Real Estate Inventory Still Building

One of the reasons I have not come to the conclusion that we are done with falling home sales and prices is the massive build up in new and existing homes for sale.

The most recent data shows inventory is continuing to rise.

Not only that, but the inventory build is occurring even as U.S. mortgage rates drop below year-ago levels

Homes for Sale as a percentage of Total Housing Units


The chart above, courtesy of Raymond James’ Jeff Saut, shows the inventory build up is not only still ongoing, its actually trending higher.

This chart makes clear why this cycle is potentially so much worse than the 1988 – 96 era, where prices were flat to negative for a decade. 

Prices have slipped, but not nearly enough to eliminate the inventory. This has lead the usually cheerleading folks over at the N.A.R. to yet again lower their forecast for 2007 existing-home sales for the seventh-straight month. The real estate agent trade group is now predicting a drop of 8.6 percent in home sales versus last year. And, they expect new-home sales will fall a whopping 24% to 801,000 this year, and to 741,000 next year.

Re_signsPrices have failed to come down enough to jump start more activity.
Sellers have been stubbornly sticking to their imagined top tick prices
of 2005.

Thus, Supply remains high, and if we
believe the NAR or OFHEO, prices have slipped only slightly. Econ 101 informs us that until prices fall
appreciably, the inventory situation will not improve.

There is a psychological component to all this: It very much reminds me of the investors who when having missed selling Amazon at $400 and Yahoo at $200 and EMC at $80 and Cisco at $60, refused to take 10% less. So they ended up riding the stocks all the way to multi year lows.

So they held onto stocks, hoping to sell again at higher prices, all the while prices fell.

One can imagine home sellers doing something similar. In their minds, their selling prices are "anchored" at the prices they imagined getting at the top.   

Oh, and the NAR only forecasts a price drop of "only" 1.7% this year. . .

Mortgage Problems to Dampen Home Sales in The Short Term
NAR September 11, 2007

Home Listings Show Modest August Rise
Total Rose 1.8% From Prior Month In 18 Metro Areas
WSJ, September 13, 2007; Page D3
(free version)

U.S. mortgage rates drop below year-ago levels
Amy Hoak
MarketWatch,  10:42 AM ET Sep 13, 2007

Realtors lower existing-home sales forecast
Associated Press
September 12, 2007,0,3541394.story

See also End of Boom For Housing Hits Title Firms

What's been said:

Discussions found on the web:
  1. johntron commented on Sep 13

    Too many small-time housing specs and flippers think that they’re above average and will survive the fray. As always, the first loss is the most certain.

    Speaking of cutting your losses (or lack thereof), it’ll be interesting to see how many qualified investors (supposedly smart money) will take advantage of the quarterly redemption window.

    Volatility awaits come September 20-30.

  2. shoeless commented on Sep 13

    As my first trading boss taught me:

    He said, “Don’t panic, but if you DO panic, be sure and panic first!”

    The second wave of panic from homesellers will be devastating.

  3. michael schumacher commented on Sep 13

    and you know that if by some magical re-distribution of the numbers if they can show even a small reduction in inventory…token at best in current environment…the market will be up by 500 pts in the blink of an eye.

    Thanks to the ever present “no NEW bad news is great news” mantra our media has adopted.


  4. Neal commented on Sep 13

    In normal times, housing and housing related expenditure accounts for up to 20% of the GDP. In these past few non-normal years, the percentage HAD to go up. Add in the kick from home equity-based purchases. Add in the “innovative financial products”. You now have the economy that was known as Goldilocks.

    Take away most if not all of the added factors, and back off on the “normal” housing related GDP factors due to over-supply and years of over-consumption.

    How could you not end up with a recession of epic proportions?

    Add in exogenous factors such as dollar collapse, deficits, lack of savings, increasing energy prices, etc., etc.,

    How could you not end up with a terminal depression?

  5. michael schumacher commented on Sep 13

    I’m just as depressed now as when McLaren were let off the hook for having our documents (i.e. stealing them) but not using them….

    Just like the options bullshit……”yes we did it, but we did’nt benefit from it”

    Ron Dennis needs to go…….I might be tempted back for a drive next year if that kid Lewis is banned along with his lying team…


  6. donna commented on Sep 13

    My next door neighbor here in the San Diego area bought in two years ago. He is investing $120K to remodel the house. He is also getting divorced. I just keep thinking, where is he getting the money, and does he KNOW he’s going to be underwater for 10+ years on this house? Not to mention what he’ll owe the wife in the divorce settlement….

    People are dumb…

  7. Whammer commented on Sep 13

    As someone who missed selling CSCO and SUNW and rode them to the bottom, I unfortunately know way too much about the psychology you’re talking about.

