Thursday, August 16, 2012

Shadow Inventory and Housing

Mark Hanson has an interesting post on shadow-inventory and the housing market:
For years I have proclaimed that “no housing recovery will ever occur — or no dead-cat-bounce will reach “escape velocity” or become “durable” — unless the repeat buyer is leading the way.  This is because investors and first-timers are thin, volatile cohorts who have been known over history to leave the market literally, overnight.
Case in point, July Phoenix area home sales were down a whopper 22% MoM and 15% YoY to multi-year lows for July…demand “recoveries” are not supposed to come with that type of volatility. However, stimulus-driven short squeezes and dead-cat-bounces are.
The problem is that the mortgaged homeowner has always been the primary demand cohort. It’s not investors, first-timers or those who own their homes free and clear.  Rather, the mortgage-levered homeowner who tends to move every 6 to 8 years who provides most of the historic underlying support for macro housing.
This is a problem. Put simply, there are more houses today then there were five years ago but a full HALF of the primary demand cohort — repeat buyers — died due to negative equity, “effective” negative equity, poor credit or legacy HELOCs, all of which prevent sellers (repeat buyers) from paying a Realtor 6%, putting 10% to 20% down on a new purchase, and getting a mortgage for the remainder.  Put even more simply, housing “supply” has grown in the past 5 years and ready and able buyers have been cut in half.
I don't know if Mark's analysis is correct, but the stock-and-flow dynamics are critical when looking at supply and demand and therefore, ultimately, prices. I wish Mark would quantify to what degree the mortgaged homeowner is actually the primary demand cohort, and more importantly, whether they are the primary demand cohort on the margin (and therefore, the price-setter).


Blogger Steve Roth said...

"the stock-and-flow dynamics are critical when looking at supply and demand"

My problem: the economics profession, as far as I can tell, has barely even begun to theorize the notions of stock supply and flow supply, or their interelationships.

The only solid attempt I know of is Clower and Burshaw, from 1954. And it's only a first tentative effort.

I am admittedly untutored, but I'm pretty smart and I try hard and read a lot. And no matter how hard I work at it, I can't understand how the concepts "supply" and "demand" can be used effectively or even coherently until this issue is worked out. 'fraid it's beyond my abilities...

4:28 PM  
Blogger winterspeak said...

Hi Steve:

I could only see the first page of the jstor article.

Nevertheless, I think this is usually managed by saying that price is set at the margin, so it would be from the most marginal flow buyer and seller who set the clearing price.

3:56 PM  

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