ONE STEP FORWARD, TWO STEPS BACKWARD

This week, the S&P 500 is on track to have one of its best weeks in a year. The market closed last Friday, July 2, 2010 at about 1022.58. At time of this writing, the S&P stood at 1077.62; this yields a gain of more than 5% in a short (4 day) week of trading. Many big corporations, including some big banks like Bank of America, report earnings next week and investors continue to wonder whether we are on the edge of a double dip recession or a sustained rally.

Although the market has shown good signs of life this week, I think the best indicator of stability in the economy right now is going to be a stabilization and possible increase (albeit a very modest increase) in home values. Here in Arizona, the idea that home values will trend upward is optimistic but with all the foreclosures and bank owned properties, I am hesitant in thinking there will be a sustained bull housing market.

Politics aside, the current legal battle between Arizona and the Federal Government will likely have some implications for the housing market here. Time will tell whether the hot button immigration issues here will lead to an influx of homeowners or an outflow of people leaving, but personally I don’t think too many people will make the most important purchase of their life based on court battles.

Right now, so many homes are for sale, with many more owned by the banks, that it is truly difficult for stabilization to occur. Simple supply and demand dictates that too much supply and not enough demand will drive down prices because of a flooded market.

What scares me the most is the idea that even if there is stabilization, the banks could easily derail a recovery. Right now, the banks own massive amounts of homes, and a lot of banks are not putting them on the market because of the weak demand for housing. What this means is that as soon as the market starts to pick up, we will start to see more bank owned houses that are currently vacant put up for sale. This will again flood the market with supply without lockstep increases in demand, driving down prices yet again.

The obvious message of this is clear, people needing to sell their homes will face a saturated market; homeowners will be forced to compete for buyers with the banks that have the time and resources to wait out a sale and the means to finance a potential buyer.

With so many foreclosures happening the banks continue to stockpile their inventory of homes. Obviously the housing market is not a prime seller’s market right now, so these banks will likely sit on these repossessed houses, keeping them vacant, until property values show signs of appreciating. That’s when the market will be flooded yet again with these bank owned homes, killing off any increases in home values. One step forward, two steps backward.

The effect of supply without demand will also negatively impact the refinance market as well. When prices go up, the supply will be again flooded, bringing down values. What this means for homeowners needing to refinance is high volatility in appraisals. Imagine that in 2011, your neighborhood sees an increase in home prices and you successfully refinance given the newfound equity in your home; the bank suddenly puts two or three homes they own, that have sat vacant, for sale in your neighborhood to profit from the appreciation; this flood of supply will inherently drag down all the home values of the neighborhood; your home value will go down with the neighborhood, quite possibly putting the newly refinanced into a position of being underwater. This could lead to an increase in strategic defaults. One step forward, two steps backward.

Got questions? Send me an e-mail: Matt@desertedgelegal.com

DISCLAIMER:

****MATT AZARI IS NOT A LICENSED ATTORNEY. THIS BLOG IS COMPRISED OF HIS OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****