Mark Hanson of MHanson Advisors, researchers and strategists focused on North American and Australian real estate and finance markets, has a very good piece out questioning the recent calls of a housing bottom. His research shows that 20-30 million current homeowners (half the market) either cannot sell and net enough for a downpayment on another house or could not qualify for a new mortgage if they did have a downpayment.
He also charts that out in relation to the over all supply:
Here’s Mark’s breakout of the zombies:
1) “Effective” Negative Equity – 25 million borrowers / houses. These borrowers are dead to the housing market, as they don’t have the equity to pay a Realtor 6% to sell and put 20% down on a new house. They were once the most active participants, the repeat buyers. Now they are “zombie homeowners”.
2) Impaired Credit – 28 million borrowers. These are borrowers with “c” grade or lower credit that can’t easily qualify for a purchase money loan outside of FHA
3) Legacy Second Liens – 18 million borrowers. Legacy seconds that banks refuse to extinguish also trap millions of homeowners making them useless in the macro housing market equation.
Note that the list is not mutually exclusive meaning one borrower can belong to multiple cohorts.
Mark’s bottom line:
This housing market will never achieve a “durable recovery” or “escape velocity” with 20 to 30 million homeowners — the prime repeat buyer cohort — trapped in their houses due to effective negative equity, poor credit, or legacy second liens. All that will continue to happen is stimulus-induced short squeezes like we saw this year and in 2010 followed by hangovers like in 2011 and will again in the back half of 2012 and 2013.
My takeaway is that sadly for the economy, a housing recovery (which generally leads the recovery) is not in the cards for as long as another five or seven years. When you combine this with the psychological shift in the attractiveness of homeownership and the demographic trends it is clear that apartment building investment provides a needed solution. I also believe that because no one is building new class B and C multifamily properties the large demand for those type of apartments will have to be filled by existing stock and that acquiring these properties in good markets with stable rental demand will provide attractive returns, especially in the zero interest rate era.
Hat tip: Barry Ritholtz