    I contend you don’t truly realize you’re being greedy until after you’ve done it and been burned.

  8. johntron commented on Sep 13


    if your neighbor is broke, then his wife will get nothing. :) divorced people have done crazier things.

    And speaking of scorched earth tactics…..does Boom Boom have the cajoles to point to WTIC and QQQQ, then say that the dangers to the economy are balanced with no commensurate rate cut?

    Like most others, I think likely scenario is 1/4 cut + balanced language re. inflation v. growth. But you never know.

  9. michael schumacher commented on Sep 13

    and the bleeding continues:

    HOG raises dividend by 20%

    Let’s saddle shareholders with MORE debt while our stock is at a 52 week low and we have just lowered guidance and actually removed any from ’09

    Yea that’s a wonderful strategy…….
    But look how they are keeping people from selling the stock all throughout the rest of the month….tricky little bastards……


  10. Steve commented on Sep 13

    FYI, Vegas inventory at 30K homes – 40% of them are VACANT!!!!

    What exactly does “cut your losses” mean to the average non-investor homeowner that is underwater with negative equity? Are foreclosure and bankruptcy the only path? Why not live in a fantasy world that your house is worth what you paid two years ago?

    P.S. I just picked up a foreclosed house for 33% less than it sold for in 2005. I’m starting to wonder if it was such a good bargain…

  11. carl commented on Sep 13

    Where do you get data on existing home sales prior to 1999? Seems like the current source (Natl Assoc of Realtors) only goes back to 99. Thanks.

  12. ELS commented on Sep 13

    Irvine Housing Blog ( has a pretty good analysis along these lines today – complete with copies of ads from 1997 showing homes in one new Irvine neighborhood going for $270K. Those homes are now being resold in the $1.2M range.

  13. jim commented on Sep 13

    Barry –
    there are so many vacant houses in my area that I’ve lost count, people that have just “walked away.”
    Isn’t logical that these are the same people that would have “bought up” in the next 3 – 5 years, and absorb all this housing inventory? I believe it will be 10 years before housing fully recovers.
    Also, all these people that walked away are now out of the market forever.

  14. Stuart commented on Sep 13

    “Greenspan says he knew about the questionable subprime lending tactics that gave loans to homebuyers and investors with low adjustable interest rates that could rise precipitously, but not the severe economic consequences they posed. “While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,” he tells Stahl. “I really didn’t get it until very late in 2005 and 2006.””

    I could just puke.

  15. Terry commented on Sep 13

    A perfect example is a guy The Orlando Sentinel profiled this week, he paid 212000 in o5 and had it listed for the last 6 months at 348000, his agent never received 1 call on the house, so he got a ne w agent and he is firm on his price of 340000.
    The classic part is he wants to sell because he doesen’t have a pool and his back yard isn’t big enough for one, so he said he needed the profit from a 340000 sale to buy a house with a pool.
    This guy is so delusional the only pool he will be in is the one in his mind.

  16. Barry M commented on Sep 13

    A CDC birth chart will show that the baby bust caused the 88-92 slump. Our present bust is caused by over building but the echo boom is comming to the market so how this shakes out will be very different than 88-92.
    My guess is that this bottom will be V shaped rather than bowl shaped.
    Many are expecting a slow no panic recovery.
    Others are expecting a panic with no end in sight.
    I look for a panic with a short buying window.

    very different from anything we have seen in housing in recent past.

  17. John commented on Sep 13

    So what would an anti-Greenspan do with the present situation? Keep FFR the same to contain inflation and allow a recession to purge the system of imbalances?

  18. me commented on Sep 13

    From Bloomberg and hour ago”

    “San Francisco Area House, Condo Sales Drop 25 Percent (Update2)

    By Daniel Taub

    Sept. 13 (Bloomberg) — San Francisco Bay Area house and condominium sales fell 25 percent last month to the lowest level in 15 years as stricter lending standards pushed some buyers out of the market, DataQuick Information Systems said.

    A total of 7,299 new and existing single-family homes and condominiums were sold in San Francisco, Santa Clara, Alameda and six other Northern California counties last month, down from 9,713 a year earlier, La Jolla, California-based DataQuick said today in a statement. Last month’s sales count was the lowest for an August since 1992, when 6,688 homes changed owners.”

    “Seven of the 10 biggest U.S. home-price drops during the second quarter were in California, including No. 1 Merced, where prices were down 8.7, according to the Office of Federal Housing Enterprise Oversight. Santa Barbara was No. 2, with an 8.1 percent drop, followed by Stockton, with a 7.2 percent decrease. In the prior five years, home values in the largest U.S. state almost doubled, the agency said.”

