Low Housing Inventory Lie Still Lives On

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For years we have heard a thesis that low inventory and tight lending are stalling  the U.S. housing market.  In the six years I have written on housing economics,  I have been battling  these two myths. Instead the true villains of the housing market are not low inventory and tight lending but demographics,  housing debt, lack of  strong wages, lack of liquid assets and poor affordability.

In an article last year I addressed one of these villains, housing debt.

“Housing Debt Still Haunts Some Move Up Buyers”

https://loganmohtashami.com/2015/10/19/housing-debt-still-haunts-some-move-up-buyers/

Briefly, if you use the national affordability index,  a home owner would need, conservatively, at least 28%-33% equity in their home in order to have the down payment and  transaction costs required to sell and move up to a bigger home.  The inability to sell and move up is one of the primary reasons the market is struggling to get to six months of inventory. The only time in this century the market has had greater than 6 months inventory was during the  housing bust & recession when the market was flooded with distressed properties.

The following two graphs show that currently housing inventory is actually higher than pre-recession levels when sales were highest.

 

Inventory LOGANSometimes a picture is more pure in telling the truth that anything written.Home-Sales-Existing

We had more annual housing  inventory from 2012-2016 than any period from 1999-2005 when interest rates and sales were lower.

Note: Without the the extra 15%-20% above historical trend cash buyers, existing home sales would be under 5 million every single month in this cycle post the 2010 home buyer tax credit.

months-supply-of-inventory-11211

 

Home loans haven’t been this cheap in more than a year.

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Interest rates have been under 5% since early 2011 and still the demand curve for both new and existing homes have been light.

Note: Every single housing cycle has had 2% + lower rates in each new cycle for over 30 years. For this trend to continue we would need to see 1.25% – 2.25% 30 year fix rates in the next cycle.

From Calculated Risk:
http://www.calculatedriskblog.com/2016/04/mba-refinance-applications-drive.html

As we can see we had much higher mortgage demand even with  lower inventory from 1999-2005. Of course some of this was due to fake demand from exotic loans. However, demographic economics were good for housing years 1996-2007.
MBAApr62016

Prices for existing homes have taken off over the last 20 years which means increased debt sizes are needed to service the loan.  This impacts the  would be buyers ability to move up because they are always chasing a higher priced home. Additionally, many first time home buyers are making down payments below 20%.  Therefore they are starting out with much less equity.  It will take them much longer to build the equity required to  move up.

From Doug Short:

http://www.advisorperspectives.com/dshort/updates/House-Price-Index
House-Price-Index

In real terms, therefore, home affordability is the problem not low  inventory.  We have more inventory now than during the housing bubble years but not the demand. Demographics, lack of exotic loans, high home prices and lack of liquid assets are the main reasons were are not selling homes.

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987.

6 thoughts

    1. Seattle inventory is lower than 1999-2005 for sure. However, the data I am showing is nationally, not just certain pockets of the nation where inventory was lower.

      We have had higher inventory, lower rates and a long economic expansion but we have had a lot less demand. Especially mortgage demand which is back to 1999 levels when rates were 4% higher

      1. Thanks Logan. I appreciate your knowledge in RE and your willingness to share your insight.

        A little off topic. What factors need to come into play that would cool some of the hotter markets like Seattle?

      2. Inventory is always the best answer for cooling down housing inflation. Part of the problem in high cost areas is that it’s hard to move up.

        Even if you do get some new construction build you need a natural supply of first time owners moving up to add that first starter home supply.

  1. Do you foresee home prices coming down in the future. It seems like everything is overprices in Los Angeles at the moment. Is there some kind of bubble or artificial inflationary aspect to what is going on?

    1. Prices in L.A. and in California are always hot.

      However, for any meaningful price declines you need more inventory to come on to the market place. Also, you need a job loss recession to create new distress homes to come onto to the market place.

      The home buyers in this cycle have been the best I have ever seen in 20 years. Unlike the last cycle where you had fake demand from exotic loans, this cycle has been clean.

      Prices in L.A. and California are very hot and we have seen that impact on sales demand. However, as long as inventory is under 6 months and their is no job loss recession, prices have legs to run or at worst case stays flattish.

      The economic cycle is old but there is no job loss economic profile outside of oil states.

      So, while there is more inventory to buy homes from 2012-2016 than 1999-2005 time frame, we are no where near the inventory levels of 2006-2011 where we saw big price declines. A big factor of those huge inventory years was the exotic debt bubble created in the housing market. This was a clear over investment thesis and hence why the housing sector took the brunt of the economic damage in the recession. We don’t have that type of economic profile in that sector. The oil sector was the clear over investment thesis and to a degree the commercial residential market right now is looking a bit too hot

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