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Saturday, January 14, 2012

Housing's Huge Supply and Demand Imbalance

Housing's Huge Supply and Demand Imbalance

"Pent-up demand."

That is the rallying cry of the housing bulls, as they forecast the great recovery of 2012. So many potential buyers are doubled up with family, stuck in undesirable rentals or just plain afraid to put their current home on the market, but that's about to change, say these optimistic prognosticators.  

Pent-up demand exists, no question, but it has nowhere to go right now for the vast majority of organic home buyers. When I say organic, I'm excluding investors from the mix, because that demand is high and building up cash like mad. I mean regular lower to upper middle-class Americans still struggling in today's rough economy.

"There are relatively few borrowers that can qualify for a mortgage given today's tight lending standards,"  "Aside from FHA and VA mortgage, you need 20% down, and that's very, very difficult for most borrowers."  

There is more distress in the housing market than some of the leading mortgage data providers portray. There might be eight to ten million more foreclosures over the next six years, because of borrowers currently in mortgage modifications.  

That includes borrowers who have never missed a payment before, but are deeply underwater and are apt to default because borrowers just like them are defaulting on a regular basis.

Plus household formation has been running very low of late, just 5-800,000 a year. A normal level is 1.1 to 1.2 million units a year.

The only way to re-balance supply and demand is to get investors into the market in force to buy up these properties and meet the huge rental demand that will continue for several years. Hedge funds are busy working on deals, but I think government needs to help guide if hedge funds are involved. Fannie Mae and Freddie Mac are currently sitting on a huge supply of foreclosed properties and facing even more down the pike.  

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