What If Housing Takes a Double-Dip?
Perhaps the rise in prices we are seeing now will lure enough traditional home buyers into the market to offset the decline in institutional interest. But in an interview with TheStreet, Eddins said he believes that scenario is unlikely.
First-time buyers still have difficulty getting credit. Even those with excellent credit scores might not be able to save enough for a downpayment amid an uncertain unemployment outlook.
Banks may be encouraged to loosen their credit standards amid rising prices, but that too remains uncertain without clarity on new mortgage rules. The Consumer Financial Protection Bureau is expected to release its rules on what constitutes a "qualified mortgage" in early 2013.
The rules will define what counts as a safe mortgage, one that a borrower has the ability to repay. Banks will have greater legal protection if they make qualified mortgages.
While clarity on the rules will help unlock some constrained lending, the agency needs to ensure that borrowers are protected but at the same time not define a safe mortgage so narrowly that it limits lending.
"We don't want to end up with any unintended consequences that prevent private capital from returning or further restrict sound lending and ultimately go counter to the reset we're trying to achieve," Bank of America (BAC) CEO Brian Moynihan said of the mortgage rules in a speech at the Brookings Institution Friday.
Meanwhile, on the supply side, the tight inventory situation that has helped drive prices higher might not last.
In some states such as Florida, New York, New Jersey and Illinois, where a judicial foreclosure process requires banks to prove in court that the borrower is in default in order to foreclose, there is a large and growing backlog of foreclosed properties that are yet to come on to the market.
The share of mortgages in foreclosure in judicial states averages 6.6% compared to 2.4% in non-judicial states, according to the Mortgage Bankers Association.
According to former Morgan Stanley analyst Oliver Chang, who now runsSylvan Road Capital , the "years supply" of foreclosed homes in New York is 40 years!
Shadow inventory, which refers to the amount of troubled loans still in the foreclosure pipeline that are yet to hit the market, has become less of a concern in the past year.
One major reason has been that the big banks- Bankof America (BAC) , JPMorgan Chase (JPM) , Citigroup(C) and Wells Fargo (WFC) have increasingly opted for short sales and other forms of mortgage relief such as loan modifications instead of foreclosures.
The shift has been good news for the housing market. One, short sales sell at a lower discount to the market than foreclosures, thus easing the pressure on home prices. Secondly, pursuing foreclosure alternatives first ensures that distressed inventory hits the market in a more measured pace rather than all at once.