The ‘Mortal Enemy’ of Home Prices: Excess Housing Inventory

According to Gary Shilling an Economist, housing prices are still set to fall another 20%.  He states this even though the most Economists believe that the housing market is on an upswing.  The main reason for his belief in the housing market is the excess inventory still out there.  As we learn with supply and demand, when the supply goes up beyond demand, prices drop.  And with banks still holding on to huge amounts of foreclosure inventory, when they get released it will cause the housing market to drop.

“Shadow inventory refers to the number of distressed homes that have not yet been listed by a realtor but are expected to hit the market soon; a number of the properties are in the process of foreclosure or are seriously delinquent or behind with loan payments.”  In fact I know of people who are currently delinquent on their homes well over a year and still living mortgage and rent free in them. 

The banks are doing this, because if the foreclose on those properties, then they have two choices, put them on the market and over inflate it, in order to sell them at a discount price, foreclose and let the property sit empty and let nature damage it. 

This is why Shilling believes this increase is just a head fake because of the over 1.5 million excess available properties out there.  “He says speculators and investors are snapping up homes and hoping to flip them as a profit but new home owners "are the foundation of the market" he notes.”  And even with mortgage rates at near all-time record lows, there just are not enough new home owners out there.


Dave Tufte said...

Owen: 64/100. You have a capitalization error (twice), an extra definite article, a word misuse, a missing conjunction and/or poor clause construction, inappropriate use of quotation marks in a compound quote, and replacement of a verb with a conjunction.

Also, I didn't take off for the following: 1) Shilling has a "belief about the housing market" not a "belief in the housing market", and 2) I believe you meant "new homeowners" not "new home owners".

Owen: you also need to add a title in the right spot, put that link in the text in the conventional way, and do something with that byline you included.

You state "... when the supply goes up beyond demand ...". This makes no sense. By design, they always touch somewhere. I think you mean when supply shifts the equilibrium price falls.

It probably isn't correct to worry that the release of foreclosed property will cause this market to drop. Banks have an interest in avoiding that. Inventories are large enough that this is the likely result, but it isn't a foregone conclusion. In fact, in large parts of the country they are selling foreclosed properties without prices dropping at all. Unfortunately, this isn't the story in our area. :(

In the end, I'm not quite sure what you mean by "just are not enough new home owners" out there. I think the concern is probably first time home buyers. This is because existing owners are usually both selling and buying, while first time buyers are just buying.

Zach said...

I do not think that home prices are going to have another drastic drop. I think they will continue to remain stagnant as the market continues to suffer from slow growth. If prices do drop again this would be another opportunity for more investors and first time home buyers to own a home.

When prices were lowest in the recent past great deals were everywhere and easy to find. However, now you have to dig to find bargains as good as the deals were in 2009 and 2010. I think this is a sign that the market is doing much better than it was a few years ago.

Dr. Tufte said...

Zach: 50/50.

Or it could be a sign of the adjustment time argument made for durables in Chapter 3 of your text. Perhaps everyone who would snap up a bargain did already. In this case, they won't be around to support the market this time.

Owen said...

New homeowners are those buying a house after either living with their parents, or renting. Many of those people purchasing homes this way are not first time homebuyers, I will one day purchase my third home, each time I have purchased a home I have moved from a rental situation, I am still a new homeowner.

Banks do have it in their best interest to hold onto properties and limit the supply. However, after years of holding onto properties, the value depreciates in the holders mind as now a sell of the property generates revenue, rather than holding onto inventory forever.
Supply can easily go beyond demand, it happens all of the time, but when it does your point comes in that the market corrects itself and prices fall. This is not instant though, so you can't say it stays on the line perfectly.
I have no argument for the errors in grammar, they are my fault, I should learn not to trust Word.

Dave Tufte said...

Owen: 41/50. You mean "on to" not "onto", "holder's" not "holders", and "sale" not "sell",

OK, so I see what you mean about new homeowners. But I wonder if there are enough people in your situation to make much difference?

Supply and demand are abstractions. When abstracting, it is important to delineate what is possible and what is not. I think when you say something like supply goes beyond demand, you're using the same words as in the abstractions, but you don't mean the same thing as the abstractions. In the post, you say "prices drop", and then try to justify that with the abstraction "supply goes up beyond demand". I think the abstraction you want is supply shifts right. But in the comment, your abstraction is different when you say "you can't say it stays on the line perfectly". Fair enough. Then there should be a reason why it is off the line, like, say, a psychological limit on the way people price their homes. I'd be happier if both abstractions were tied together better.

In general, I'm not worried about the specific situation in housing. But, specifically, I'm worried about stating the abstractions simply, clearly, and consistently. Abstract thinking is tough, and when explaining something I'm pushing you all towards making your explanation easier for the reader who has to follow the abstraction.

Dave Tufte said...

BTW: since Owen did the post, he doesn't need to do a comment in this Block. It's up to him if he wants the score for this comment applied in another Block.