Before You Jump Back Into Real Estate, Read This

Time for a little public service for those crazies buying back into housing. Amherst Securities did this report – Amherst Mortgage Insight – on the huge shadow overhang in the housing market. They count 7M units already delinquent, up from 1.3M in 2005 and more than the 5.2M annual home sales right now. They estimate an additional 300K go delinquent each month, or another 1M since this chart ended in Q2.

The government’s vaunted modification program doesn’t seem to have much impact, as 70% of them go delinquent again within a year. Maybe 1M of the overhang could be modified if all went well, but then 700K would go back into the overhang a year later. In other words, best case the modifications would only save a month’s accumulation of more overhang.

They look a little deeper into Riverside CA, which has 1,372 units for sale out of 34,800 total properties. If you add to the listings the foreclosures not yet listed, houses about to be auctioned off, and houses with a notice of default, you find over 7,000 units are in the shadow inventory – 20% of all houses in the city! Now, Riverside like Vegas and places in Florida was at the center of the irresponsible government-backed no-money-down loans of the housing bubble, so this sort of shadow inventory of 5x the listings is at the extreme. But they sample other places, and find LA is a 3x overhang, Vegas is 4x and NYC over 1x. San Diego, where some of the crazy buying is going on, is at 3.4x overhang – the buyers are nuts!

The problem right now is that defaults are happening much faster than liquidations, so the overhang is growing. See chart, which divides by loan type. Subprime are past their peak defaults, and the liquidation has caught up. AltA and OptionARMs are close. The problem is now in the Prime loans.

They conclude with an analysis why prices and sales seems to have bottomed: seasonal factors have given a temporary plateau. But the seasonal buoyant period is over, and both prices and sales should now resume a slump.

If you jumped back in and are now stuck, you have another option: sue! Bloomberg reports how condo buyers in Florida are suing for deposit refunds. Condos they put a deposit on in 2006 at $1000 sq ft are now down as much as 8x, and the worry is they will soon drop 10x or below $100 sq ft, the level in 1989! At those levels, maybe the crazies will jump back in and bottom fish …

About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

1 Comment on Before You Jump Back Into Real Estate, Read This

  1. I am a real estate appraiser in San Diego and Riverside counties and I can concur with the conclusions and statistics and assertions in this article. I see hundreds of properties either on their way to foreclosure or that are bank owned already and not actively on the market.

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