Housing Inventory Build Worsens

Last week, we noted that the Housing Freefall Continues Unabated. Conversations with Real Estate Agents prior to the NYT story anticipated that column’s thesis that this has been one of the worst Springs — the peak real estate selling season — in decades.

The net result of this is that the inventory of unsold homes continues to build, taking the housing mess further away from its final resolution.

Today’s WSJ has the details: 

"Growing inventories of unsold homes continue to weigh on the U.S.
housing market, portending more downward pressure on prices, the latest
data show.

The number of homes listed for sale in 18 major U.S.
metropolitan areas at the end of May was up 5.1% from April, according
to figures compiled by ZipRealty Inc., a national real-estate
brokerage firm based in Emeryville, Calif. The data cover all listings
of single-family homes, condos and town houses on local
multiple-listing services in those areas.

The sizable increase is notable because, on a national
basis, inventories of listed homes have typically been little changed
in May during the past two decades, according to Credit Suisse Group. May is one of the peak home-selling months because families with children often aim to move during the summer vacation.

Some of the biggest inventory increases last month
came in the metro areas of Seattle, up 12% from April; San Francisco,
11%; Los Angeles, 10%; and Washington, D.C., 9%.

Inventories also are up sharply from a year earlier.
For the 15 cities for which year-earlier comparisons were available,
combined inventory was up 29% from May 2006."

As inventory continues to build, the effect on prices is inevitable. Even in the face of steady demand, economics 101 is that prices will fall. However, we seem to have diminishing  demand, even as inventory ramps higher. That’s a formula for prices that will fall more than just modestly.

As we noted way back in 2005, a 20 – 30% drop from the peak is hardly unthinkable.

Home_sale_price_reductionsThe impact of this is already showing up in various consumer sectors

And yet, some fools continue to insist that the housing slowdown is having zero impact on the broader economy. The best response to that silliness comes from Raymond James’ chief strategist, Jeff Saut:

"Now for those pundits that insist that real estate is not spilling over into the real economy, we ask the question, “Why has the Association of Home Appliance Manufacturers’ Index posted a roughly 10% decline in shipments?”

Or, “Why is Circuit City laying off 3,400 of its best sales personnel and attempting to hire maladroit sales people at a much reduced compensation package?”

Similarly, “Why is Citigroup cutting 15,000 financial-related jobs?” And, “Why is GMAC stating that its Residential Capital subsidiary is going to hurt profits?”

Inquiring minds want to know such things.

Moreover, if the problems in sub-prime mortgages are NOT spreading, why are sub-prime mortgage companies dropping like flies, why are companies like ACC Capital closing their “call centers,” and why are delinquencies rising not only in the Alt-A complex, but in prime portfolios as well?”  (emphasis added)

The answers to these queries are rather obvious: Housing is impacting the rest of the economy in a significant AND ongoing manner.

Further, its no coincidence that 1) housing prices are falling; 2) Mortgage Equity Withdrawals (MEW) are contracting; 3) Retail sales have softened notably.

Indeed, the broader risk to the economy is the impact of the real estate price declines on consumer sentiment. MEW has already declined from over $844 billion to well under $400 billion over the past 2 1/2 years. We still have the upcoming adjustable mortgages resets — and at considerably higher interest rates.

The final chapter in the impact of Real Estate on the broader economy has yet to be written . . .


There’s a full interactive graphic at the public section of WSJ online.
click for full chart


Graphic  courtesy of WSJ online



Rise in Home Inventory Continues to Hurt Prices
WSJ, June 6, 2007; Page D3

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What's been said:

Discussions found on the web:
  1. jmf commented on Jun 6

    via herb greenberg

    That’s borne out by what AutoNation (an) CEO Mike Jackson has been saying for several months: The slowdown in housing is having an impact on his business. “…The overall malaise, if you will, is people coming to terms with higher payments for their homes and not sure what their home worth is,” he said on his company’s earnings call in April.

    Last time I looked, automobiles were a big part of the economy and any slowdown there still causes its own ripples as the price of life continues to rise.


