Several of our readers have asked if the market is really as good as we’ve been reporting. Multiple offers, inventory shortage—-what about all the foreclosures I’m reading about and all these bank-owned properties that have yet to come on the market?
Very good question. And the Washington Post raised it in a front page story last week. The Post used national statistics which provide half the story. However, like politics, all real estate is local. So today we’re going to compare what is happening nationally with what is happening in the District and put some context around the numbers.
Brief History of Current Foreclosure/Housing Crisis
There will likely be at least three waves to the real estate crisis and we’re only in the second phase. The first wave was caused by people defaulting on sub-prime mortgages. These were risky loans with high-risk borrowers and it’s what started the housing crisis. This wave of defaults is largely done. We’re now in a second wave of defaults. This time they’re conventional loans and the economy is the culprit. As people have lost their jobs, they’ve been unable to make their mortgage payments–and while this second wave has affected DC, our region has more job stability than any other place in the country. The third wave involves commercial real estate, which is just beginning to go through its own set of financing challenges and defaults.
A Fourth Wave? The Elephant in the Room
What the Washington Post story addressed and what much of the industry is in some denial about is how to address the rising number of bank owned properties and delinquent loans. Let’s put this in perspective: The National Association of Realtors estimates there will be 5.8M residential transactions this year nationwide. Here is the sobering news: banks currently have an inventory of more than 3M properties that are not currently on the market, dubbed the shadow market, and an additional 9M loans are in some stage of default (1 of 7 are at least 30 days behind on mortgage.) That’s a problem that no one has solved—not the banks, Congress, Fannie Mae or Freddie Mac.
Now before you panic, keep in mind that more than half of the foreclosures are in four states (Arizona, California, Florida, & Nevada) and this is where the shadow market poses the greatest risk. Michigan is also in trouble. Much like the economic effects of Hurricane Katrina, this is devastating to the areas hardest hit, but is more limited in other parts of the country.
While a solution has not been found, it’s not in anyone’s interest for all of these properties to hit the market at the same time–nor is there the infrastructure to support that.
What about DC?
This is the more optimistic news. We’ve been reporting and sharing with you a number of stories about the strength of DC’s economy and housing market–particularly when compared to the rest of the country. Last year, there were 6,335 sales in the District. According to RealtyTrac there are currently 1,878 active listings in the MLS for DC and only 745 bank-owned properties that are not already sold or on the market. So while the national picture—or perhaps the picture of 5 states is not reassuring–the District does not have a large inventory of bank-owned properties waiting to flood the market. We did not run the numbers for the MD and VA suburbs and it is clear that there are some regions of the metro area that are more affected by foreclosures than others.
However, the District should continue to weather the storm if two factors remain stable: interest rates and local employment. With the Fed committed to keeping interest rates low for the next few years–which is benefiting today’s buyers as well as those who took out Adjustable Rate Mortgages (ARMs) several years ago, the major cause for default is loss of income. Currently, the region is benefiting from its job base as the center of the federal government and the continued popularity of the region which is leading to increasing population. Both of which should support stability in the local housing market.
Next Issue: Part 2
Our next issue will look at some of the national trends that could address and help absorb the shadow market on a national level.
