Option payment arms is another good point of wealth destruction. An additional fact that you wisely are considering.

The people without mortgages aren’t spenders. Not so good for a consumer based economy. They won’t as likely sell their houses. Good for supply. Still, that’s 1/3rd of the home owners. Leaves a lot of others not in that category. These folks may also freak when their credit card limits are reduced and spend even less.

Many qualified their mortgage and second mortgage on those two incomes. The loss of one income is serious for many households. It’s all about jobs. The result of less jobs is more defaulted mortgages at this stage. The housing debacle has moved from a cause to an effect. We now have fundamental economic structure issues that are the cause.

I enjoy your approach of investigating and not burying yourself in the sand. None of us can really know the future, but trying can be useful.

You make excellent comments. My feeling is that Traditional Sellers in many cases have further to fall on their prices because they are still high given historical levels. As far as future foreclosures my concern lies more with Option Payment Arms versus unemployment since unemployment benefits last quite some time, there are often multiple incomes in the household, and there’s still 50 million homes out there with no mortgage. When 30%+ of subprime mortgages are defaulting that’s pretty dramatic versus an unemployment rate that’s gone up by around 5% in the last year.

I’m not sure how much Traditional Sellers need to come down yet… the two recent Traditional Seller sales I’ve done had the sellers drop their prices 10%-15% further to get my clients to buy but then I’ve seen several on the MLS sell recently for full price as well… with such variety in the housing stock any summarization does simplify things at the expense of reliability.

You’re the second consumer to bring the same points to me today with this post and I will be doing some more blogging on this topic as I feel the dialog is very good. I specifically left Traditional Seller pricing out of this post because I know it is so much more of a complex issue and a story all on its own.

I have to agree with Ryan that more bank owned supply is coming.

As “traditional” prices are being suppressed by bank owned properties, more people will go underwater in terms of loan to value. If true, that would increase inventory. Refinancing may be more difficult regardless of interest rates if equity continues to erode.

Additionally, more job losses could increase the bank owned supply.

In time, either the new owners of the foreclosed properties see appreciation or the “traditional” values head down towards the forclosed properties, or some of both, which is more likely.

A reknown bank analyst has publically stated credit card limits will be reduced in half to $2.5 trillion, calling that a pay cut for the 90% of Americans using revolving lines of credit. She stated possibly all credit card holders will experience reduced credit card limits. That would cut consumer demand further, creating more job losses.

The stimulus measures, including first time home buyer credits, are temporary. I see on this website that you state FHA, 3% downpayment mortgages are being used extensively. So, in effect, with the tax credit, buyers are being paid to move their rent payment to a deductible mortgage payment. A no risk proposition. A point of bottom. At the same time the Government is buying down mortgage rates. The FED now owns almost $5 trillion of all federal debt. And, in effect, housing is still being sold with less than zero down. The difference this time is the Government is the instigator through FHA and interest rate buy downs and not the private mortgage investors. And, of course, now the prices are much lower.

One question is: “Can the FED buy unlimited debt?” Some say yes.

But then, when rates do rise, will that end most real estate transactions? And then, is that the collapse of the “traditional” home sales market? Contract for deed doesn’t work too well on homes with existing mortgages.

Are these bank owned properties sucking the last available buyers out of the market for quite some time?

Some are proposing the economy is in a long term deflationary period where Treasuries will out pace the stock markets. If this becomes truth, housing prices could continue to sink, while activity still remains solid around depressed prices and low interest rates. Would this type of situation be a boon for first time home buyers for quite some time?

My point overall is that while your prediction may turn out to be correct, the result may be an extended, long term, damaging destruction of “traditional” home prices. This would be a disaster for the return of the consumer economy for potentially an extended period of time.

Benefits such as home buyer tax credits for all buyers may be beneficial. But then we are further using taxpayers to support the markets.

Anyway, with the current tax credits and financing structure at the low price end, a bottom may be in for bank owned housing, but the “traditional” market may be the tremendous loser.

Sellers are in many cases still overpriced in my opinion. Many are still stuck with an unrealistic vision of the value of their home in today’s market. The hard part is that if they can’t sell this year at the price they’re at today, how will they sell it next year when rates are likely to be 6%, or more? That’s an increase in payment of 20% or so… ouch!

Until Months of Supply gets back down to around 6 or so, Traditional Sellers will continue to face strong pricing pressures. I’m working on an article focusing specifically on these issues for sellers.

Between your chart above showing a decline in closed sales of traditional homes and my personal experience of watching more than a handful of homes in my area on the market for over 1 year it seems to me like traditional sellers may have their head in the sand when it comes to pricing.

Count me in with the naysayers looking for another round of foreclosures once the Credit Card Companies march to congress for a bailout and are forced to reign in their lines.