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May 27th, 2009

Disturbance In Supply and Demand Cripples Housing

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“Supply and demand” is perhaps the most generic, even cliche, law of economics. Yet, the seemingly-oversimplified phrase is the functional foundation of the housing market. The healthy dichotomy of seller and buyer is what greases the housing market. Unfortunately there are several monkey wrenches jamming the system.

When the housing market self destructed in 2006, supply surged and demand was vanquished. There are at least 10 separate factors to monitor which will dictate when the housing market can reinvent itself.

Surge in Supply

Foreclosures, foreclosures, foreclosures — for starters, major lenders put off foreclosure filings in anticipation of the president’s housing rescue plan. California, one of the states hardest hit by foreclosures, enacted a law that essentially limited foreclosure filings. Both actions only served to delay the inevitable.

Banks have been sitting on a vast inventory of repossessed homes. This inventory consists of properties in which underwater homeowners decided to simply “walk away.” Zillow.com reported nearly 20% of all homeowners owed more than their home was worth by March.

The growing default of Alt-A  and prime loans, combined with the upcoming resets of many adjustable-rate mortgages, is expected to keep the supply of foreclosures flowing for months, if not years.

Where’s the Demand?

It’s all about the economy — as employment levels fall, so does a consumer’s confidence about the future. With such uncertainty, a new home is almost never in the cards.

It’s no surprise why a large segment of the housing rescue initiative is designed for first-time homebuyers. “Move up” buyers — those who save sold a home and are looking to buy another — only represent 15% of the current marketplace, down from a more typical 80%.

Tight credit conditions have prevented not only potential first-time buyers, but move-up buyers as well, from getting approved for a loan. Once again this goes back to the lack of confidence pervading the system. So many lenders and investors were burned when the bubble broke; many are still trying to make up for their losses.

The Moral of the Story

Sometimes the truth hurts. Even with home prices still inflated and the woes trickling uphill to wealthy borrowers, there still are deals out there for those with just the right set of circumstances. For the rest of us, it’s just hurry up and wait until supply finds its way back to demand.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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