Pending Home Sales index for December 2012 was released this morning. The data itself was mixed — down 4.3% from November (SA) but up 6.9% year over year. The index is a measure of housing contract activity, based on signed real estate contracts (existing single-family homes, condos and co-ops).

The spin from the NAR is always amusing, and this report is no different. How the NAR framed this, and what it might mean going forward, is rather interesting. NAR chief economist Lawrence Yun made the following statement: “The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis.1

Yun is onto something, but he doesn’t seem to really understand what it is. Supply limitation is an important factor, but why supply is limited is an even more important factor. Understanding the inputs into this directional vector is significant if we want to discern where housing may be heading this year. Said differently, the factors underlying the limited supply matter much more than the supply itself.

On the positive side:

- Fed has taken rates down to very low levels
- Employment has been improving (albeit slowly)
- 7 years have elapsed since the RE market peaked in 2006
- $25 billion dollars or so of Private Equity funds has been purchasing real estate for a “Rent-to-resell” model
- Confidence is coming back that the crisis is behind

On the negative side:

- Low rates will eventually rise, capping price appreciation
- Growth is inorganic, artificially spurred by the FOMC
- Wages have been flat
- Banks are still sitting with millions of REOs, waiting for price appreciation
- 20% of home owners with mortgages are underwater
- 20% of home owners with mortgages have little or no equity.

Those last two data points come from Jonathan Miller, who calls the current environment a “Pre-covery.”

“Sellers, when they sell, become buyers (or renters) and with >40% of mortgage holders having low or negative equity, they don’t qualify for the trade up. We have been so focused on negative equity that we’ve paid short shrift to the impact of low equity.

Not only don’t many sellers qualify – they simply aren’t under duress i.e. they haven’t lost their job, don’t need to move, etc. so what will they do when they realize they don’t qualify? Nothing.

There is the reason for what the NAR has correctly identified as the basis for falling prospective sales index: The lack of inventory.

But it is not the kind of shortfall they think it is. It is not “If we only had more houses, we could sell them.” Rather, its more of “The lack of equity is causing both a lack of homes for sale and a lack of potential new buyers.

What fixes these problems? More Household formation, increased employment — and increased wages. As those three go, so goes Housing.



See also:
Pending Home Sales Down in December but Remain on Uptrend
January 28, 2013

Falling Inventory Has Created a Housing “Pre-Covery,” not “Recovery” 
Jonathan Miller
Miller Samuel January 28, 2013   

A New Housing Boom? Don’t Count on It
NYT, January 26, 2013


1. Note that when home sales were falling, their emphasis was on monthly data, but let’s save that for another time.



click for larger graphic

Source: Calculated Risk

Category: Data Analysis, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Inventory and the Low Equity/No Equity Homeowner”

  1. louis says:

    What would really help is a bailout plan for underwater mortgages that gets rid of that problem for good.

    I know the feelings on that are extreme on both sides. It is just my opinion that it needs to be done.

    In my area I see tremendous spike in rentals and anemic inventory levels on the MLS. Standard sales are rare, like maybe 1 every 2 months.

    There is no one with power to solve the problem which will actually benefit the nation.

  2. DSS10 says:

    The new CFPB rules (if implemented) will limit far more than 40%. The new “qualified mortgage” (“QM”) requirements will probably take away another 10-15% of the market due to both “ability to pay” and down payment restrictions. I have a feeling that we will be in a sideways market once the FED stops its intervention in the mortgage securities market and that there will really never be a full recovery for those who were caught on the down side of the RE market. You know, a smart person might think that perhaps someone would look at both disclosure and transparency rules for real estate given their role in pumping up the market. Ultimately they are selling a financial instrument when they sell a home…..

  3. wally says:

    It is not “If we only had more houses, we could sell them.”

    Nevertheless, it is true. Some areas are now supply-constrained and bank-owned REO’s being held for a rising market are not a factor in those areas.

  4. Kelja says:

    ah, yes, a bail-out of all those underwater mortgage holders would solve the problem. Hey, we should bailout all those who already sucked out their inflated equity with HELOC and refinancing too! And the ones that have been sitting in their homes for years not paying the mortgage – squatting! Why not?

    How about the market solving the problem!!!! Yes, the pain would have been intense, but the crisis would have been behind us already. With government manipulation it will akin to Chinese water torture.


    BR: Now, it is the Fed driving the bus.

  5. A says:

    NAR is the same as a politician: any pronouncement needs to be followed with a fundamental question:
    “That’s very nice…now what is the truth ?”

  6. Super-Anon says:

    I think the housing pessimists may be discounting the effect of speculators in the short-term. In my market the local radio stations are now inundated with real estate buying shows and commercials. I think it may actually be worse than 2005.

