Real Estate Investing

Housing inventory in 29 metro areas across the United States showed an approximate 2.5% increase at the end of March, versus one month prior. At least 18 metro areas showed a 12% YTD increase, the Wall Street Journal reports. As bad as this sounds, it may not be the whole picture. There is a “hidden real estate market,” a whole sea of homes with owners ready — but unable — to sell. So, they have given up and retained ownership of the property or entered the landlording business.

The Christian Science Monitor reports:

“While it’s difficult to say how many houses this might be, housing experts believe the numbers are substantial. The implications of this “shadow inventory” are widespread: the housing market may be slow to come back, affecting everything from when Americans retire to whether they can afford to move to find a new job.”

With the current housing inventory known to exist, it would take 9.9 months at current sales rates to sell it all. That’s just slightly below the 10-month inventory of the early 1990’s. Lowering the price is one of the most common sense tactics for unloading an unwanted home. It is also, however, one of the biggest obstacles sellers face. It is very, very difficult — emotionally, mentally, and often financially — for sellers to voluntarily lower their asking price. And in many cases lately, lowering the asking price doesn’t even help the house sell. Some experts speculate that buyers are waiting out the market, holding out for home prices to fall even further. It’s going to be a long year, indeed.

Fort Worth-based D.R. Horton Inc., one of America’s largest homebuilders, has had a hard year. Revenues dropped from $2.8 billion to $1.71 billion, home closings fell 36% and cancellation rates stayed at 44%. And they are not alone. Builders across America are running into similar hard times.

According to the Commerce Department, housing starts in January were at their lowest level in 17 years. Just over 1 million new homes were started in January, up 0.8% from one month prior, but down 28% from one year prior. Builders have offered all sorts of incentives to pique buyers’ interest, including discounts deep enough to anger surrounding homeowners who paid full price only to see their home value drop like a rock.

D.R. Horton is no different, except maybe in marketing tactics. The company’s recent “unauction” offered “auction-level pricing without all the hassle.” The tactic, also commonly referred to as a “firesale,” offered discounts of up to 50%, more than $300,000 in many cases. These are in about two dozen developments in southern California, a notoriously pricey real estate market. Well, obviously, response was overwhelming, with a line of buyers camped out in sleeping bags in the cold. According to the Outstanding Investment blog, this is the first of many such sales as builders look to cut their losses and boost their capital. What a boon for first-time homebuyers!

Homebuilders, buyers and sellers aren’t the only ones hit hard by the foreclosure crisis. A large number of banks, especially at the local level, are suffering greatly from poor returns on loans they’ve extended. Many are being forced to lay off workers, merge with larger banks, or close their doors entirely.

LaSalle Bank merged with Bank of America. Ocean Bank merged with Peoples United and closed three New Hampshire branches. All across South Florida, numerous banks are reporting significant losses. Perhaps most earthshaking of all, Citigroup announced a loss of $5.1 billion and the impending layoff of 9,000 employees.

Fort Lauderdale-based BankAtlantic, one of South Florida’s largest local banks, recently reported that 3.38 percent of its loans were “problem loans,” up from .10 percent the year before. That bank laid off 115 people this month, on top of 225 layoffs last year. Alan Levan, chairman of parent company Bank Atlantic Bancorp, said the bank has successfully weathered such financial downturns in other decades, and maintaining strong capital is the key.

“Our financial results reflect the continuation of the unprecedented market and credit environment and its impact on our historical risk positions,” said new CEO Vikram S. Pandit in a statement. Pandit added that efficiency in operations and accountability at all levels of the Citigroup organization will aid the effort to right the ship.

Accountability, efficiency, strong capital and skilled PR spin aside, some banks are still just not going to make it. Time can only tell who will outlast this period of “survival of the fittest.”