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Housing Inventory Still Dramatically Oversupplied — Before You Add In The Foreclosures

December 27, 2009

The housing market remains oversupplied by 860,000 units when compared to a 10-year average inventory and the overhang represents a direct contradiction to the spirit of this week’s headlines describing new data from the National Association of Realtors.

Major media said that “Home Sales Exceed Forecasts” (Bloomberg) and “Sales Rise 7.4%” (Wall Street Journal) and “Sales of Existing Homes Surge” (MarketWatch) and the data providers described “Another Big Gain in Existing Home Sales” (National Association of Realtors) .

If you view the chart above you see supply exceeds long-term inventory averages by 32% — a significant hurdle despite a count of months-of-supply inventory which is just 12% above average and is practically normal (see below). The disconnect in the measure of excess between units for sale and months of supply suggests a logical problem with the data.

inventory months of sales NAR 1999 to 200911

If you were to depend upon the months-of-supply figure, you would estimate the market is very close to a long-term equilibrium. Look next at the unadjusted unit-sales figures — which are the only figures I look at because they are the real numbers.

unit sales NAR 1999 to 200911

The unit-sales numbers look less promising when you see that unadjusted sales figures show the last 12 months of activity is very similar to a bad year last year (see above). We are headed in to the doldrums this year with a special un-trainable child locked in the attic: A mammoth set of delinquent mortgages (see chart below where X = the set of inventory plus delinquent mortgages.

And 3.5 million units for sale is not nothing when it should be 2.7 million.

inventory (units) sales (units) NAR 1999 to 200911

With the most knowledgeable sources saying that the cure rate for delinquent mortgages has fallen in to the abyss of “rarely or never” (see below), you would be right to conclude that the federal government can only stop this hellfire by actually paying  the monthly bill for homeowners who are behind. Since they are funding every new mortgage, maybe it’s possible they can pay the mortgage too? Think of it as citizen-friendly quantitative easing.

mortgage performance cure rate

You can’t fight the Fed, but even Superman cannot win in the presence of kryptonite. Foreclosures are kryptonite. It’s possible the United States government can be beaten. The trend in mortgage payments says they will lose.

The inventory of existing homes for sale is not a source of intelligent confidence. Overall, I see a year of weak sales when the actual number of units sold is compared to the trend in the last 10 years.

This is especially true in light of radical and draconian intervention via Fannie, Freddie, FHA, the home-buyer tax credit, the purchase of mortgage-backed securities, and the equity credit line Fannie and Freddie depend upon for solvency. And a third of unit sales are distressed sales.

If the Fed and Treasury fail in their desperate mission in the housing market, every recent purchaser will be a victim of fraud. Even if the Fed and Treasury are successful, the hardball risk has not been disclosed to new buyers. These consumers don’t have slightest idea what it means when Fed and Treasury are pulling a dozen rabbits out of their hat to fund every new mortgage in the United States.

The Fed and Treasury are now perpetrators of a fraudulent scheme probably greater than any market manipulation previously known to the history of the world.

The first time homeowners dancing to their positive tune may very well be remembered as dead persons buying. Honestly I think even Angelo Mozilo, the legendary leader of the greatest originator of garbage mortgages in the bubble boom, would find this game too unfair and corrupt.

Look who is running the systemic criminal enterprise now.

superman dead on the ground

Michael David White is a mortgage broker in Chicago.

9 Comments
  1. Rachael permalink
    January 3, 2010 12:47 pm

    Very insightful article! Would love to read even more of your thoughts on income v. home value and the changes that need to come.

    What do you see as next big ‘wave’ coming besides high end real estate/commercial defaults?

    Wish more people with your insights were out there!

  2. December 28, 2009 10:33 pm

    It’s great that we have some buyers giving their prospective about the market. But the market can go down which is what is happening now and it will go up which is slowly occuring in some real estate markets.

    For those who really study or even remember their history, this type of market occured during the Carter and Reagan Administrations. There were problems although not as severe in the housing market. It was so bad, that interest rates in some areas approached 16-18%. Homes were sold with seller financing or various types of creative financing. The market bounced back. It will bounce back again because the market has better strategies for a comeback: low interest rates; lower price housing; better screening of potential buyers who can buy, and more futuristic lending once the banks are on better economic footing. The problem is that it will take a little more time due to the catastrophic financial mismanagement of the past U.S. Administration.

    • December 29, 2009 1:01 am

      No doubt about the financial mismanagement, but whose mismanagement? There’s a lot to go around. Thanks for your note. mdw

  3. HJ James permalink
    December 28, 2009 4:54 pm

    If the Fed and Treasury fail in their desperate mission in the housing market, every recent purchaser will be a victim of fraud. Even if the Fed and Treasury are successful, the hardball risk has not been disclosed to new buyers.

    Arghh, could you speak plain English? Are you referring to recent buyers being subjected to steep declines in real estate valuations?

    Prospective Chicago Buyer

    • December 28, 2009 10:27 pm

      Recent and current borrowers have a good chance of losing money on their real estate investment. It is much more likely than they are aware. The article attempted to describe some parts of that risk. Thanks for your comment. Please send your questions. mdw

  4. December 28, 2009 12:26 pm

    I HAVE LEARNED TO ALWAYS BUY LOW AND SELL HIGH (any asset).
    ALWAYS CHART THE PRICES OF THE ASSETS YOU INVEST IN.
    ALWAYS TURN OFF YOUR EMOTIONS & ANALYZE THE MARKET.
    ALWAYS TREAT CASH LIKE OXYGEN!!
    YOU CAN HOLD YOUR BREATH FOR SO LONG, BUT YOU STILL NEED A GOOD AMOUNT OF IT IN THE AIR OR FROM TANKS ( savings & liquid assets).
    Buy assets when the streets are bloody, and sell assets when everyone is happy!

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