'Shadow Inventory' Adds to Housing Decline

NEW YORK (TheStreet) - The housing crisis, which has gripped banks like Bank of America (BAC) in a vice, forced Washington Mutual into the arms of JPMorgan Chase (JPM) and Wachovia to sell to Wells Fargo (WFC) will continue its reverberation through the industry for several more years before "true consumer demand" comes back to life.

Kevin Brungardt, who formerly held positions at Citigroup's (C) Citi Mortgage and Fannie Mae (FNM) and is currently the CEO of RoundPoint Financial Group, a Charlotte, N.C.-based mortgage banking, servicing and investment firm, says while borrower defaults have fallen "significantly," the so-called foreclosure shadow inventory remains "stuck," during an interview with TheStreet this week.

While on the one hand the various government and bank-led loan modification and foreclosure moratoriums have kept some troubled borrowers in their home, Brungardt says it should not come as a surprise to see further home price declines.

"In the next couple of years people shouldn't be shocked, given the supply and demand mismatch with property, that house prices are going to continue to go down, which is not a bad thing because once there is an acknowledged bottom, true consumer demand is going to come off the sidelines," Brungardt said.

"We have roughly 4 million outstanding existing homes for sale, which is about an 11 month supply. We have new home starts, but we have 7 million or 8 million foreclosures that are in this foreclosure shadow inventory. So we have three years roughly of supply vs. the existing clearing rate," he added. "Naturally there is pressure on prices to come down over the next couple of years. I expect acknowledged bottom sometime in 2013 early on and that acknowledged bottom is going to bring demand off the sidelines."

Listen to what Brungardt said about mortgage putbacks .

Brungardt also has concerns about the potential damage that the housing crisis has done to consumer psyche.

"Interest rates are at historic lows, but I think people still realize that despite interest rates, despite tax credits, what's important to them is they don't [want to] fundamentally invest in the largest investment for most people in their lifetimes and it depreciates by another 15-20%," he said. "What was once thought to be a safe investment -- almost a mandatory investment -- in their lifetimes, people are feeling that it's no longer a good investment."

-- Written by Laurie Kulikowski in New York.

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