SOURCE: KEEPING MATTERS CURRENT

"HOUSING IN AMERICA:THE NEXT DECADE", A RESEARCH PAPER BY Ronald TERWILLINGER.

MR. TERWILLINGER SPEAKS OF TWO MAJOR CHALLENGES THE CURRENT HOUSING MARKET IS SEEING, AND COVERS BOTH RATHER EXTENSIVELY.

1. THE FIRST STEP IS PRICING. HE SAYS: THE BIGGEST OBSTACLE TO STABILIZING HOME PRICES IS THE THREAT OF A NEW WAVE OF FORECLOSURES.  IN 2008, MORE THAN 1.7 MILLION HOMES WERE FORECLOSED OR LOST BY SHORT SALE OR DEED IN LIEU.  ANOTHER 2 MILLION WERE LOST LAST YEAR AND MOODY'SECONOMY.COM PROJECTS 2.4 MILLION TO BE LOST IN 2010, AN ESTIMATE THAT MAY TURN OUT TO BE CONSERVATIVE.

AND HE IS RIGHT.  EVERY TIME PRICES DROP, MORE AND MORE HOMEOWNERS ARE SEEING THEMSELVES IN THE POSITION OF BEING "UNDERWATER" ON THEIR MORTGAGE.  STUDIES HAVE SHOWN THAT ONCE THEY REACH THAT POINT, HOMEOWNERS ARE MORE APT TO "WALK AWAY" FROM THE HOME AND THE MORTGAGE.   THIS LEADS TO MORE FORECLOSURES, WHICH LEADS TO MORE PRICE REDUCTIONS, WHICH LEADS TO MORE PEOPLE BEING "UNDERWATER".  AND THE Viscous CYCLE CONTINUES.

MR. TERWILLINGER EXPLAINS: THE NUMBER OF "UNDERWATER" HOMES IS THE SLEEPING GIANT OF THE HOUSING CRISIS.  THERE WERE 48.4 MILLION HOMES THAT HAD A MORTGAGE IN 2005.  ESTIMATES OF HOW MANY OF THESE HOMES CURRENTLY ARE "UNDERWATER" VARY FROM 12 TO 16 MILLION, OVER ONE IN FOUR.  DEUTSCHE BANK SECURITIES PROJECTS THAT 21 MILLION U.S. HOUSEHOLDS WILL BE "UNDERWATER" BY THE END OF 2010 MEANING THAT OVER 40% OF MORTGAGED HOMES WOULD BE AT RISK...IF ONLY ONE "UNDERWATER" HOMEOWNER IN FIVE DECIDES TO WALK FROM THEIR HOME; THIS WOULD DOUBLE MORTGAGE DEFAULTS OVER LAST YEAR.

PRICING IS A MATTER OF SUPPLY AND DEMAND.  WITH THIS "SHADOW INVENTORY" OF HOMES ABOUT TO COME TO MARKET AS DISTRESSED PRICES, WE HAVE TO REALIZE THAT VALUES WILL AGAIN FALL THIS YEAR.

2. THE SECOND POINT HE STRESSES IS HOW BROKEN OUR HOME MORTGAGE LENDING SYSTEM IS.  HE QUESTIONS HOW LONG IT WILL TAKE TO CORRECT THE SYSTEM AND SHOWS CONCERN FOR WHAT WILL HAPPEN IN THE INTERIM.  VIRTUALLY ALL FUNDS SUPPLIED TO THE RESIDENTIAL MARKET TODAY ARE THE DIRECT RESULT OF FEDERAL ACTION.  ALL NEW MORTGAGES TODAY ARE BEING BOUGHT OR SECURITIZED BY THE FEDERAL GOVERNMENT AND PRIVATE INVESTORS HAVE COMPLETELY EXITED THE MARKET ABSENT A FEDERAL GUARANTEE.   WHAT WAS ONCE CONSIDERED THE WORLD'S MOST EFFICIENT HOUSING FINANCE SYSTEM, ATTRACTING TRILLIONS OF DOLLARS OF INVESTMENT FROM AROUND THE WORLD, IS NOW SHUNNED BY ALL, BOTH HERE AND ABROAD.

AND THIS TIME WHEN THE FED FINDS IT NECESSARY TO EXIT THE MORTGAGE MARKET.  INTEREST RATES MUST GO UP TO LURE BACK THE INVESTOR TO THAT MARKET.   AS WE OFT TIMES SAY: HIGH RISK IS HIGH REWARD.

BETWEEN THE CERTAINTY OF MILLIONS OF FORECLOSURES AND THE UNCERTAINTY OF THE LENDING PROCESS, THERE SHOULD BE CONCERN FOR WHEN THE HOUSING RECOVERY WILL ACTUALLY GAIN FOOTING.

HOWEVER, WE SHOULD REALIZE THAT OPPORTUNITY IS ALSO IN FRONT OF US!!!!!