Why the Housing Stats Are Lumpy

A while back, I took a look at the distribution of housing inventory across the U.S. and found great disparities. Some regions of the country show little oversupply; others are completely glutted. This lumpiness of the data makes the housing crisis more difficult than aggregate numbers might suggest. It is not clear that lowering of mortgage rates, aiding select homeowners in avoiding foreclosure, and similar measures will be sufficient to create the demand for years worth of housing inventory in overbuilt market segments (resort areas, beach condos) when consumers are pulling back from even modest retail purchases.

Indeed, there is some indication that much of the recent demand for homes has been fueled by speculators who purchase homes in foreclosure. Should these speculators find that the housing market remains weak beyond their projections, we could get a second wave of selling, as a "shadow inventory" of homes comes to market.

Someone recently told me that my own local housing market in Naperville, IL is in relatively good shape because there is only about one year of inventory for sale based on 2008 sales figures. If, however, we break down the inventory by price (see chart above), we again see evidence of lumpiness. There is little inventory problem at the lower end of the housing spectrum; speculation in that market had centered on the luxury end, where there is more than 3 years of inventory. At year end 2008, annual sales of homes above $1,200,000 in Naperville were 36, but 114 homes were on the market. Stated otherwise, about 3% of housing sales in that market have been above $1,200,000, but 15% of the inventory is priced at that level.

In my looks at other suburban communities, from Washington to Florida, I have seen similar lumpiness in inventory. The high-ends of the market, which was where the money was, generated the greatest overbuilding. In an environment in which aging baby boomers are downsizing, consumers are retrenching, and home values are falling, it is not at all clear that there is the demand to meet such supply, leaving builders and local banks at serious risk.
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Comments

[John Lounsbury:]

I agree completely with your conclusions: seekingalpha.com/artic...

Jan 16 08:25 PM

[stats:]

Thanks. Great piece of information.

Jan 17 09:38 AM

[Scott Sambucci:]

This is such an important concept that housing market participants need to understand. Many markets are bipolar - there's the distressed properties market at one end and the traditional properties on the other. Looking the trends in Naperville by price quartile (25% breakouts), it's pretty clear that the "top of the market" has held strong through the recent downturn:

tinyurl.com/8m736q

Compare that the Chicago MSA in aggregate, and there's a completely different story to tell:

tinyurl.com/7la9pw

It's particularly challenging for agents & brokers in these stronger areas to sell because uninformed buyers think they can walk in and off 80% of list and get it "because it's in Chicago." Fact is, micromarkets like Naperville are quite different. This happens nationally is stronger microareas like Santa Monica (Los Angeles) and Palo Alto (San Francisco).

Jan 17 10:10 AM

[M-P:]

In terms of extrapolating the info, it would be nice to disaggregate via multiples (e.g., 2x, 3x, etc.) times median income for the market ... in some areas of the country, a million will get you quite a home, in others, not so much. Given the local flavor of the markets, I think we need to look at multiples of median income vs. a nominal dollar value.

Good analysis - I like when people disaggregate or de-average the numbers - you can generally get a better picture and be more specific in recommendations. I think the government will have an uphill battle if they are trying to "re-create" the housing/mortgage bubble we are currently de-leveraging from - it's not an exemplar for the economy. Consumerism and leverage will eventually break down - you can only get something for nothing for so long. The dot-bomb showed us that the fundamentals of business, economics, and valuation eventually come back home.

Jan 17 11:01 AM

[Perki:]

I have a simple view of the real estate price changes. The areas most overbought due to mortgage glut, are "resetting" to 2003 prices.

Those that went up the most are coming down the most. See for self.

I have plotted historical Case-Schiller data by metro area over the last 21 years. The graph tells the story. tinyurl.com/7hovj6

Jan 17 12:07 PM

[Foobarista:]

Not sure about general areas, but in my area, Silicon Valley, the opposite tended to be true. Areas like Palo Alto, Cupertino, and Los Altos, which have always been expensive, haven't had a lot of problems. But "cheaper" areas like south and east San Jose, some parts of Sunnyvale, and poorer areas of the Peninsula, had lots of speculators and people buying with junk loans. These areas now have tons of inventory, foreclosures, and REOs - and have had big price drops.

Jan 17 05:08 PM

[Trinitymaster:]

Wow- really? People speculated in the segments of housing with the highest potential to rise exponentially in price?

This is what you call a "NO SHIT, SHERLOCK!" conclusion.

When I lived in California (about 6 years ago) there was a trend for several middle-income families to "go in" on an ungodly expensive house, live there for a couple of years, and then sell it for a huge profit. I wonder how many multiple-family households, now that the market has nose-dived, had their credit detroyed using this technique.

Jan 17 08:44 PM

[blasted:]

In my market (NE Indiana) there has always been an over supply of homes in certain segments. Over $650,000, second homes and rental properties. I think the sellers list in hope of geting their dream price. So when looking at statistics that shoud be considered. It not like this apparent over suply is a brand new thing, not to say the market is not much worse.

Jan 21 11:13 PM