Low Housing Inventory Is NOT A Sign of Housing Recovery

Posted by Jonathan Miller - Monday, July 9, 2012, 10:49 AM

I wrote “The Decline In Inventory Right Now is NOT a Good Sign” back in February, but there has been a more refined discussion about low inventory recently. Back then my orientation was more about the “robo-signing” scandal causing a drop in distressed listings as servicers held back supply – as well as the lack of confidence by sellers over whether they can achieve their price.

Stan Humphries, chief economist of Zillow has been a guest on my podcast and penned a great piece about it a few weeks ago called “The Connection Between Negative Equity, Inventory Shortage and Increasing Home Values: Why the Bottom Won’t Be as Boring as We Expected” tackling the impact of negative equity on inventory.

CoreLogic reported (via Nick Timiraos/WSJ) that the supply of homes for sale declines as negative equity increases.

David Rosenberg, chief economist as Gluskin-Sheff, and whom I had the pleasure of meeting with for dinner a few months ago, presented a great series of charts in his newsletter (via ZeroHedge).

It basically presents the idea that “upside-downers” ie those with negative equity, can’t list their homes for sale because they don’t have equity (or enough equity) for the next one.

Here’s the most compelling excerpt:

According to data cited by the USA Today, the supply backlog where over half of homeowners are “upside down” on their mortgage is at 4.7 months’; in areas where “upside down” borrowers make up less than 10% of the market, the listed inventory is closer to 8.3 months’ supply.

In other words, in markets with unusually tight inventory, prices are being “goosed” higher, not because the housing market is improving, but because there are fewer houses in the game. Low mortgage rates are artificially creating excess demand, with those buyers fighting over the slim pickings of sellers who can actually sell.

That, my friends, is NOT a housing recovery.

More visuals:

The Decline In Inventory Right Now is NOT a Good Sign [Matrix]
David Rosenberg Explains The Housing “Recovery” [Zero Hedge]
The Connection Between Negative Equity, Inventory Shortage and Increasing Home Values: Why the Bottom Won’t Be as Boring as We Expected [Zillow Real Estate Research]
Why Aren’t There More Homes for Sale? [WSJ Developments Blog/Nick Timiraos]