Are the housing scares behind us?

As much as we would like to say yes…. We all know the only true answer is… In our dreams.    While home prices may be nearing a bottom, by no means is the market about to recover. We expect that major housing markets will be dominated by short sales and REOs for at least the next 5 years.

Good news: The highly regarded S&P Case Shiller home price index showed its first monthly increase in 7 months. Home prices rose 1.3% in April.  On a yearly basis, home prices fell, but the decline was smaller than in previous months.

Bad news:  There are still more than 10 million properties (Zillow estimates that the real number is 16,000,000) with underwater mortgages, and a shadow inventory of 1.5 million, or four months supply.  Negative equity will continue to take its toll on consumption, while the shadow inventory, worth about $246 billion according to CoreLogic, will constrict lending.

Out of those 10-16,000,000 mortgages that are underwater, about 3-6 million remain “severely underwater,” which means the initial loan-to-value ratio (LTV) is 125% or more (in other words, the value of the mortgage is at least 25% higher than that of the property).  While seriously delinquent mortgages (at least 60 days) have declined, the percentage of loans in foreclosure has remained stubbornly high, at about 10% of underwater mortgages. Borrowers with high negative equity are also many times more likely to default.