Different looks at housing supply

Posted by Tim

May 29, 2008

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 is several classes:

New home building: This is the only source of new inventory, all other 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 builder’s 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 forclosure 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 have written 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.

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