U.S. Economy In 2012 And Beyond To Face Housing Overhang

by: Carlos X. Alexandre

The National Association of Realtors has truly become an unreliable source, and its latest reading on pending home sales showing an increase of 7.3% cannot be validated. It's only a continuation of a marketing campaign to portray a much healthier market, and hardly an economic guiding light.

Looking back at the data series, the traditionally busy summer real estate season was anemic at best, and then the association admitted to erroneous data and revised sales as I indicated in a previous article. Common sense tells us that it's hard to believe that real estate activity picked up steam as the holidays approached, and even the association's "revised" existing home sales data show a drastic decline since September. In addition, CoreLogic pegs sales 25% below NAR's revised number for 2010, although that is now water under the bridge.

Best case scenario, sales are driven by heavily discounted foreclosures. For example, "Existing-home sales in the West rose 3.6%" in November according to the NAR, while during the same period new home sales saw a 16.9% drop in the same region according (pdf) to the Census Bureau.

Bloomberg reported that "even with the increase in sales, residential real estate prices continue to fall, showing a broad-based decline that indicates the market continues to be weighed down by foreclosures" - and the Case/Shiller index (pdf) proves it. Meanwhile Mr. Yun continues to earn his keep with encouraging words.

"Housing affordability conditions are at a record high and there is a pent-up demand from buyers who've been on the sidelines, but contract failures have been running unusually high," NAR chief economist Lawrence Yun said in a statement accompanying the release. "Some of the increase in pending sales appears to be from buyers recommitting after an initial contract ran into problems, often with the mortgage."

But the underlying weakness was highlighted by "CoreLogic Reports Shadow Inventory as of October 2011 Still at January 2009 Levels."

As of October 2011, shadow inventory remained at 1.6 million units, or five-months' supply and represented half of the 3 million properties currently seriously delinquent, in foreclosure or in REO.

Of the 1.6 million properties currently in the shadow inventory (Figures 1 and 2), 770,000 units are seriously delinquent (2.5-months' supply), 430,000 are in some stage of foreclosure (1.4-months' supply) and 370,000 are already in REO (1.2-months' supply).

Florida, California and Illinois account for more than a third of the shadow inventory. The top six states, which would also include New York, Texas and New Jersey, account for half of the shadow inventory.

The shadow inventory is approximately four times higher than its low point (380,000 properties) at the peak of the housing bubble in mid-2006. A healthy housing market should have less than one-month's supply of shadow inventory, which would be an easily absorbed stock of distressed assets with little or no discernable impact on house prices, unless the inventory was geographically concentrated.

Despite 3 million distressed sales since January 2009, a period when home prices were declining at their fastest rate, the shadow inventory in October 2011 is at the same level as January 2009.

Because shadow inventory is often concentrated in suburban and exurban submarkets, where distressed sales compete with new construction sales, it is one of the reasons why new home sales continue to be weak. In normal times, new home sales account for 12% of all sales, but they are currently running at 7% of all sales.

Based on current estimates of the visible inventory (both distressed and non-distressed), the shadow inventory is approximately half of all visible inventory listings. For every two homes available for sale, there is one home in the "shadows."

Certainly the future is not as bleak as Spain's, where the "unofficial" estimate stands at 20 years to clear the housing inventory, with plenty of land now completely worthless in "exurban" areas. Unfortunately the aftermath of the housing debacle will continue to be a drag on economic growth, and unlike some predictions that we're turning the corner, it will take a very long time to clear the books.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.