  2. Jay Weinstein commented on Jun 6

    Here is something I wrote to clients in April–

    “While I was clearly premature in holding too much cash of late, it seems clear to me that Wall Street is almost as deluded and loony as in the 1998-2002 period. The bull case is as follows: a) private equity firms will buy every public company, b) the housing recession won’t spread, and c) regardless of the economy, the Fed will save the day with interest rate cuts. Naturally, corporate earnings will be fine in virtually any scenario and will continue to grow at the double digit pace that is their divine right. As you may notice, this analysis suggests to buy stocks regardless of the environment.

    I don’t buy it. History is not a perfect guide, but I remember saving everyone a lot of money in 2002 by insisting that the tech stock blowup would ultimately affect the whole stock market, which was not the popular view at all. I cannot imagine that huge declines in housing prices will not have the same effect.”

    But it is a slow, slow process—much slower than a stock market kaboom. After all, you cannot look in your morning paper and see that your house dropped $10,000 in value yesterday.

    There are many non-consumer industries that are booming though, and whose fundamentals will remain good despite a consumer retrenchment. So I am not as bearish as 2001-2, but very cautious about new commitments.

  3. Greg0658 commented on Jun 6

    Inventory down late in the year for tax benefits – replaces spring buying to move the family during the summer?

  4. DenverKen commented on Jun 6

    Wall St seems remarkably unconcerned about any of this. Here are the 1 year changes in some homebuilder stocks. June 5, 2006 to June 5, 2007 closing prices:

    TOL…up 5%
    CTX…up 4%
    LEN…down 4%
    KBH…down 5%
    PHM…down 9%

    meanwhile book values keep falling and the p/e ratios, where there IS one, are skyrocketing

  5. apw commented on Jun 6

    Every time I see data like this, I think of something Bill Fleckenstein wrote a few months ago, which seems just as valid today:

    “I have received a number of queries from friends as to why the market at large seems not to care about the problems that exist. My best explanation is this: The stock market, which is normally thought of as a discounting mechanism, doesn’t work that way at the moment. For the better part of at least six months (and perhaps nine), it has traded more like a price-discovery market. (Think voting machine.) “Price discovery” is how commodities like wheat, corn, etc., trade — where a commodity just gets pushed from one price to another. The reaction is almost totally to price, although fundamentals are loosely correlated.”

    What do you think, Big Picture? Does the market discount anything these days? Are we missing something here?

  6. Greg0658 commented on Jun 6

    In this highly engineered robotic world – a new start company has a tall hill to climb to begin to compete.

    apw – Is that your price discovery point and why M&A may be good for business but bad for consumers in a tightening/expanding world of haves/have nots.

    Get ready bottom tier it’s time to downsize your expectations.

  7. jswede commented on Jun 6

    well put together post, Mr BP.

  8. jmf commented on Jun 6

    wait until this happens…

    Forced Unwind Example
    Assuming a hedge fund leveraged 4.0x (20% margin) were operating near or at maximum permissible leverage, the fund could be forced to sell as much as 25% of its assets in the event of an initial 5% price decline in the value of its assets.

    Any collective, downward pressure on prices in the market arising from the hedge fund unwinding or an increase in margin requirements from the prime brokers would magnify the total amount of assets the fund is forced to sell. For example, an increase in the prime broker’s margin from 20% to 25% on average would require a fund to deleverage as much as 40% to meet its margin calls and restore leverage to within acceptable limits.

    the entire piece from mish is a must read


  9. michael schumacher commented on Jun 6

    Did anyone notice the revision lower to the productivity numbers??

    This is the first revision lower to any of the numbers I can recall. it must be ok to put out bad numbers now since Bernanke has know telegraphed our economy as rebounding…..nevermind that we had no weakness and no consolidation period just from a “spft landing” to a “rebound”.

    Gotta love that…..

    Did they put Wolfowitz in charge over at commerce???…LOL


  10. Rich commented on Jun 6

    That’s why if the Fed raises rates they do so at their own peril.

  11. michael schumacher commented on Jun 6

    Fed raising rates at there own peril??

    Do elaborate as they pretty much have no other choice at this point..


  12. Associated Press commented on Jun 6

    Sector Snap: Rails Down on Freight News

    NEW YORK — Shares of the nation’s largest freight railroad operators traded lower on Wednesday, after an executive at eastern carrier Norfolk Southern Corp. reported that its freight volumes so far this year are down nearly 4 percent.

