Different Views on Housing Supply

I have been reading with great interest recent articles on the current housing market. The recent Case-Shiller report shows average home prices have fallen 14% over the last year and there is currently an 11 month “inventory” of 4.55 million homes. This report has widespread news reporting, but there are other reports out there that paint a slightly different picture. I would like to reference some of these reports with a little analysis of my own.

First, let us talk about housing “inventory”. Jeff Miller at A Dash of Insight has a nice discussion on the errors of mass media discussion of housing inventory. He points out that the difference between motivated and unmotivated seller and demand of buyers changes tremendously with pricing and perceived price directions. I have put housing inventory in several classes:

• New home building: This is the only source of new inventory, all others are existing homes someone is trying to sell. Home builders have slashed new construction and managed to sell the bulk of their existing inventory. This news release from the California Building Industry Association - New-Home Production Remains Weak in April, shows that California home builders will build the lowest number of homes in 2008 since records were started right after WWII. Further, the 80,000 new homes this year and 92,000 projected for 2009 are well below the 200,000 that are needed annually to account for population growth in the state. The results (from the press release):

  Furthermore, if the current projection comes true and we build the lowest number of homes since at least World War II this year, the current increase in affordability could quickly turn around when the pent-up demand for new housing starts outweighing the supply.

• Finance foreclosure homes: This is a significant portion of available housing “inventory” and is owned by extremely motivated sellers–banks. This is the portion of inventory that is both pulling down prices and offering buyers tremendous opportunities. This article (subscription req.) from the Wall Street Journal documents that sales are increasing in the hard hit areas of the housing meltdown: Las Vegas, Sacramento, CA, Ft. Myers, FL and inner city Detroit. Quote:

  In the Las Vegas area, sales of single-family homes in April were up 30% from a year earlier. The Greater Las Vegas Association of Realtors says properties being sold by lenders account for more than half of recent sales.

I wrote earlier here on the positive sales reports from Sacramento, where a large amount of foreclosed homes are being snapped up by value conscious buyers. In many areas of the country, once potential buyers believe the prices of foreclosed homes have leveled many will jump in to buy and get a “deal”.

• Motivated sellers: These are those homeowners who really need to sell. They fall into two camps. Those who purchase at the price peak and are having trouble with their mortgage, but are not willing to let it go to the lender. These are very motivated, but may not get the price they want/need and go with another option, like mortgage work out. The other camp is those who need to move. If they purchased the home before 2004, they are most likely still have equity or a house payment that makes renting out the property and option.
• Unmotivated sellers: These are sellers who do not really need to sell, for example, retirees who would like to go buy a repo in Florida, but remember the prices of a few years and have listed their homes at unsaleable prices. Let us call this “dream inventory”, because these homes only sell in the owner’s dreams.

When we look at these classes of inventory, it is apparent that foreclosures are the driving factor in current housing sales. Sales figures from scattered areas of the country show pricing for bank inventory has started to reach levels to bring out additional demand. Once public perception is that prices have stopped falling, demand will increase significantly, most likely starting serious bidding on most bank owned real estate. Because home builders have very few homes starting or in inventory, there will be no outlet for heating up demand. Individual home sellers will start moving up their asking prices as the 3rd alternative for home buyers who do not want to miss the “bottom”.

At this time I am looking for more of a leveling of prices and sales, with new home sales continuing to fall. True growth in home sales and prices are dependent on availability of financing and interest rates. At this point, almost all financing must meet Fannie/Freddie guidelines and these are dependent on what the politicians accomplish.

Comments

[Basic Finance:]

Oh no! I don't want to miss the bottom. I better go out and buy a house in Sacramento.

Why in the world do you think REOs are going to run out any time soon? I guess I don't take seriously any article that cuts and pastes "significant pent up demand" directly from Lawrence Yun, the master of calling false bottoms.

2008 May 30 09:39 AM

[jimsep:]

Tim,
Are there national numbers that show similar statistics as to what is going on in California? It has been my belief that many of the public homebuilders were continuing to build out their communities, therefore keeping building activity too high. If what you are saying is true in many places, it is time to get much more positive.

2008 May 30 10:18 AM

[Pent up demand:]

"Pent up demand" is going to make a great name for my garage band.

2008 May 30 10:42 AM

[delta 777:]

there is another large group of "sellers??" who bought a home for hundreds of thousands of dollars more than current valuation and deliberately choose to walk away rather than be stuck with a vastly overpriced negative cash flow, regardless whether they are actually able to pay the mortgage or not, and regardless of the effect on their credit rating. This group also includes speculators who purchased multiple properties to flip. It doesn't require a lot of financial smarts to know that it is best to walk away from this type of loss--if you still have cash, you can be sure that you can buy again at a lower price. It would be of interest to know how large a percentage this walk-away sector is.

2008 May 30 10:51 AM

[User 202386:]

One of the hardest things to do in life is convincing someone of something that has not happened yet. Essentially, predicting the future and then selling that prediction to get people to act. When things are going this badly in real estate, it is very difficult to get people to look at it rationally without emotion. There is going to be a HUGE demand coming very soon for housing. Population continues to grow, people continue to need housing, and the world is still round. As stupid crazy as it was on the upside of this cycle, we are seeing the same stupid crazy on the downside. Prices have way over-corrected in some markets and here in Las Vegas, that problem/opportunity is as acute as you will find. This is one of the main reasons we are seeing so few transactions on the land side. Tons of buyers are looking, but sellers simply don't believe the pricing, so they have, en mass, decided to wait for better times.

