold the firms accountable, bring clarity and certainty and help households." With the banks under pressure, the de-emphasized foreclosures in October. According to Lender Processing Services, a data company, the number of foreclosed homes that the banks prepared for sale during the month dropped by a third, to 80,000.

Even before the freezes, foreclosures were losing steam. In the Minneapolis-St. Paul area, for example, sales of previously foreclosed homes have fallen by a third over the last year, while traditional sales were largely stable. In California, the sales of previously foreclosed houses dropped to 10,367 in October from 15,621 in October 2009 and 19,925 in October 2008, according to DataQuick, a real estate information company.

A large part of the reason is that lenders simply are not bringing them to market. CoreLogic, the data company, estimated this week that there was a "shadow inventory" of more than two million delinquent and foreclosed homes that banks will ultimately have to dispose of. "Some share of it surely will come to market," said Mr. Fleming, the Core Logic economist. "How much is debatable."

See you next month with maybe some better news.

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