  19. Mr. Bubbles commented on Sep 13

    Anyone who things real estate is in the process of bottoming has his/her head in the sand. Real estate doesn’t bottom in 2 years. We’re just getting started.

    The Fed will certainly try to prop this pig up with rate cuts, but in the end nothing will prevent this credit bubble from unwinding. Mark it down.

  20. Tim commented on Sep 13

    “Prices have failed to come down enough to jump start more activity. Sellers have been stubbornly sticking to their imagined top tick prices of 2005”


    So they held onto stocks, hoping to sell again at higher prices, all the while prices fell.

    “One can imagine home sellers doing something similar. In their minds, their selling prices are “anchored” at the prices they imagined getting at the top. ”

    Ok. Now explain why the banks that own all of these brown lawn specials and know all of the above, won’t price them to move?

  21. Marcus Aurelius commented on Sep 13

    but the echo boom is comming to the market so how this shakes out will be very different than 88-92.

    Posted by: Barry M | Sep 13, 2007 3:47:49 PM


    Where will the “echo boomers” get the money for a home?

    Maybe the glut of unoccupied, bank-owned houses will devalue to the point that they return to an average price equivalent to 3x the prevailing average wage (within traditional loan limits). If this happens, those who didn’t walk away will become financial slaves to their overpriced homes. Those that did walk away will have a very tough time reentering the market.

    Then again, maybe inflation will make the value chasm between peak-bubble, for-purchase housing prices and the rest of the economy seem less lopsided – a 600K house is nothing if the prevailing average wage is $200K. If we inflate our way out, the rise in average income will lag far behind the rise in prices, and foreign investors will get burned.

    If inflation prevails, maybe we’ll see a return of the kind of wage and price controls we had under Nixon.

  22. techy2468 commented on Sep 13


    i am thinking along the same lines.

    * rate gets cut slowly…like 25bps every two months till we reach around 4-3.5%
    * dollars falls slowly till we reach something like (.5 to euro)
    * import inflation kicks in
    * wages increase
    * DEBT gets dicounted.
    * Manufacturing gets started back up.
    * Export starts booming (i have my doubts though about this, since i think europe is not going to let their currency appreciate against the dollar too much, it hurts their export)

    if rate does not get cut, we are going to go into recession (if data about consumer being in neck deep debt is right, along with falling employment)

    so why not cut rate??

    can some one explain in detail why falling dollar is bad for USA?

  23. echo boom commented on Sep 13

    yes, the echo boom will buy these houses after they pay off their 30,000 in college loan debt.

  24. x-man commented on Sep 13

    falling dollar means u.s. consumption will crater due to higher import prices (i.e. everything in your house ex food).

    falling dollar means falling yuan–possible float

    falling dollar means higher interest rates

    falling dollar means UST dumped by FCB.

    right now the fed is choosing between a recession and a bad recession/possible depresssion

  25. stormrunner commented on Sep 13

    I don’t think we’ll see a rate cut till a mainstream Financial Market or Geopolitical Event occurs. The FED is still building credibility with the markets and still positive on the year, where is the PAIN, the pain is not transparent it is buried in commercial paper, and debt instruments, till these problems actually cause a real correction, something greater than 10%, I believe the FED will resort to other measures, possably more insidious but definately less obvious than a substantial rate cut. The Member Banks that are the Spokes of the FED can take the losses while waiting to consolidate the banking industry at bargain prices. Just to illustrate a need for prudence they will likely allow a couple of large banks to fail. So far the fall out has been confined to Residential Mortgage Lenders, 155 to date according to Krowne, but no top teir banks and the indexes are recovering. Imagine the credibility problem if the FED tries and fails here. At least if they wait for implosion every little bit will be perceived to help. Intervening now if unsuccessful will be perceived as impotence.

  26. techy commented on Sep 13

    i kind of agree with you stormrunner..

    that fed right now better wait and watch, since looks like things are calming down a bit except in housing/mortgage.

  27. techy commented on Sep 13

    X – man.

    falling dollar means u.s. consumption will crater due to higher import prices (i.e. everything in your house ex food).
    *****thats the point, inflation means higher wages******
    falling dollar means falling yuan–possible float
    *****can you elaborate how this affects the economy***
    falling dollar means higher interest rates
    *****i am not very sure about that, afterall china,japan and india are still going to buy all treasuries/bonds etc****
    falling dollar means UST dumped by FCB.
    ****not by everyone and they cannot afford to do a sudden dump they will lose the value of their own holding***
    right now the fed is choosing between a recession and a bad recession/possible depresssion
    ****i agree with this****

  28. dave commented on Sep 13

    So why are so many people not making mortgage payments? After listening to Bush and congressional pandering, they are all waiting for the coming bail-out.

