A new report by Amherst Securities Group (ASG) stressed the importance of investors helping the recovery of the still-fragile housing market.
ASG analysts believe that investors possess the crucial ability to help correct the current supply/demand imbalance plaguing the market through increased housing demand. They believe that the best way to do so is to increase financing for investor properties.
Investors have the ability to bid for these distressed homes, and could then rent them as the rental market strengthens. High rental yields combined with financing for investor properties would provide a sizable amount of private capital, according to the report, which would subsequently help prevent further drops in housing prices.
Addressing the Imbalance
The demand/supply imbalance in housing is a central issue facing the sector, according to the report. Due to the sluggish movement of distressed loans in the delinquency/foreclosure pipeline, an enormous shadow inventory has built up in the market.
ASG analysts estimated that the total current shadow inventory, including those in REO, stands at 3.36 million units. By their calculations, if the rate of loan liquidations per month continues to remain at 94,000, it will take 30 months (2.5 years) to clear the already accumulated inventory. The report stressed that this figure does not include loans that are less than 12 months delinquent and those with a chance of default or currently underwater.
The possibility of default is likely to increase due to the questionable credit history or status of many current loans. As a result of their payment history, 19% of borrowers from 2007 would not qualify for a mortgage today. Additionally, some of the remaining borrowers are disqualified as a result of borrowers not having money for the down payment or having low FICO scores.
Aside from these, it is becoming increasingly harder to get a mortgage, which reduces the amount of qualified applicants in the market. The report warned that this problem will be worsened by strict qualified residential mortgage (QRM) standards.
Despite low housing prices, the lack of demand should persist as a result of limited credit availability and the fact that fewer families can qualify for a mortgage, ASG analysts said. They believe that the tightened credit standards for GSE origination are only making the situation worse. The report stressed that overbuilding, while problematic in the past, was not the issue at hand here.
For the market to be on an upward trajectory, ASG analysts stated that the stimulation of both the supply and demand sides is necessary. They reiterated that principal reduction modifications are a critical tool for keeping borrowers in their homes, and therefore stunting the growth of housing supply.
The demand side is where analysts believe investors will play a key role. Due to their lack of credit history, the report predicted that an increasing number of defaulted borrowers will be converted to renters. ASG estimated that 10.4 million out of 55 million borrowers are in danger of losing their home under current standards.