Overhang

There's a new term being kicked around: "overhang," and it refers to the extremely large pipeline of foreclosed properties that's going to hit the market sometime. You've heard of taking a sip from a firehose. Now, picture standing in front of that hose, and its end has been clamped shut by foreclosure moratoriums, courts log-jammed with more foreclosures than they can process, and modifications and workouts that bought people time, but in many cases won't keep them from saving their homes from foreclosure. The problem is compounded by a slow real estate market that keeps properties from moving. That pent up pipeline of water that is absolutely certain to burst past the clamp is the overhang, and you can picture the characters from the Ice Age movies, standing on what seems to be solid ground, only to find it all giving way with a loud cracking sound. In his "Up & Down Wall Street" column, Alan Abelson reports in Barron's a scenario that I liken to seeing the proverbial light at the end of the tunnel, only to find out it is much more likely the next train coming at us, than the end of this dark period in the housing market. He references a recent report by Amherst Securities Group, which gives the following statistics:

• Number of housing units in the foreclosed property backlog in 2005: 1.27 million
• Number of housing units in the foreclosed property backlog today: 7 million
• Number of housing units in the mortgage universe, per the Mortgage Banker's Association: 56 million
• Number of housing units in pipeline, headed to liquidation: 6.94 million

It is a fact that the overhang exists, and it is a fact that it will undoubtedly depress the market further when it hits. I see some reason to believe, though, that the overhang might not come crashing out from under us. For one thing, the very dynamics that are causing an inventory to build (moratoriums, modifications, log-jams in the courtroom) are preventing a cataclysmic crash. These factors may make it more of a slow slide down the hill. When these properties come to market, they are going to hit over many months. The onslaught of properties will depress prices. The system hasn't yet found a way to make loans broadly available, so they will sit on the market for a long time. If we find a way to bring liquidity back, so that people can buy those properties, we'll come through without calamity, because of the drag from a system that now takes its time to foreclose, instead of racing to the finish line with every property. The condition that says we must have liquidity to make loans possible for this to happen is a big if, by the way.