    So why arent banks marking their REO properties down to market? They remember the RTC took all the bad properties in the S&L crisis, and they are all waiting for the bail-out.

    So why are all the investment banks not marking their CDO, etc toxic waste to market? They have already been told they are too big to fail, and they are waiting for the bail-out.

    We still call it Capitalism, but it looks like something completely different.

  29. Estragon commented on Sep 13


    There are many different “dollars”, but I’ll come back to that.

    Probably the single biggest risk in a declining dollar is the loss of status of the USD as a reserve currency. This status gives the US two huge advantages:

    1. The US doesn’t have to maintain foreign currency reserves. It can pay for an excess of imports over exports for a very long time by exporting debt (printing USD).

    2. The US is able to earn more on foreign investments than foreign investors are able to earn on US investment (in aggregate) because the reserve status of the USD creates “artificial” demand for USD beyond that of trade and investment flows alone.

    A significantly declining USD is a defacto default on foreign debt, and the consequences of such a default are almost always dire. The reserve status of the USD is what stands in the way of such dire consequences, and if that status is threatened, the dire consequences become far more plausible. In particular, sovereign defaults tend to restrict access to fungible resources (oil, for example). Not just price increases, but actual access. Absent military action, sellers simply refuse to trade resources for defaulted currency.

    Returning to the concept of many “dollars”, the “dollar” is a hypothetical mix of cross rates (XR’s).

    A change in the value of a “dollar” affects different people in different ways, depending on which XR we’re talking about. If you’re in the hospital, the XR between dollars and health care is important. If you’re a Canadian auto worker, you don’t care about that XR, you care about the CAD/USD XR. The point is that you have winners and losers depending on which XR is moving which way.

    Think of the external USD XR from the perspective of two broad groups. One group actively manages XR’s via pegs, crawling pegs, baskets, or whatever. The second lets XR’s float. If the USD XR is broadly dropping, it drops against the floaters, and the fixers take action to maintain the peg.

    Here’s the rub from the US point of view.

    The fixers have to buy USD (debt) to maintain the peg, leading to a buildup of claims on future US production. The falling XR can’t fall relative to the fixers, so the outcome you’d normally expect (higher import prices = domestic replacements, lower export prices = gain in market share) doesn’t happen with respect to the US vs fixer countries. Instead, it happens disproportionately in the fixer countries vs the floater countries. It isn’t just the USD that’s dropping, its a USD block, including fixers, that’s dropping.

    Eventually, the fixer countries will find they can’t get resources from floater countries, and will decouple. Yes, they’ll take a hit on their USD reserves, but their national currency will appreciate and give them access to the floater resources they need. The US could print more USD to further diminish the value of the fixer’s foreign reserves, but by then it’s too late. Everyone has an ask on the USD, but there are no bids. The floaters aren’t taking a worthless currency any more. The US can print a currency nobody wants, but has no reserves of anything. The fixers will get access to the resources.

    The bottom line here is that a falling USD is the crack of trade. It’ll feel good for a while, but the aftermath could be much worse than you can imagine.

    I strongly believe that the US can adapt and prosper with a changing world, but if the addiction to the crack of competitive devaluation dulls the senses, I’m far less sanguine.

  30. stormrunner commented on Sep 13

    A poster over at Mish’s site left this.

    It eloborates on rule changes to the discount window and the ability of the FED to accept many instruments as collateral including MBS. Also note the removal of stigma related to borrowing in this manner.

    “In a situation in which the Fed exposed itself to significant quantities of iffy collateral and multiple institutions refused to honor their obligations, the Fed would be required to sell massive amounts of treasures in order to withdraw unbacked cash from the financial system, in the process drastically reducing the money supply and making an already precarious situation worse.”

    Can you say deflation !!

    If this were to occur Rate cuts would probably have less inflationary consequences and the DEBT —poooof.

  31. ron commented on Sep 13

    Besides the money issue will be the mobility factor. People have gotten use to quickly selling a home and moving around which will still be possible for the upper 2% but the majority will find it dificult to sell the current home for their asking price in a short sell timeline.
    The other problem is all the cash out refi activity the past 5 years has added to the home debt load leaving little or no equity after the sales for another house to buy.

  32. David Davenport commented on Sep 15

    falling dollar means u.s. consumption will crater due to higher import prices (i.e. everything in your house ex food)

    In particular, think of what will happen to the dollar-denominated price of oil.

  33. The Big Picture commented on Mar 27

    Read it here first: Illogical Home Sellers

    David Leonhardt has a terrific column in yesterday’s NYT that hits upon many of our favorite themes:Real Estate sellers (like other humans) are often irrational; Price Anchoring occurs with many investors; Here’s what we wrote back in September 2007:Pr…

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