Home Inventories Soaring? Not Exactly

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

Comments

[Can'tSpotAB...:]

If your market is similar to mine then I believe the statistics do not tell the complete story regarding inventory. In my area there are many REO properties that are NOT on the market. The bank is sitting on them. This is probably due to the fact that once they sell, they will be required to reflect the loss on their balance sheet. The statistics also do not reflect pent up seller demand. Many people would like to sell but are not putting their house on the market in hopes the market will improve later.

2008 Sep 07 08:37 AM

[kevincei:]

The reality is beyond these numbers. Tom Brown actually had been bullish on the financials and housign a tad too early. Some of the facts known to common man but beyond the grasp of rich traders and hedge fund managers are going to keep housing market down for years to come. Many people are now waiting to put their houses on the market and waiting for higher prices. If prices were to go up for any reason (probably wont happen for two yrs) many people will put their houses on sale.
Today many californians are able to stay in a house for upto two yrs with the help of certain legal help without paying a cent in rent. These are owned by banks and banks are not getting a cent on their mortgage holding. The treand is increasing. Due to the nature of securitization of the mortgage paper there is a legal loop hole now becoming more and more prevalent thoroughout california and the rest of the country. This augments the losses to the banks exponentially and is well known to common people. I have about ten friends (close and persoanal) who are currently doing that. IF you doubt it just do a google search and find out.
With government stepping in housing will be fully regulated. No more hanky panky loans. Remaining banks owning common and preferred shares of FRE and FNM are going to get a big hair cut on those ownerships.
They are also getting a big hair cut on their revenue streams. By keeping the false accounting in books these cash strapped banks will only worsen the country's credit crisis. FDIC can help the situation by closing down all these zombified banks and letting healthy banks take over deposits.
Just like the japanese banking index dropped 90 percent of the bubble high this unwinding will continue. July fifteen low is not the real low. Real low will be about fifty percent below that according to my opinion and the opinons of many who were able to predict the exact downturn. Tom Brown was famous for coming against Whitney Meredith and calling her a liar. I really think Whitney Meredith spoke the truth and is still far more credible than Tom Brown

2008 Sep 07 09:00 AM

[notsosmart:]

who knows what this guys agenda is? just think for yourself.the experts have no idea. if they did this mess would not exist.

2008 Sep 07 11:30 AM

[Tom Lindmark:]

Thanks for a different view. I agree that it's not a pretty picture but it's not as bad as most seem to want it to be. We've been beaten up pretty well in Phoenix yet the inventory and months of supply has not gone through the roof and is actually trending down slightly. It's going to be a slow climb out but it will happen. In the meantime, a lot of home buyers and investors are getting unbelievable values. There are always winners as well as losers in these cycles.

2008 Sep 07 01:24 PM

[Kunst:]

Your chart says unit sales are up 14% or so Y/Y. That's a meaningful data point. So who is buying these houses? It's not a good environment for home buyers, especially first-timers.

While inventory may only be "slightly" higher than two years ago, it is more than double three years ago. And there are a lot of houses being held off the market "until prices improve".

It would be nice to believe the housing market is coming back, but this article leaves me unconvinced. I have a feeling there is more to the story than meets the eye here.

2008 Sep 07 08:14 PM

[Steven Hansen:]

i am thinking that tom's statistics suck but they are real data points on housing. orange county is not an average american county, and i would not project the orange county situation to the rest of the usa. in fact, each area seems to have a different dynamic.

i have a few houses i would like to unload and i would like this analysis to be correct. i just cannot shake the feeling things are going to get worse.

2008 Sep 08 02:20 AM

[fxtrader07:]

Tom, I don't know whether it is smart to dismiss inventories measured in months so quickly. After all, the number of units don't telle you anything about how fast this overhang might disappear. Second, I see from your graphs that supply is up or going sideways AND number of transactions has come hsrply down. But this is the state of affairs amid a 30% drop in prices from the peak, as you said. So that 30% drop obviously was only sufficient to let the situation not deteriorate too much. I wonder what price drop will be needed to clean things up again...

2008 Sep 08 05:07 AM

[billddrummer:]

I still think that median prices will fall to the level seen in 2003, before the boom began. When that happens, we'll see inventory getting cleared much more quickly.

As far as people holding their homes off the market waiting for prices to improve, they'll have to keep waiting. I don't think prices post-boom will start to rise until the inventory level becomes more balanced. Which could take another year or two.

2008 Sep 08 10:15 AM

[evergreen16:]

Here is also something to consider. I hear people whine about high RE prices. Consider for example prices in Europe, even the 'cheap' easter Europe. Prices of houses in small towns there are higher than comparable properties in metro area of Seattle, Chicago, Denver... Now, where would you rather live?

2008 Sep 08 04:39 PM

[AJ30:]

It seems to me that one metric that most pundits are missing but that is known to us "commoners", is that everybody has to live somewhere! If someone bought 5 condos at pre construction "deals" hoping to "flip" they are in a world of hurt, but that wasn't the big chunk. Most housing is bought by renters moving up. Unless divorce intervenes they will fight hard to stay in something. They may have to "downsize" but they have to live somewhere.

2008 Sep 08 04:39 PM