NEW YORK (CNNMoney.com) -- Home prices took a shockingly steep plunge on a monthly basis, an indication that the housing market could be on the verge of -- if it's not already in -- a double-dip slump, according to an industry report released Tuesday.
Prices in 20 key cities fell 1.3% in October from a month earlier, an annualized decline of 15%, according to the S&P/Case-Shiller index. Prices were down 0.8% from 12 months earlier.
Month-over-month prices dropped in all 20 metro areas covered by the index. Six markets -- Atlanta; Charlotte, N.C.; Miami; Portland, Ore.; Seattle and Tampa, Fla. -- reached their lowest levels since the housing bust first began in 2006 and 2007.
"The double-dip is almost here," said David Blitzer, chairman of the Index Committee at Standard & Poor's. "There is no good news in October's report. Home prices across the country continue to fall."
The report was far more dire than anticipated by industry experts, who had forecast an almost flat market in October. It followed weak September numbers.
"It was a bit of a surprise," said real estate analyst Pat Newport of IHS Global Research. "I wasn't expecting it to lag so badly in all 20 cities."
He, along with many other experts, has been forecasting further price erosion over the next few months of 5% to 7%, but didn't expect the price drop to hit so fast and so hard. It's mostly attributable to the end of the tax credit for homebuyers, the effects of which started to vanish beginning in June.
"The trends we have seen over the past few months have not changed," said Blitzer. "The tax incentives are over and the national economy remained lackluster in October, the month covered by these data."
Sales volume continues to lag, off 25% even from last October, when markets could hardly be described as robust.
The inventory of homes on the market is up about 50% compared with last year at this time, and there are millions of potential homes for sale waiting on the sideline for markets to improve.
Much of that "shadow inventory" is held as repossessed properties by banks, who will eventually have to release them back on the market.
Prices in Atlanta, down 2.9%, and Detroit, off 2.5%, took a particular beating in October. Las Vegas and Washington came out of the month only slightly bruised, down just 0.2%.
The report ran counter to what have been generally positive signs of economic recovery, according to Richard DeKaser, an independent housing market analyst and founder of Woodley Park Research.
"The market is not showing much improvement after the summer slump," he said. "Housing is acting as a drag on recovery."
The coming of the second of the double dip is icing on the cake for homebuyers, who already have benefited from prices not seen in years in most markets.
"Prices have already adjusted, and are probably undervalued in most cities," said Newport. "This will make them even more undervalued."
COMMENTARY: I have been tracking both residential and commercial real estate for the last three years and in a previous blog post dated October 28, 2010, I commented on an interview Knowledge@Wharton had with Wharton real estate professor Susan M. Wachter about the housing market's slow recovery, the prospect of another sharp dip in prices, the effect of foreclosures on the economy, and what it will take to get the market back on track.
I had predicted a second real estate bubble to occur by mid-2010, but several factor's prevented this from happening:
- First-Time Buyer Incentives - The $8,000 federal tax credit for first-time buyers was extended through April 2010. When the credit experied we began to see a softening in the residential real estate market.
- Loan Modification Defaults - Historically about 80% of borrowers who obtained loan modifications default within six months to a year. We are starting to see the effects of this new wave defaults.
- Strategic Foreclosures - Many borrower's simply "walked away' from their property after failing to obtain a satisfactory loan modification from their lender. Many borrower's preferred this over enduring a painful foreclosure process.
- Prime Borrower Foreclosures - Sub-prime loan defaults and foreclosures were the principal cause of the first real estate bubble, but continued high unemployment rates has created a new wave of prime loan defaults and foreclosures. Prime real estate loans represent 85% of the total mortgage market, and even a slight increase in foreclosures in this segment of the market, is magnified by a factor of six.
- Lender Mistakes In Processing Foreclosures - Several lender's failed to follow proper procedures for during the foreclosure process. After this situation was discovered in the third quarter 2010, many lender's put a halt to new foreclosures, until after irregularities and omissions were rectified. Many real estate experts are now predicting record foreclosures in 2011.
- The "Shadow Inventory" Is Artificially Low - The real estate overhang or "Shadow Inventory", as it is commonly referred to, includes properties that are 1) seriously delinquent (90 days or more), 2) bank REO's (properties owned by banks) and 3) properties in the process of foreclosure. However, the Shadow Inventory is artificially low because many banks have taken their bank repossessed properties off the market.
On November 22, 2010, CoreLogic (NYSE: CLGX), a leading provider of consumer, financial and property information and business services, reported that the shadow inventory of residential property as of August 2010, reached 2.1 million units, or eight months worth of supply, up from 1.9 million, or a five-months’ supply, from one year earlier. With visible inventory remaining flat at 4.2 million units, the change in shadow inventory increased the total supply of unsold inventory by 3 percent.
Shadow Inventory
CoreLogic estimates shadow inventory, sometimes called pending supply, by calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders and that are not currently listed on multiple listing services (MLSs). Shadow inventory is typically not included in the official metrics of unsold inventory.
According to CoreLogic, the visible supply of unsold inventory was 4.2 million units in August 2010, the same as the previous year. The visible inventory measures the unsold inventory of new and existing homes that were on the market. The visible months’ supply increased to 15 months in August, up from 11 months a year earlier due to the decline in sales during the last few months.
The total visible and shadow inventory was 6.3 million units in August, up from 6.1 million a year ago. The total months’ supply of unsold homes was 23 months in August, up from 17 months a year ago. Although it can vary and it depends on the market and real estate cycle, typically a reading of six to seven months is considered normal so the current total months’ supply is roughly three times the normal rate.
As you can clearly see, the total inventory of residential property (shadow and visible) is three times what is considered normal. Even after the federal credit of $8,000 for first-time home buyers, we have not put a dent in the total inventory. In fact, it has increased slightly.
According to several economists, the unemployment will remain at about 9.8% by the end of 2011, and drop to 9.5% in 2012. Banks have increased their loan borrower requirements, and many of them have stopped lending altogether. There is simply no incentive for them to loan at today's 3.5%-4.0% rates when they are getting 6% from their existing loan portfolio.
Homebuyers, also sense that prices in many areas will continue to drop, so they are waiting for better deals.
All of these factors are going to play havoc with the residential real estate market in 2011. If a second real estate bubble does occur, it should come as no surprise.
Courtesy of an article dated December 28, 2010 appearing in CNNMoney.com and dated November 22, 2010 appearing in Business Insider Money Game
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