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Housing inventory is starting to drop, but it has a long way to go



February 25, 2009 – Comments (6)

I have stated a number of times here that I do not believe that the economy will stabilize until home prices stop falling, ideally to a level that is affordable enough to encourage consumer spending.  The bad news is that home prices are falling at a record pace (see post: Home prices tank). 

The good news is, according to today's report by the National Association of Realtors (see article: January existing home sales fall by 5.3 percent) we are finally starting to whittle away at the excess inventory of homes out there.  Housing prices are not going to stabilize until the inventory gets down to a reasonable level.  That is going to take time and likely lots of it given the fact that homes are still selling at an anemic pace. 

When I heard on Bloomberg this morning that economists were expecting new home sales to rise this month I thought to myself, "Man these guys are on crack.  There's almost no way that home sales will be up...even with the massive drop in prices and all of the foreclosures that are flooding the market."  I was right (of course it's easy to claim that one was right when there was no witnesses ;) ).  According to this morning's NAR report, sales of existing homes dropped 5.3% in January to their lowest level in nearly 12 years.  Also of note, the NAR claims that the median sales price of U.S. homes slid 14.8% during Jan.

The months' supply of homes on the market will likely have to drop significantly from here for us to see stabilization in home prices, but at least we're now headed in the right direction.  Builders have finally gotten the message and have stopped adding to the glut of available homes out there.

For me, housing is the key metric to focus on in this whole mess.  The sooner home values stabilize, the sooner banks' assets will stop falling, the sooner consumer confidence can perk up, on, and on, and on...  Keep a close eye on it to see when the economy will hit bottom and at least sit there, if not begin to slowly recover.


6 Comments – Post Your Own

#1) On February 25, 2009 at 11:52 AM, wolfhounds (32.84) wrote:

You have on the button regarding the supply issue.

I had an interesting conversation last night with one of the leading realtors here in northern Westchester County. Our upscale townhouse development was built in 2003, saw prices go up 50+ % in two years, then drop about 20% since. Until this month there were virtually no units for sale in a year. Five units (of 423) had open houses and showed considerable interest this past week, mainly due to interest rates, according to the realtor. 

What was more interesting was her statement that she had a number of "A clients" who she couldn't show properties to. As soon as "A" properties opened up they were sold. 

I don't follow trends except locally, but I would be curious how specific areas are doing in the next 2-3 months to see if localities where foreclosures are not an issue are showing signs of life. It may show that there is a pent up demand.

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#2) On February 25, 2009 at 12:40 PM, TDRH (97.25) wrote:

You are spot on as housing as the key, but to decrease the supply you are going to have reach a price level of "qualified demand".    This is a function of the median household income.     Without alternative financing, prices will have to fall to reach equillibrium with qualified buyers. 

Attempts to try and artificially support the pricing levels, through temporary tax credits will only delay stabilization/prolong the correction.   For instance, if I buy a home today that I qualify for because of the tax credit, what happens 5 years from now if I want to sell it.  I would say I was stuck, and would probalby have to take less for my home.  

It is, and will continue to be painful, but qualified demand with constant factors is the key.   The problem could actually get much worse if unemployment and interest rates rise.

 Very nice post, forgive the intrusion.

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#3) On February 25, 2009 at 1:49 PM, nthought (< 20) wrote:

I've heard that a lot of people are factoring in pent up demand in the recovery.  That is, there are people waiting for housing prices to stabilize but are interested in buying a home.  I disagree with this, and this chart demonstrates that there is pent up supply. 


Inventories are decreasing, but values of homes are declining.  This is counterintuitive, but not surprising if you think about it.  Seems to me there are a lot of sellers who have given up waiting for a recovery and just want out of their homes.   Babyboomers expect to retire at 65.  They might sell their home for a smaller one, which is just more downward pressure on demand. 


So if you were born in 1945, you are 64 years old this year....


If there are no policy changes to stabilize housing prices, we will see more decline in home values, worsening this recession.  The economy can't function if every property owner in the world is underwater. 



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#4) On February 25, 2009 at 2:04 PM, DemonDoug (31.03) wrote:

-1 rec for using the words "perk up."  you sound like a mouthpiece for the NAR or any one of a number of pompom waving cheerleaders on CNBC.

I completely agree with TDRH.  Everyone who is hosed should be left to be hosed... leave me (the renter taxpayer who didn't buy into that NAR crap) alone.  We'd have real price discovery very fast if it weren't for all this bailout mess.

A lot of inventory has been taken off the market because they are waiting for "better prices" or a turnaround in RE.

It is not going to happen.  We're about halfway down from top to where the bottom will eventually be, and it may go lower than that.  The only way to get housing prices to stabilize is for the Fed to jack up interest rates, tighten the credit markets, and force people to continue saving instead of speculating on worthless buildings no one will ever inhabit.

I'm with Mish and many on - higher real estate prices are BAD, not good.  If the median home price fell all the way to 50k, I think that would be the best thing ever for this country, and if it takes 10 years to get there, I'll be "perked up" right with ya deej.  In the meantime, stop using the NAR's data, and use a significantly less biased source:

The US Census Survey on Housing

The information is quarterly, not monthly, so you can't blog about it as often, but at the end of 2008, there were 1.2 million more vacant homes total as compared to the end of 2007.  And not just taken off the market, more homes for sale and rent too.

I don't know where the NAR gets their numbers, and I'm not sure where the data comes from for that "months of supply" chart from calculated risk, but my estimate is that it's closer to a 4 year supply, not a 10 month supply.

One of the things I like about ya deej is that you are honest, especially with your biases, and one of them being as a homeowner you want to see the value of your home at least be maintained or going up.  Sorry to be the bearer of bad news, but 1. The value of your home is going down, and 2. Your bias shines through way too much in this current post.

BTW I did see you used the US Census data on housing starts, next time just go the full monty and use them for all your data.

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#5) On February 26, 2009 at 10:04 AM, TMFDeej (98.37) wrote:

Doug, most people speak their book.  Just like I am speaking my book in not wanting the value of my home to fall even further you are doing so as a renter who wants them to continue to fall.

No one knows for certain what the solution to this problem is.  The massive wealth destruction and damage to banks' balance sheets that you want to happen could be painful enough to offset any benefit that would be derived from ultra low home prices for a long time. 

I agree that home prices have to continue to fall some.  Quite frankly, I'm a lot less outraged by the massive fall in home prices than the vast majority of home owners are.  I made a decision years ago and I am comfortable with the consequences.  The ideal solution to this problem is likely somewhere in the middle of the complete implosion of home values that you would like to see and them staying where they are.


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#6) On February 26, 2009 at 9:04 PM, tfirst (39.08) wrote:

I'm gonna say this one more time...the fed is our problem. The banking techniques practiced by the fed has been like a disease, infecting the banks downstream that look up to its mentor. When the fed creates credit by printing money to loan to member banks, we all know it creates inflation. This may be ok in the short term, but when those banks repay the loans, the fed has an obligation, to the American public, to shred the false money they have created. They haven't been doing that and we are feeling the effects of many years of abuse by our unelected fed members that answer to noone. The downstream banks think they can do the same and have, with the blessing of our legislators. I think this is the reason none of the so called experts can find a solution. What do you think will happen when China realizes how bad they've been ripped off. God help us..

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