Radar Logic Questions Recovery’s Sustainability

Despite reports of improvements in home prices and sales, ""Radar Logic"":http://www.radarlogic.com/ argued that upon closer examination, the housing market is not doing as well as assumed.

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As of September 25, 2012, Radar Logic's RPX composite price increased 5.2 percent year-over-year across 25 metro areas, according to the company's monthly housing report. In addition, sales activity has gone up by 12.3 percent over a one-year period.

However, the increase in prices tracked by Radar Logic is not a result of ""significant appreciation in household-owned homes,"" the report stated.

Instead, it is due to a decline in ""motivated sales,"" or sales of foreclosed homes and REOs, which are sold at significant discounts compared to non-foreclosures.

Radar Logic's composite shows homes sold through motivated sales were 34 percent lower than the composite price for all sales in September.

Overall, motivated sales have fallen yearly by 39.2 and monthly by 9.4 percent since September 25. As a share of total sales, motivated sales have shrunk to 13 percent, the smallest share since January 2008, according to the report.

On the other hand, the share of ""other sales"" have gone up by 27.9 percent year-over-year during the same time period.

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The report further stated ""a significant and increasing share of demand in the last year has come from institutional investors rather than households.""

Among the 25 metro areas tracked, the share of purchases from institutional investors has increased to 9 percent from 7 percent a year ago. Monthly investor purchases also jumped 42 percent over a one-year period.

While investors are helping to push prices up, Radar Logic says the growth is not likely to last as prices for REOs see an increase.

""If prices rise to a point where investors' expectations of future home price appreciation do not support their desired returns, then demand for REO will decline and prices could fall again,"" the report stated.

The report also pointed to data from LPS, which ""shows"":http://dsnews.comarticles/delinquency-rate-falls-after-spiking-in-september-2012-11-26 1.8 million properties are in pre-sale foreclosure inventory and another 3.5 million properties are more than 30 days or more past due but not in foreclosure, leading to a total of 5.3 million properties in distress.

Radar Logic believes that at some point, ""these distressed properties will make their way onto the market, and as they do they will weigh on home price metrics.""

In addition to the supply of inventory that may potentially flood the market, the more than 10 million ""estimated underwater borrowers"":http://dsnews.comarticles/borrowers-in-negative-equity-slowly-declining-as-home-values-gain-report-2012-09-12 also gave Radar Logic a reason question the authenticity of the recovery.

If prices rise high enough, the analytics company expects to see a supply of homes unleashed from homeowners who were once prevented from listing their properties due to negative equity.

Thus, not only is demand expected to dry up from investors, but supply is expected to increase.

So, instead of a steady rise towards a recovery, Radar Logic expects a different pattern to play out.

""We believe that an alternative scenario is equally likely, one in which housing price metrics rise and fall in a saw-tooth pattern until the shadow supply has been substantially absorbed,"" the analytics firm stated.