Home sales have been in the tank for months, while new foreclosures come on to the market at a record rate. That’s not good! It means home inventories are up, up, up, and, with few buyers in sight, are set to move higher. And everyone knows the housing market can’t come back until that mountain of inventories gets cleared away. Right?
If you say so. The only problem with the above—which is Item A on bears’ checklist of conventional wisdom—is that (not to put too fine a point on it) it’s not true.
Oh there’s no doubt about the surge in foreclosures. But the surprising news is, if you look at the actual data, the market seems to be working through them in a fairly orderly way. Sure, unsold inventories are higher than normal, but they’re nowhere near the levels the doomsayers might have you believe. And they’re nothing like the mountain of supply that’s commonly supposed.
Look, for instance, at what’s going on in Orange County, Calif. Over the past two years, the housing market there has been a disaster. Prices are running 30% below their peak a year ago. Worse, at the start of the year the inventory of unsold homes were running 20 months or more—meaning sellers could expect to wait nearly two years, on average, to dispose of their properties. And that’s before taking into account the flood of new foreclosures hitting the market every day. Which is why the bears predict the O.C. housing market, and markets like it, will recover much more slowly than they did in prior downturns.
But, as I say, those inventory figures were misleading. First off, if you measure inventory in months rather than units, it’s easy to get distorted figures should sales rates decline—which of course is exactly what happened in Orange County last year and early this year. This past winter, home sales in the O.C. were off by 45% or more. So even if inventories didn’t rise by a single house, inventories measured in months nearly doubled.
You’ll get a more informative picture if you look at home inventories measured in units. And there, the picture isn’t nearly so dire. Given the declining sales pace of the past year or so, and the surge in foreclosures, I would have thought that home inventories would be much higher now than they were at this time last year. But they’re not. Take a look (click to enlarge images):
Rather, inventories (in units) are lower than they were last year and are only slightly above where they were two years ago. And that’s happened before the mini-recovery in home sales in Orange County that apparently began last month.
As that boom continues (and given how far prices have fallen, it likely will) units will get cleared from the market at an accelerating rate.
For months, we’ve been hearing how foreclosed properties will bring the housing markets in one city after another to a standstill. Yet on the available evidence, it appears that home inventories, while high, are far from unmanageable. The market is taking care of the problem. Imagine that.
Tom Brown is head of Bankstocks.com