More blows on the way for battered housing market

February 16, 2010 6:57:35 PM PST
A triple whammy, perfect storm is brewing that could strike a blow to California's and the nation's battered real estate market.

Two major studies are out Tuesday that estimates 5 million homes whose owners are delinquent on their mortgages may flood the housing market in the next 24 months, primarily due to high unemployment. That could cause home prices to fall.

On top of that, mortgage loan rates are expected to rise in the year ahead as the federal government stops buying bundled loans on March 31 as part of its initiative to keep the home lending market liquid.

Finally, the first-time home buyer tax credit is set to expire at the end of April. That program has given an $8,000 tax credit to first-time buyers and a $6,500 tax credit for existing homeowners.

Together, they are called real estate's "shadow inventory." By some estimates, California's shadow inventory is about 80,000 homes. The owners could be trying to modify their loans, they could be bank owned, but not on the market, waiting for a rebound in prices.

Sharleen Kilgore, a manager at Project Sentinel in Sunnyvale, says her five housing counselors are seeing a major increase in requests by distressed homeowners seeking loan modifications so they can stay in their houses. However, many cannot qualify for help as a result of losing their jobs due to the recession. Kilgore says she agrees that the number of foreclosures could rise dramatically. Only one in four cases Project Sentinel handles results in success.

"Loan modifications have a financial criteria and they have financial guidelines that the homeowner has to meet, and unfortunately, we're not seeing a huge percentage of the people who come through our office that meet those financial guidelines," says Kilgore.

Officers of the Santa Clara County Association of Realtors disagree that home prices will be depressed by an increase in foreclosures. Association president Karl Lee says the increased inventory could help balance the current demand for houses. He says that multiple bids for houses have become common as a result of a lack of homes for sale.

"If we have a little more inventory, we can moderate the market right now. The market's never good at any extreme and right now, we actually are seeing the extreme on the demand side," says Lee.

Association president-elect Michael Sibilia says that there are currently fewer than 2,000 single family homes available for sale in the county, whereas in past years, the inventory has been closer to 5,000.

There is one other wild card that could influence the future of the real estate market.

"It's jobs. It's not so much the interest, it's not so much the pricing. But if someone feels secure with their job, they're going to go out and buy a home to secure their long-term investment," says Sibilia.

Some analysts are warning that efforts to help troubled homeowners in their homes, while they renegotiate the terms of their deal, could put more stress on the real estate market by creating a logjam that will suddenly break and flood the market with too many homes for sale.