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Weaving Through the Foreclosure Wave

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how news sources like Reuters offers real fact-based news.  Stripped of confusing partisan media spin, we're left to interpret the unadulterated news.

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Today, Reuters observes that while home sales are up, the inventory for new homes is down to record lows.  From my perspective, this is great news as it's a reflection of our free markets at work.  As prices have come down from the bubble peaks, builders have no incentive to build more and add to current inventory.

http://www.reuters.com/article/2011/04/25/us-usa-economy-idUSTRE73D8GJ20110425

The current low levels of new construction is giving the housing market time to right itself and absorb all the excess inventory from distressed properties.  The article mentions that we have about 50% more current inventory than our average annual absorption rate.  This is congruent with my view that we're likely 12-18 months from seeing a bottom, since the low prices are attracting more investors and the market will accelerate the sell-through rate.

As for the 4-5 million in potential new inventory from foreclosures, I believe those will trickle onto the market as banks try to minimize the price disruption for the next few years.  Even then, those foreclosure units will likely not be as detrimental to price stability since many will be 8-10 years old by then and will not be desirable enough to compete against regular inventory.

As I noted in my previous blog, during the housing boom, builders often built in sub-prime locations to keep prices affordable.  This means there are likely millions of foreclosed units out in the deserts of California, Nevada, and Arizona just baking in the hot sun.  Neglected, those units of 2004-2007 vintage will look 20+ years old by the time they come on the market in 2012-2014.  By then, intrepid investors will pick those up while first time home buyers look for units in move-in condition in prime locations.

So, as the market clears, look for houses in safe, pedestrian neighborhoods near city centers.  Get a good agent who can help you navigate between distress and great future potential.

Michael Cheng