New Housing Normal; Pent-up Supply and Demand

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While he has written about some of the elements in the past, Mark Fleming neatly summed up the current state of housing's supply and demand constraints in the latest edition of CoreLogic's Market Pulse.  That issue, the company's chief economist said, is one of the factors underlying the current faltering housing recovery and contributing to what he calls the new housing normal.

First there is a pent-up supply of housing - that is homes that might be but aren't available for sale.  The shadow inventory, homes in the process of foreclosure (some definitions include homes with the potential of foreclosure) has worried economists since the start of the foreclosure crisis.  While the fear has been that these homes, once they become bank owned, might overwhelm the market they have instead come on the market at a fairly measured pace as foreclosure time-lines stretched into years and have provided a source of low-cost homes for both first-time buyers and investors.  The inventory is now becoming concentrated in a few judicial foreclosure states and REO (bank-owned homes) are available for sale.

What Fleming calls "the interest rate lockout" is a second constraint on supply and can also be considered a second source of shadow inventory.  The wave of refinancing as interest rates bottomed out has resulted in almost half of all mortgaged homes having a mortgage rate under 4.5 percent.  As rates rise these homeowners will have a disincentive to sell and lose that rate.

The third source of pent-up supply is the large numbers of homes that are underwater--or rather, under-equitied--with loan-to-value ratios of 81 percent 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.

Fleming says that many of the causes of pent-up supply are mirrored on the demand side.  Underwater houses are missing from the available supply of homes but their owners are also absent on the demand side.  Even if they manage to sell their existing homes they have lost what has always been a significant source of the downpayment on the next one.  While low-downpayment mortgages are still available they come at the price of FHA loan guarantees or private mortgage insurance.

Tight underwriting is another constraint on demand. Few loans are being originated for those with credit scores below 640 meaning that about one-fourth of the traditional credit-eligible populations is having problems accessing credit. Higher downpayment requirements (or the cost of the alternative) also keeps buyers on the sidelines.

Institutional investors turned to the single family market when prices and interest rates were low and rents were rising, shoring up the market at the lowest point in the housing bust.  Now those investors are pulling back from the market, further lessening demand.

Finally, the decline of homeownership has led to an increase in renters, particularly among the young although renting has increased strongly in the pre-retirement age groups.  The coming-of-age Millennial generation should be providing first-time buyers but many in this generation either have not formed their own households or are renting.

Fleming says the combination of these factors has resulted in modestly less demand this year compared to last.  The decision to buy and/or sell are purely financial decisions he says, but "even so, they could continue to reduce turnover in the housing market for years to come.  Welcome to the new housing normal."

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New Normal housing; Supply and demand pent up

While he wrote about some of the elements in the past, Mark Fleming sums up the current state of constraints of supply and demand for housing in the latest edition of CoreLogic market pulse.  Who delivers, Chief Economist of the company said, is one of the factors that underlie the current flickering of repossession of a dwelling and contribute to what he calls the new normal housing.

First of all, there is a pent-up housing - supply homes that could be, but are not available for sale.  Inventory of the shadows, process of foreclosure houses (some definitions include the houses with the potential of foreclosure) has worried economists since the beginning of the foreclosure crisis.  Even if the fear is that these houses, once they become possessed, the Bank could overwhelm the market they came to the place on the market a fairly measured pace as foreclosure timelines stretched into years and provided a source of low-cost housing for first-time buyers and investors.  Inventory is now become concentrated in a few States of judicial foreclosure and REO (bank-owned houses) are available for sale.

What calls Fleming " locking in the interest rate" is a second constraint on supply and can also be considered a second source of the shadow inventory.  The wave of refinancing as interest bottomed out of a rate resulted in nearly half of the homes mortgaged with a mortgage rate of less than 4.5%.  As rates increase those owners will have a disincentive to sell and lose this rate.

The third source of supply pumped is the large number of houses that are under water - or rather, under-equitied - with loan-to-value ratio of 81 percent or more.  While it requires no special device such as a short sale to sell these homes, lack of fairness serves to discourage the owners trying to sell in the first place, that it limited financing options on their next home.  This, of course, assumes that the potential home-sellers have additional liquidity to bring to the table for their purchase of "move-up".

Fleming said that many of the causes of pent of food are mirrored on the demand side.  Underwater homes are absent from the supply of homes, but their owners are also absent from the demand side.  Even if they manage to sell their existing homes, they lost what has always been an important source of the downpayment on the following.  While the low-downpayment mortgages are still available, they come at the cost of guarantees of loans FHA or private mortgage insurance.

Tight is another constraint on request. Some loans being come for those who have less than 640 credit scores, which means that on a quarter of the populations eligible traditional credit has some problems accessing credit. Increase in expenditure of funds (or the cost of the solution) also keeps buyers on the sidelines.

Institutional investors has turned to the single family market when prices and interest rates were low and rents were up, support the market at the lowest point in the housing bust.  Now, these investors are pulling back from the market, further reduce demand.

Finally, the decline of the homeownership has resulted an increase in tenants, in particular among young people even if the rent increased sharply in retirement age groups.  The generation of coming-of-age Millennium should provide some first-time buyers, but many in this generation have not formed their own household or rent.

Fleming said that the combination of these factors has resulted in less modestly in demand this year than the last.  The decision to buy and sell are purely financial decisions, he said, but "Nevertheless, they could continue to reduce turnover in the market of housing for years to come.  Welcome to the new normal housing. »

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