Upside Down Home Equity Positions Now Driving Housing Market

Econintersect:  News of low inventories being good for the market continue to grow.  Most imply it is good news. One of the loudest voices comes from Lawrence Yun, NAR chief economist who said:

“The general downtrend in both listed and shadow inventory has shifted from a buyers’ market to one that is much more balanced, but in some areas it has become a seller’s market.”

CoreLogic’s MarketPulse report stated:

“……. REOs has slowed over the last 18 months, negative equity has become a positive force in real estate markets by restricting supply in the face of increasing demand“.

While the rapid decline in month’s supply is typically good news because it indicates a better balance between demand and supply, this decline is occurring less because of an increase in sales and more because of a drop in unsold inventory as a result of negative equity.  Negative equity is typically a demand-side obstacle to sales and refinances, but currently is also restricting the supply of homes for sale.  Analysis of the 50 largest markets reveals the metropolitan areas with the lowest levels of months’ supply also have the higher shares of negative equity.  Markets with negative equity share of 50% or more have an average months’ supply of 4.7 months, compared to 8.3 months supply for markets with less than 10% negative equity share.  The presence of negative equity not only drives foreclosures, reduces the availability of purchase down payments and impedes refinances, but also restricts the ability of owner to list their homes for sale as the demand side of the market improves.

CoreLogic also notes while home sales are up 13% year-over-years, distressed sales make up a large but decreasing share – and notes:

While home sales are strong, days on market are being kept high partly by new listings entering the market and partly by homes sitting in the active supply and driving  up the overall days on the market.  The number of days on the market for both active and sold listings remains stubbornly high.  The days on market for active listings remains stuck at 172 days, and the days on market for sold listings rose to 139 days in April – back to February 2011 levels.

Read CoreLogic’s MarketPulse report in full.

There is another view of why inventories are coming down from Calculated Risk.  That argument is that inventories are coming down at least partly because of price expectations.  With both buyers and sellers starting to believe prices will rise in the future the behavior of both is changing.  According to the price expectations theory, buyers are more anxious to buy and sellers are willing to wait to put their house on the market.

There are still other views about the future of housing prices.  Some feel they still have a way to fall.  Two of those are real estate market analyst Keith Jurow and real estate and mortgage professional Michael David White.  White still points to the shadow inventory comprised delinquent mortgages which have not yet entered foreclosure or, if in the process, have not completed takeover by the lender.  While the rate of foreclosure processing has slowed down White says there are still up to 6.7 million more homes to complete the process.

Jurow has been tracking price per square foot for a large number of markets and finds that year-over-year declines in that metric are frequently double digits, even for markets where the sales price data per housing unit shows little decline or year-over-year gains.  Jurow says the price per square foot data is telling the true story of the continuing housing decline and there is a lot more to come.

Steven Hansen and John Lounsbury

Sources:

• CoreLogic

• Housing Inventory and Price (Calculated Risk, 6 June 2012)

• Keith Jurow:  Prepare For The Coming Housing Collapse (Keith Jurow, Business Insider, 30 May 2012)

• Housing Story (Michael David White website)