    Of course this means the housing recovery will be artificial and this economic cycle will end in a crash just like the last two…

    But it could be a lonely place being a housing bear for the next 2-3 years.

  7. Ramstone says:

    What fixes these problems? More Household formation, increased employment — and increased wages. As those three go, so goes Housing.

    And vice versa. Expansion=virtuous circle, contraction vicious.

    Nice demographic cross-cut here

  8. louis says:

    Kelja I disagree, when they bailed out the banks (and AIG) without picking up the dead bodies of the homeower that’s when the water torture began.

    The enemy of your market is the banking cartel. The change must come from the inside of their power structure. If they would see that they could make money from restructuring maybe it could get done.

    How can the market solve negative equity? You need to make it disappear.

  9. DSS10 says:


    Speculation is just a transfer of risk. In DC (a “hot” market….) you are starting to see unfinished houses come up for sale along with a lot of “Texas Whorehouse” renovated houses (1-2Mil) sitting on the market for 100+ days.

  10. Most home owners with some value in their property find out pretty quickly they really have zero equity once the Agent’s fees for selling are presented. I’d like to see L. Yun address how the industry could reduce the cost of selling when anywhere from 3-6% of the home price is eaten up by commissions alone. How can it really cost as much as $30k in commissions alone to sell a $500,000 home? A change to a flat fee sales basis could increase some inventory…

    Kidding aside since Yun can’t address that issue without being kicked to the curb, don’t forget that HARP refinances have cemented millions into their negative equity homes with comfortable 3.75 – 4.50% or so interest rates. These properties normally would have been flushed through the foreclosure pipeline by now adding to available homes for sale at an affordable price.


  11. rj chicago says:

    Hey BR – I haven’t seen you refer to Mark Hanson Advisers of late – he has a good summary in his 1.4.13 post. I would suggest that those who are market bears like me read this to RE-affirm what has been happening in RE and what his prognosis is. In short I agree with Hanson on a number of fronts – the great unknown again is a job – a quality job and those who have the potential to move out of mom’s and dad’s basement.

  12. rj chicago

    Hanson does good work

    I am skeptical about the Housing recovery — he is downright bearish

  13. bear_in_mind says:

    I think we’re in the early, early stages of the national housing market getting back to some sense of equilibrium.

    With 40+ pct. of mortgaged properties with zero to negative equity, these potential sellers still face a bloodletting at transaction time. Some back-of-the-napkin examples:

    Zero equity
    $185K median existing home price w/ 6 pct in realtor transaction fees = $11,100 loss

    Negative 5 pct equity
    $185K median existing home price = $9,250 + $11,100 = $20,250 loss

    Negative 7.5 pct equity
    $185K median existing home price = $13,875 + $11,100 = $24,875 loss

    And these numbers barely scratch the surface for families who purchased in the peak years (2005-2007). Many of them are face an add’l 5-to-20 pct loss.

  14. DRR says:


    Fannie To Allow Walkaways by On-Time Borrowers: Mortgages

    “Non-delinquent borrowers with illness, job changes or other reasons they need to move will become eligible in March to apply for a so-called deed-in-lieu transaction that erases the shortfall between a property’s value and the size of its mortgage”

    From a personal prospective I see the cheap houses selling well but the McMansions for sale are just sitting. Lots of boomers trying to unload them, but to whom?

  15. Petey Wheatstraw says:

    The middle class must be re-enfranchised.

    THAT is the key — the ONLY key — to The Big Picture becoming brighter and more sustainable.

    As part of that larger picture scenario, wages must rise, and industries that are able to create more jobs must be encouraged to do so (that encouragement could take the form of tax breaks, but it seems we’ve already tried that, unsuccessfully. Maybe we should consider a large tax hit for letting employees go). We could also consider giving substantial tax breaks to the self-employed and “independent contractors” (formerly known as employees), as well as companies that allow telecommuting.

    Entropy in the consuming classes — housing and everything else — will be the death of us.

  16. wally says:

    DRR says,
    “I see the cheap houses selling well but the McMansions for sale are just sitting.”

    Exactly so. One of the problems, for years, has been that national homebuilders were really going down the wrong path with their product offerings… but people bought anyway. It has been obvious for a long time that an aging population, especially families whose kids have now moved out, were going to have difficulty selling those McMansions. This is a problem completely independent of the housing boom/bust. This is one of the reasons that I don’t believe the “REO overhang” hype is much of a concern. Many of those REOs simply are not desirable, competitive products in today’s market.
    Example? Well, people will pay more – much more – for location than for the house itself:

  17. overanout says:

    Low and no equity define the new normal in residential housing along with the reality that driving hours to work and back is not worth living hundreds of miles from major employment centers. New housing starts the real engine for significant growth is doing small upscale developments near major employment centers as large developments far from employment centers are high risk and not attractive while housing is not in a major up cycle.
    The lower sales growth both for new and used homes means more job cutting in the securities and banking industry ,home inspections,title searches, RE commissions, remodeling and even less tax revenue for cities and states.