2008 May 30 11:08 AM

[Left Coast ...:]

Prices need to get back to 2003 levels before we see this thing level out. There is still no significant job creation in California -- the largest demand component for housing. Unless that happens, prices have to fall. Construction costs remain high, interest rates aren't getting lower, it's harder to qualify and it costs more for every day items, like fuel. What's hard to figure here...

2008 May 30 11:23 AM

[Pent up demand:]

"Population continues to grow"

Uh huh. So I heard it here first: "they aren't making any more land". Wow that is an ironclad argument.

User 202386, your "way overcorrected" areas are still above traditional measures of affordability. My whole life I have heard that home prices cannot go down everywhere at the same time. People now see for themselves that it can and did happen. They are not going to stretch themselves to the limit to buy thinking that if they delay they'll be priced out forever. Too bad for the bagholders who are left looking for another fool greater than themselves to sell to.

2008 May 30 01:42 PM

[joof:]

many of the perma bears are fighting the last war- they imagine it is still 2005. Life HAS changed , and you had better be hip to the change if you actually want to buy in the down market . It won't last forever

Detailed data shows that both major trends described here are happening - 1. Builder inventory is clearing and production is low 2. Affordability has markedly increased almost everywhere and that has driven resale volume - largely due to the amount of distressed property on the market and continuing low mortgage rates .

After many months of denial the market is clearing . It will stay bad for awhile , but not indefinitely . Certainly the best stuff ( good locations, good quality and good price) has already been picked over and absorbed

2008 May 30 07:10 PM

[VegasBob:]

Housing was way overbuilt from 2001-2007, to meet demand from speculators and flippers, not resident owners. Think I'm kidding? I sold my Vegas condo in April 2006, just as the market was collapsing. I could buy it back today at a 30% discount. And my real estate agent in Vegas has not sold a property in NINE MONTHS.

I think that everyone who wants a house and can afford one already has one. Further, as soon as there is a hint of price stabilization, sellers who are trying to wait out the decline are going to be rushing for the exits. That will put a damper on price appreciation for several years.

2008 May 31 03:26 AM

[voltaic:]

I don't know how you can be so positive when all the exotic loan packages that included no down payment, 125 LTV loans, flipping ARMS, pay-option Arms, depreciating home values and a populace that can't save $5, let alone 10-20% for a down payment on a 200k home. Credit card and car payment defaults are at new highs each month and the outlook is for further deterioration. Your opinions sound more like the delusional rhetoric coming from L. Yun and his band of smiling liars at the NAR than someone with a realistic view of a bursting bubble housing market that is going through a necessary correction that will take years to stabilize.

2008 May 31 04:35 PM

[Reinko:]

As usual and so often observed on this website:

Nobody knows how much median house price climed compared to median family income over the period 1996 to 2006 (the top of the housing market).

Elementary calculations indicate that the median house price / median family income factor doubled.

That means that from 2006 top prices we will have a full 50% retreat in house prices. That is over 10 trillion in family housing equity that will bubbled out.

May be there are some idiots that see 'good prices' now the housing prices are 'near bottom'. I wish them luck...

2008 May 31 06:12 PM

[sickofthehype:]

New home builds down = GREAT news. Over-supply will dwindle as less new homes are built. Less = GREAT news. I'm sick of depressed, angry, and disgruntled people, who lost homes, who can't afford a home, who have crap credit, who RENT, that give advice to the rest of us. Monday morning quarterbacks, as with anything I guess..


MEDIAN prices always skew the stats, and the MEDIA produces news stories based on skewing the skewed numbers even more. When more bank owned homes sell, the prices are much lower, therefore the MEDIAN goes way down. Duh. Year over year median decreases simply mean that more of the bank-owned crap properties are selling than the 'normal' homes (ones in good working order without missing A/C units and graffiti painted throughout the interiors).

With a decrease in new builds (permits WAY WAY down), with bank owned homes selling like hotcakes (which they are), it will get to a point where average Joe can sell his house in a normal real estate environment. And yes, believe it or not, there is a ton of demand on the sidelines waiting for the right entry point. gradually they will take the plunge, decreasing inventory even more.

Maybe it's 2009-2010 before things are normal again, but a ridiculous lowball offer that the seller takes, right now, could put you in a position to make serious money in 12-24 months. It's how you buy, not just how the market is goinig up or down.

2008 Jun 02 04:43 PM

[niterider:]

johndoe110 is in the real estate business. You sound just like Lawrence Yun ,another delusional liar in the real estate business.

2008 Jun 03 04:30 PM

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2008 Jun 03 09:17 PM

[sickofthehype:]

niterider - you must drive an '82 Firebird and be a disgruntled POS.

I'm not in the real estate business, but rather the common sense optimistic business. Lookout, your sky is falling, you putz.

2008 Jun 06 12:35 AM

[User 355575:]

sickofthehype, you lost me when you somehow included "common sense" and "optimistic" in the same sentence. you are going to lose everything, and have been warned, making you the eventual putz a la grande

Feb 12 05:30 AM