2009 May 27 Wednesday
Banks Holding Back Repo Houses From Market

Banks have a lot of houses in the bank.

Only 30 percent of foreclosed homes are currently on the market, meaning that some 500,000 sit vacant across the country, part of a vast “phantom inventory” that the market has yet to grapple with.

“There’s a frenzy for bank properties right now, and as a consumer, I’m likely to say, ‘Wow, that’s got to be an indicator of the bottom,’ ” says Brett Barry, a real estate agent at HomeSmart in Phoenix. “But a lot of us expect a tsunami of foreclosures to come on top in June, July, or August, because at some point the banks are going to release this stuff.”

They are holding back partly because they are too busy to process the paperwork. But the Obama Administration has also encouraged banks to hold back in order to help housing prices stabilize. I think they are just delaying the decline.

Whether the housing market recovers depends in large part on when the unemployment numbers turn around. Martin Feldstein, formerly Ronald Reagan's chief economist, argues that Obama's fiscal stimulus will only temporarily lift the economy. Rising unemployment will likely drive many more mortgages into default.

But the key thing to bear in mind is that the stimulus effect is a one-time rise in the level of activity, not an ongoing change in the rate of growth. While the one-time increase will appear in official statistics as a temporary rise in the growth rate, there is nothing to make that higher growth rate continue in the following quarters. So, by the end of the year, we will see a slightly improved level of GDP, but the rate of GDP growth is likely to return to negative territory.

The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.

Expiring foreclosure moratoriums will also boost bank repo numbers.

Major lenders temporarily halted foreclosures late last year and early this year in anticipation of President Obama's housing rescue plan. In addition, California enacted a new law this fall that slowed down foreclosures. That means the foreclosure rate was artificially depressed over the past several months. The moratoriums have now expired.

Share |      By Randall Parker at 2009 May 27 11:55 PM  Economics Housing

Stephen said at May 28, 2009 2:13 AM:

Why are the houses sitting vacant? Aren't there tenants who can rent?

Randall Parker said at May 28, 2009 6:15 PM:

Banks do not want to be landlords.

Stephen said at May 28, 2009 8:42 PM:

They can sub-contract all of that stuff to a property management company for a percentage of the rent collected.

Property values would look much better compared to just leaving them vacant.

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