At The Atlantic, Daniel Indiviglio is perhaps the last man in the country to become aware of banks’ looming inventory of foreclosed and soon-to-be-foreclosed homes. He’s gotten hold of a chart from Laurie Goodman of Amherst Securities, and is worried:
According to Goodman’s presentation, even though homes sold are only about 90,000 per month, inventory is growing by around 60,000 per month. So the homes sold each month would have to increase by two-thirds just to keep up with the growing inventory — not to begin to cut the 3.35 million homes in the shadows. To conjure up enough demand to meet 150,000 sales instead of just 90,000, home prices would almost certainly have to fall faster. [Emph. added]
Indiviglio is overreacting. First, while the inventory of homes owned (or soon to be owned) by banks has ballooned, other sources of housing supply have collapsed. The collapse will act to offset some of the banks’ overhang. The most obvious of these other sources is new homes. Since 2007, housing starts have plummeted. Last year, there were just 471,000 of them-the fewest since the Commerce Department started keeping records in 1959. By contrast, the typical run-rate of home starts in the 1990s and 2000s was more like 1.2 million per year. Since 2008, the homebuilding industry has trailed that rate by an aggregate of roughly 2.2 million units. That’s a lot of forgone supply. Take a look:
Meanwhile, incremental demand has evaporated too-but only for awhile. It will surely return with a bang. A bedrock fact in the homebuilding industry is that demand growth is driven by household formation. But thanks to the recession, there hasn’t been much of that lately. Just 357,000 households were formed last year, according to the Census Bureau, the fewest since 1947. It was the third year in a row that household formation came in well below its long-term, 1.2-million annual rate. By now, total pent-up formation comes to around 2.2 million households. Those people aren’t going to live with their parents forever.
Nor is net in-migration to the U.S. from other countries, which has been falling for years as the economy has slowed, apt to stay depressed indefinitely. As the economy and job prospects here improve, net immigration will rise-which will create further demand for housing.
You’ll get no argument from me that the banks’ shadow inventory constitutes a huge challenge to the housing market. Things won’t get back to normal until all those properties have worked their way through the system. But if you only look at banks’ housing inventory, shadow and otherwise, to figure out where prices are headed, and ignore other big shifts going on in the market, you’re apt to come up with too gloomy a conclusion. Rather, look at all the factors that are driving supply and demand. Housing starts and the rate of household formation are hugely important. Recent trends for both go a long way to offset the huge inventory of homes held by the banks.
What do you think? Let me know!