Why is Housing Inventory so Darn Low ?

I’ve just finished a week-long tour of some of the big financial institutions in Dallas, San Francisco, and Los Angeles with a Wall Street research partner. These meetings always make me look deeply into the data because we’re faced with insightful questions from smart people and I always want to have insightful answers. I have a few blog posts bubbling as a result. Here’s the first.

This summer the defining characteristic of the US housing market is low inventory. The  Altos 10 and 20-city national composite data is a third fewer homes than last year and half of what was on the market at the ugliest points in recent memory.

Housing inventory June 2012Inventory of homes for sale in Los Angeles, San Francisco, and Dallas – The cities I toured last week. 90-day rolling average, single-family homes. Y-axis not zero scaled.

This observation is generally true around the country. Sales are up, prices are up aggressively (a good 10% year-to-date), and inventory is low.

This low inventory, coupled with rising demand, is pushing home prices upward. Demand isn’t the crazy, influencing factor here. Except for the most-well financed among us, it’s still not easy to get a loan. There’s plenty of economy weakness out there. So in the spring and summer of 2012, the housing market strength is a supply-side function.

The question is Why? Why, this year, are there so few properties available? Why, when we hear so much about the “Shadow Inventory” of homes with distressed mortgages, can’t we buy them? Why, when guys like economist A. Gary Shilling think this shadow inventory will cause homes prices to tank another 20% this year, are they climbing?

Conspiracy of Banks?

The intuition of many that I talk to is that it must have to do with the banks. The banks aren’t selling. They’re afraid of tanking the market. It’s the fault of the big bad banks. But my experience says that’s not the case. The banks are actively moving the stuff on their books. They’re getting better and better at identifying and accepting reasonable deals. They’re actually selling into this strength. As they should. They’re not taking low-ball deals, which they shouldn’t, because markets are generally rising.

Staying in the Shadows

Rather, what appears to be happening is that everyone else, the consumers, those underwater borrowers who make up the vast majority of the shadow inventory, are holding out. Think about the class of people who watched their home lose 40% of its value in 2008. Those that didn’t default have now seen pretty reasonable price appreciation. In most cases it’s not back to it’s peak, but there is light at the end of the tunnel. Now is not the time, theh thinking goes, for me to sell. If I was down $100,000 and simply by holding on, I’ve recovered a decent chunk of that, I keep holding. That shadow inventory is staying in the shadows.

Regular home sellers are holding back

So Joe Sixpack feels his house has recovered a bit. He’s also a bit disillusioned with real estate in general. If he hasn’t defaulted already, he’s less inclined to throw himself into the market now. Refinancings are up so strongly, that many are paying less on the same home. People are pretty happy I made it through this mess alive.

Low inventory is the order of the day. This is consumer America catching up on a few years’ worth of equity. [sigh of relief]

What’s next? When does it turn? Stay tuned for the next post in the series.

Nino Gaetano


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