Pent-up supply

Pent-up supply
Commentary: Any hint of a housing rebound draws anxious sellers back

By MarketWatch
Last update: 11:16 a.m. EDT Aug. 25, 2008

CHICAGO (MarketWatch) – Nobody in their right mind would put a home up for sale in the market that exists in most parts of the country these days, nobody who wasn’t forced to out of job or personal circumstances, that is.

Declining home prices and intense selling competition over the last year have created a climate where folks who don’t have to move won’t contemplate the idea and those who do have to move shudder at the prospect. Throw in a credit crunch that grows worse by the day, limiting mortgage options, and you can see why staying put is replacing mobility as a hallmark of the American homeowner.

That’s why the news Monday from the National Association of Realtors that sales of existing homes rose 3.1% last month to a seasonally adjusted annual rate of 5.0 million – the highest level in five months – represents a bit of a double-edged sword. ****See Economic Report.]({AADC5D9E-73B8-449F-8C90-F2944431AA5F})

Sure, the pickup, however slight, is welcome. But any hint that the market may be turning around may also prove its short-term undoing, as sidelined sellers catch a whiff of early opportunity to get back in the game. And what the housing market does not need right now is more inventory.

July’s inventory of unsold homes on the market rose 3.9% to a record 4.67 million units, representing a supply of 11.2 months based on the current sales pace. A healthy inventory level is about half that, no more than a six-month supply, and at the height of the housing boom inventories were often at a two- or three-month supply.

It isn’t just anxious homeowners that could dump more supply on the market if they sensed better times ahead. Plenty of investors are holding units they would like to unload if they could – just take a look at the condo inventory, which jumped to a record 769,000 units in July as projects that started construction just as the housing bust was beginning continue to come online.
Home builders and developers have been working to curb inventory, holding back on housing starts and permits. See Economic Report.

But the bigger threat to the market is from the inventory of existing homes. Even if sales hold up, those inventories can be expected to climb in the coming months as more homeowners face financial difficulties that force them to put homes up for sale or fall into foreclosure, which will force their lenders to put their homes on market.

And since lenders do not like to hold property, they won’t hesitate to dump houses on the market as fast as they can – and since they’ve shown they are willing to write assets down to virtually nothing, they also won’t hesitate to cut prices even more.

You can see the inevitability of that downward spiral.

Steve Kerch, assistant managing editor/personal finance

Climbing inventory due to more homes being added rather than fewer homes being sold helps the inspection industry.

If I had my way, every home in America would be for sale if it lead to increased sales.

With the exception of the program which benefits by huge inventory, it is moslty sales that our industry is tied to, not inventory.

The rules of economics have not changed, any increase in supply must in the end lead to lower prices.

We are transitioning into another period when homes will be undervalued in relation to other investment vehicles and will once again be considered shelter only. I remember my father’s first house being purchased in the late 40’s for about $6.5K, he sold that house in the early 70’s for about $10K by the early 80’s the house was resold for over $100K. We are moving back once again to a time where real estate will under perform in relationship to other things. People recognize this and refuse to pay premium prices for something that appears to be depreciating in value.

Of course the biggest loser in all this is local government who will have to survive massive shortfalls in tax revenue without the recourse of the Fed’s who can print their way out of deflation. Personally I see nothing good in any of this, everyone loses.

Busier than ever!