Business | Economy
Shadow inventories rise in US
As the US housing recession enters its fourth year, there's no sign of a recovery because speculators account for most of the rise in sales.
- Bloomberg
- Published: 23:38 January 8, 2009
Boston: As the US housing recession enters its fourth year, there's no sign of a recovery because speculators account for most of the rise in sales.
While the purchases are trimming the inventory of unsold properties, most of those bought by speculators are likely to return to the market when prices rise again, hampering any recovery, said Nobel laureate economist Joseph Stiglitz and Yale University Professor Robert Shiller in interviews.
"We're creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve," said Stiglitz, a Columbia University professor of economics. "We could see a double-dip in the housing recession if that happens."
Banks owned a record $11.5 billion of repossessed homes in the US at the end of the third quarter, according to the Federal Deposit Insurance Corp (FDIC). Foreclosures accounted for almost half of all U.S. purchases in November and homes in default helped increase sales 83 per cent in California.
There were an average 3,100 foreclosures per day in the US in November, according to RealtyTrac Inc, an Irvine, California real estate data company. That's triple the 1,000 per day average in 1933, the worst year of the Great Depression, according to the Federal Reserve Bank of St. Louis.
The repossessed properties offer opportunities for investors, who typically buy homes at auction and rent them out until prices rise and they can sell.
"You don't have it in strong hands, you have flippers," said Shiller, who helped create the S&P/Case Shiller real estate price indices. "These speculators are preventing the market from crashing now, and when they get out it could fall again."
US real estate prices and sales may begin to stabilise in 2010, said Stiglitz. A worsening economy and growing speculation will delay the recovery further, he said.
"Assuming we don't overshoot, we could be back at equilibrium in 12 to 18 months, but there are reasons to believe we might overshoot," Stiglitz said.
In November there were 4.2 million homes on the market, falling from an all-time high of 4.6 million in July, the National Association of Realtors said in a Dec. 23 report. The US median home price plunged 13 per cent from a year ago, the fastest pace since the 1930s, the trade group said.
Dario Moscoso of San Diego tracks notices of default and negotiates directly with banks if a home doesn't sell at auction. He bought a three-bedroom foreclosed house in San Diego three weeks ago for $490,000, half of what it would have fetched a year ago. He's renting it for $2,500 a month and plans to sell when prices rebound.
"We hope to put it back on the market in about a year," Moscoso, 52, said in an interview. "We'll gauge the market and see how it goes."
The "speculative fervour" blamed by former Federal Reserve Chairman Alan Greenspan in July, 2005, for causing a price bubble is returning at the bottom of the property market in part because investors have the edge in buying foreclosures, said Dean Baker, co-director of the Center for Economic and Policy Research.
"Regular homebuyers are excluded from the foreclosure market because the rules favour professional investors and that lack of competition is driving down prices," Baker said. "This is a place where the government could step in and stop housing's downward spiral by encouraging a more user-friendly process."
Banks that have received federal bailout funds should be forced to sell foreclosures in a way that gives homebuyers a fair chance, said Stiglitz. Lenders repossessed about 850,000 properties in 2008, according to RealtyTrac.
"In past housing recessions, we didn't see as many mortgages under water, so it didn't matter if the focus was on speed and not on maximising value," Stiglitz said. "Now, the same banks that created the problems by mismanaging their risk are mismanaging the disposal of their assets."
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