Behold, a Positive Housing Market Forecast (More or Less)

Shadow inventory. Foreclosures. Falling prices. Tighter lending standards. For months, you’ve been hearing about all the things that are wrong with the U.S. housing market. I thought you might like a refreshing change of pace. Here is some positive housing market analysis for a change.

Home Prices Ready to Climb, Says HUD Boss

Across the U.S., home prices may start rising by the end of 2011. This would mark an end to the steady price declines we’ve seen in most areas over the last few months. This housing market forecast was offered by HUD Secretary Shaun Donovan in July 2011.

Mr. Donovan said that continued price erosion in the housing sector was “very unlikely.” He then posed a question about when we will see a steady rise in home prices. Some analysts are predicting this could happen by the fall of 2011, according to Donovan.

As to whether or not this forecast will bear fruit, much of it depends on foreclosure inventories. This is the number-one factor holding prices down in most areas. Mr. Donovan pointed out that home sales have mostly risen over the last few months, while mortgage-default rates have gone down.

Data reported by CoreLogic in June showed an 18-percent decline in the shadow inventory of distressed homes (compared to the January 2010 peak). This bodes well for the broader housing market. As these trends reduce the number of foreclosure homes on the market, prices will likely start to rise. It makes sense on paper, anyway.

“In the long run, it’s a good time to buy,” Donovan said.

Barclays Analyst Sees Ray of Light in Housing Data

Here we have another housing market analyst pulling a sunbeam from an otherwise gloomy sector. Ajay Rajadhyaksha, a managing director at investment-banking firm Barclays Capital, explained that foreclosure-heavy home sales were responsible for previous price declines. As the percentage of homes sold moves back toward the non-distressed side of the fence, prices should stabilize.

He said we must consider pricing data for non-distressed sales to see where the housing market is headed. “Non-distressed borrowers will increasingly determine the true health of the housing market,” he added.

According to real-estate data and analytics firm CoreLogic, national home prices fell 7.5 percent in April (over the same period in 2010). But, as Mr. Rajadhyaksha pointed out, much of this price erosion is the result of distressed sales. If you removed distressed sales from the equation, the price drop would only be around half a percent. As the inventory of distressed (foreclosure) homes shrinks, the housing market will normalize again.

“The regular marketplace is hanging tough,” says CoreLogic chief economist Mark Fleming.

Shrinking Inventory: The Real Key to Recovery

The million-dollar question is: When will the inventory of distressed homes begin to shrink significantly? You can’t make a reasonable housing market forecast without answering this question. Opinions are divided on the subject, though most believe it’s not that far off.

Housing economist Thomas Lawler thinks it’s happening right now. “Whatever the excess supply of housing is, it is shrinking pretty fast,” he said.

The folks at Moody’s Analytics have put a future date on it: 2013. That’s when they feel the number of distressed homes for sale will decline significantly.

Warren Buffet, the Oracle of Omaha, also feels that housing inventory could balance out within the next couple of years. “We’re sopping up housing inventory,” he said recently, “and I don’t know exactly when that hits equilibrium, but it isn’t five years from now … it actually could be reasonably soon.”

Mark Fleming, chief economist with CoreLogic, also sees inventory reduction on the not-too-distant horizon. “That’s going to take a number of years to happen,” he said, referring to a reduction in the so-called shadow inventory of homes. “The good news is it’s not getting any worse and it’s slowly beginning to get better.”

As foreclosure inventories shrink, it will help the housing market in two ways. First, and most obviously, it will help balance the scales of supply and demand. Over the past few years, supply has outgrown demand and pushed prices down. Inventory reduction, particularly in the distressed homes department, would eventually allow prices to rise.

Bank-owned foreclosures and short sales are often sold at a discount. This depresses the comparable sales data (or “comps”) used by real estate appraisers to determine home values. Thus, a decline in foreclosure sales will allow a return to normalcy, in terms of home prices.

Every housing market forecast you read over the next few month will come down to foreclosures. It is the core problem that is delaying home-price stabilization. The two things are inseparable.