The foreclosure market "is the housing market" in 2009, analysts at Deutsche Bank say in a new report that’s skeptical about the effectiveness of the recently passed $787 billion stimulus bill to revive housing markets.

The foreclosure market "is the housing market" in 2009, analysts at Deutsche Bank say in a new report that’s skeptical about the effectiveness of the recently passed $787 billion stimulus bill to revive housing markets.

The report warns of the lurking "shadow inventory" of real-estate owned (also known as bank-owned or REO) properties and homes slated for auction that haven’t showed up in multiple listing service (MLS) data.

That inventory could put continued downward pressure on prices, making the $8,000 tax credit for first-time homebuyers a less-than-compelling incentive for some buyers who expect to see further declines in their markets, the report said.

In eight of the 26 markets analyzed by Deutsche Bank analysts Nishu Sood and Rob Hansen, foreclosure inventories outnumbered MLS listings (the report counted REO properties and homes scheduled for auction, and assumed two thirds of "preforeclosures" would end in foreclosure).

Five of those markets were in California, including the Inland Empire region east of Los Angeles, where there were nearly twice as many bank-owned properties as MLS listings.

The report found foreclosure inventories were equal to 89 percent of MLS listings in bubble markets with volatile prices, compared with 56 percent of listings in nonbubble markets and 77 percent of listings across all 26 markets.

Because there’s some overlap between REO properties and MLS listings, those numbers are an indication of how many REO properties may not be in the MLS, rather than the percentage of properties in the MLS that are bank-owned.

The 83-page Deutsche Bank report, published Feb. 17 with a focus on homebuilders, includes more detailed market-level breakdowns.

An executive at data aggregator RealtyTrac told attendees at the recent Inman News Real Estate Connect conference in New York City that the company’s analysis of 500,000 distressed properties in four states revealed only about one in four were listed for sale.

That could mean three out of four distressed properties have yet to hit the market, a potential source of additional pressure on inventory and prices (see story).

Because many foreclosures aren’t listed in the MLS, another way Deutsche Bank attempted to assess resale inventories is by calculating months of inventory using 2008 new-home production as a frame of reference (that method may overstate actual housing supplies in some markets where home construction dropped far below historic trends, but is a useful metric for analyzing future prospects for homebuilders).

Looking at the same 26 markets — including "bubble" areas in California, Florida, Arizona and Nevada and "nonbubble" markets in Texas and North Carolina — the report estimated that foreclosure inventories alone represented a 34.7-month supply of housing in bubble markets, compared with 14.4 months in nonbubble markets.

Using 2008 building permits as a metric for months of housing supply, Miami, Fla., topped the list, with more than eight years of foreclosure inventory.

Five markets in California — the Inland Empire, Los Angeles, San Diego, San Francisco and Sacramento — were next on the list, with an average of 67 months of foreclosure inventory.

Four markets in Texas and North Carolina had much smaller overhangs — less than six months of foreclosure inventory — and the New York City area and Seattle also had less than a year of foreclosure inventory, the report said.

Another way Deutsche Bank analyzed foreclosure inventories was to compare it to the total number of housing units. Foreclosure inventories represented 2.1 percent of housing units in bubble markets and 1.5 percent in nonbubble markets. The high and low ranged from 6 percent of all housing units in Las Vegas to 0.5 percent in Austin, Texas.

The report also looked at home prices and transaction levels in 41 metro areas, and concluded that the rapid decline in home prices in the latter half of 2008 does not bode well for the success of the recently passed stimulus package.

Home prices in those 41 areas are down 26 percent from their peaks, with a little more than half of the decline coming in the last half of the year. That means some homebuyers are likely to remain on the fence until the second half of this year in hopes of purchasing the home for less, the report said.

The stimulus bill’s $8,000 tax credit for first-time homebuyers "doesn’t buy you much confidence when prices are falling so fast," Sood and Hansen said. The tax credit doesn’t help with down payments, they said, and equates to a median 5 percent discount on December home prices in the markets Deutsche Bank tracks.

Price drops on real estate-owned properties are softening the price expectations of nondistressed property owners, "entrenching price-cutting as a widespread phenomenon," the report predicts.

Sood and Hansen cited a recent Zillow survey in which 57 percent of homeowners recognized their homes had lost value at the end of 2008, compared with 38 percent of homeowners six months earlier (see story).

"This major change in psychology is an important one, because it implies that price declines are likely to persist beyond just the foreclosure-saturated markets to places like Texas and the Carolinas as well," the Deutsche Bank analysts said.

While home prices are falling fast in some markets, existing-home sales in markets tracked by Deutsche Bank were up 3 percent in December compared to a year ago, the report said — a major reversal from a 21.6 percent year-over-year decrease in transaction volume in November.

With the National Association of Realtors estimating that foreclosure and short sales represented 45 percent of existing-home transactions during the fourth quarter, the question becomes whether the rise in transactions indicates signs of a bottom or just opportunism, Sood and Hansen said.

Although good numbers are hard to come by, Deutsche Bank believes up to half of foreclosure purchases are made by investors, which doesn’t translate into demand for new homes. The rebound in transactions has been most pronounced in "bubble" markets that saw the most price inflation, while areas like Texas and California were still experiencing year-over-year declines in December, the report said.

The year-over-year increase in sales volume was 251 percent in California’s Inland Empire, where prices were down 41 percent, the report said. Fort Myers, Fla., which experienced a 50.3 percent year-over-year price drop, saw sales shoot up 146 percent.

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