New Housing Normal; Pent-up Supply and Demand

While he has written about some of the elements inrnthe past, Mark Fleming neatly summed up the current state of housing’s supplyrnand demand constraints in the latest edition of CoreLogic’s Market Pulse.  That issue, the company’s chief economistrnsaid, is one of the factors underlying the current faltering housing recoveryrnand contributing to what he calls the new housing normal.</p

First there is a pent-up supply of housing – that is<bhomes that might be but aren't available for sale.  The shadow inventory, homes in the process ofrnforeclosure (some definitions include homes with the potential of foreclosure) hasrnworried economists since the start of the foreclosure crisis.  While the fear has been that these homes,rnonce they become bank owned, might overwhelm the market they have instead come onrnthe market at a fairly measured pace as foreclosure time-lines stretched intornyears and have provided a source of low-cost homes for both first-time buyersrnand investors.  The inventory is nowrnbecoming concentrated in a few judicial foreclosure states and REO (bank-ownedrnhomes) are available for sale.</p

What Fleming calls “the interest rate lockout” is arnsecond constraint on supply and can also be considered a second source ofrnshadow inventory.  The wave ofrnrefinancing as interest rates bottomed out has resulted in almost half of allrnmortgaged homes having a mortgage rate under 4.5 percent.  As rates rise these homeowners will have arndisincentive to sell and lose that rate.</p

The third source of pent-up supply is the largernnumbers of homes that are underwater–or rather, under-equitied–with loan-to-value ratios of 81rnpercent or higher.  While it doesn’t require any special process such as a short sale to sell these homes, the lack of equity serves as disincentive for the owners to attempt selling in the first place, as it limits their financing options on their next home.  This, of course, assumes that the prospective home-sellers don’t have additional cash to bring to the table for their “move-up” purchase.</p

Fleming says that many of the causes of pent-uprnsupply are mirrored on the demand side. rnUnderwater houses are missing from the available supply of homes butrntheir owners are also absent on the demand side.  Even if they manage to sell their existingrnhomes they have lost what has always been a significant source of therndownpayment on the next one.  Whilernlow-downpayment mortgages are still available they come at the price of FHArnloan guarantees or private mortgage insurance.</p

Tight underwriting is another constraint on demand. Fewrnloans are being originated for those with credit scores below 640 meaning that aboutrnone-fourth of the traditional credit-eligible populations is having problemsrnaccessing credit. Higher downpayment requirements (or the cost of thernalternative) also keeps buyers on the sidelines.</p

Institutional investors turned to the single familyrnmarket when prices and interest rates were low and rents were rising, shoringrnup the market at the lowest point in the housing bust.  Now those investors are pulling back from thernmarket, further lessening demand.</p

Finally, the decline of homeownership has led to an<bincrease in renters, particularly among the young although renting hasrnincreased strongly in the pre-retirement age groups.  The coming-of-age Millennial generationrnshould be providing first-time buyers but many in this generation either havernnot formed their own households or are renting.</p<pFleming says therncombination of these factors has resulted in modestly less demand this yearrncompared to last.  The decision to buyrnand/or sell are purely financial decisions he says, but "even so, they couldrncontinue to reduce turnover in the housing market for years to come.  Welcome to the new housing normal."rn

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