  18. rd says:

    To make home sales pop you need to have household formation. However, we are seeing the percentage of 55+ people in the labor force rising while people entering the workforce in their 20s are unemployed or underemployed, so they are not forming many households or buying homes while the 55+ people already own a house (often underwater or low equity).

    If you are looking at retiring these days and you don’t have solid pension income, then it is a very nasty calculation to see what your income will be to live on in retirement. 2% dividends and 2% interest rates are not conducive to extracting the 5%-7% of their nest egg that you thought you would be able to live on annually, so you work for a few more years. Meanwhile, you are paying off the mortgage on your house and the debt you took on to put your kids through college while supporting your kids who have moved back into the house. Also, your local property tax and utility cost is increasing so that the mortgage interest rate reduction is only part of the cost equation for affordability.

    The housing crash, Fed-driven reduction in interest rates, high unemployment, and two stock market crashes in the past 12 years means that the average person is bewildered on what they are supposed to do to provide some certainty on their assets and income. They have been trying to do all of the things that they were told to do by the talking heads like the President (go shopping after 9/11), their brokers, their bankers, and the NAR but the outcome has been utter chaos in their personal finances.

    However, it is good to know that the NAR believes all of these issues are behind us. It makes me feel so much better.

  19. theexpertisin says:

    BR through his own words and through selected articles of others posted here remain factual, honest and spot on in this arena.

    Addressing the high number of “almost” underwater mortgages and/or home owner equity positions in their homes is but another excellent point to bring to the table.

    NAR, you suck.

  20. howardoark says:

    I live in California. We bought our house at the end of 1998. If I wanted to move up to a nicer house (say 20% better than the one I’m in, which I could easily afford) my property tax would, because of the idiotic Prop 13, go from $8,200 a year to $16,400. I could afford that, but since I’m planning to retire some day, I’m not willing to do it. So, I’m pretty well stuck in my house that some nice young couple with three kids would love to have.

  21. Hammer of Thor says:

    I’ve heard a few people mention recently that they are going to push to buy a house this year (first time) because they think we’ll see higher rates in 2014.

    It’s anecdotal and a small sample size, but it could be a theme for 2013.

  22. Calidony says:

    As a life long residential home buider I see the different housing bubble that is beginning to form. That bubble consists of todays “disposable homes”. The market for cheaper and cheaper (lower cost per SF) houses in most areas has builders cutting more corners and using inferior materials. Potential buyers are still falling prey to realtors, banks and mortgage companies that continue to promote home ownership as a worthwhile investment. When many of today’s buyers go to sell in 10 -15 years, their home are going to need major renovations or updating to make them marketable. Many homeowners will find themselves once again with little or no equity even if the market stabilizes or improves.

  23. BennyProfane says:

    So, they are going to be underwater very quickly, because the price of their home will drop with those rising rates. Hope they plan to stick around for ten years, at least.

  24. Angryman1 says:

    They are buying to buy. Thus, they cannot be underwater. People aren’t getting it.

  25. The median national price for Existing Homes was $177k in 2012, $11k more than the 2011 trough. Existing Home price is ending the year precisely on the long term Price/Family-Income trend line. In short, prices have resumed their secular uptrend and are presently at equilibrium.

    The more impressive story is that the median national price for New Homes was $244k, $27k above the 2009 trough and a mere $4k under the 2007 record. As mentioned last Summer, there is no doubt a new high will be set in 2013. Present prices are 5% ($11k) above the long term P/FI trend.

    Realty Bubble Monitor:

  26. The median national price for Existing Homes was $177k in 2012, $11k more than the 2011 trough. Existing Home price is ending the year precisely on the long term Price/Family-Income trend line. In short, prices have resumed their secular uptrend and are presently at equilibrium.

    The more impressive story is that the median national price for New Homes was $244k, $27k above the 2009 trough and a mere $4k under the 2007 record. As mentioned last Summer, there is no doubt a new high will be set in 2013. Present prices are 5% ($11k) above the long term P/FI trend.

    Realty Bubble Monitor:

  27. [...] by Bill McBride of Calculated Risk that put the recent housing recover in perspective. Here’s another good review from Barry Ritholtz of The Big Picture. A number of analysts have pointed out that one reason home [...]

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