    Shares of Norfolk Southern fell $1.13 to $56.84 in midday trading, while shares of eastern rival CSX Corp. retreated 99 cents, or 2.2 percent, to $44.94. Shares of Union Pacific Corp., the nation’s largest railroad, gave up $1.58 to $119.40 and shares of its rival in the west, Burlington Northern Santa Fe Corp., fell $1.72 to $91.18.

    The activity came after Norfolk Southern Executive Vice President Don Seale told analysts earlier in the morning that economic headwinds continue to affect its freight volumes.

    Seale said in a Webcast he agreed with popular sentiment that says the U.S. economy currently lies “somewhere between resumed growth and recession.” He said freight volumes at Norfolk Southern so far this year are down nearly 4 percent.

    Railroad operators have experienced tremendous pricing power in recent quarters, driven by their competitive advantage over truckers.

    Norfolk Southern, for example, has witnessed 18 straight quarters of pricing gains, based on revenue per carload, and like some other railroads a fair piece of its business goes up for re-pricing this year.

    That is seen as a key reason why billionaire Warren Buffett’s company, Berkshire Hathaway Inc., recently took significant positions in three freight railroads, including Norfolk Southern.

    But slowdowns in the automotive and housing industries finally caught up with railroads this year and most operators reported softer volumes in the first quarter. Harsh weather also played a role, Seale said, and railroads also face tough comparisons to a brisk first half of 2006 that benefited from hurricane relief efforts.

  13. GerryL commented on Jun 6

    There is now way the Fed will raise interest rates unless they want a collapse in housing. The Fed is in a box. They are waiting to see which gets worse, housing or inflation.

  14. GerryL commented on Jun 6

    I meant “no way”

  15. michael schumacher commented on Jun 6


    If the fed lowers then you collapse the dollar further into oblivion. Correct me if I am wrong but do you not need dollars to purchase homes????

    only wat to go is up (for rates that is)


  16. GerryL commented on Jun 6


    I agree that cutting interest rates will hurt the dollar. Yet another reason I think the Fed is in a box.

    However, I dont think it will take more dollars to buy a house (at least in the short run).

  17. MAS (San Diego) commented on Jun 6

    Jay said:
    But it is a slow, slow process—much slower than a stock market kaboom. After all, you cannot look in your morning paper and see that your house dropped $10,000 in value yesterday.

    True, however if you have access to the MLS you can watch your neighbors do price reductions. I’ve been monitoring the prices of a gated community in Northeast San Diego.

    The price reductions in the last 30 days are significant.
    Glad I Sold My House Already Part 2

  18. jack commented on Jun 6

    What happened with Fred. No post from him doday. Is he alright?

  19. Brooklynguy commented on Jun 6

    Where is New York on the list? I find it a curious ommission…

  20. James Bednar commented on Jun 6

    Not curious at all. Ziprealty doesn’t report on the NYC area markets because they aren’t active there.


  21. Shawn H commented on Jun 7

    Given that the difference between prime and subprime is FICO, and as we know FICO is *EXTREMELY* easy to manipulate, what does that do to expectations on future defaults in prime mortgages?

    As the worthless FICO story gets more press, I fail to grasp why no one makes that connection. I guess another trillion dollars of bad mortgages is no worry. However, if the price-insensitive buyers go away (Brazil, Kuwait, others already unpegged, UAE next?) look out below.

  22. 8 commented on Jun 7

    Explain the manufacturing and manufacturing productivity numbers away, and I will buy your theory as it relates to the overall economy (not just sectors connected to housing).

  23. canis commented on Jun 7

    We can agree all we want about housing contagion spreading, but looking at April-> May increases in sales doesn’t get us there. Of course more homeowners wait ’til May to list houses than jump on the boat in April. (Have you seen a Seattle April? Not open house weather.) Not ’til the 3rd para. of the WSJ quote do we learn that that number is ALSO up compared to past averages, but even still, that is only nationally (vs. the graphic’s city break down.) I wouldn’t be surprised if SF listings increase 10% EVERY year from April to May. I don’t doubt the conclusion, and the macro data, but you really can’t get there from just the chart or the article…

  24. TKL commented on Jun 7

    Barry et al. — Various publications, probably including your blog, have charted how a plunge in housing activity has presaged recession on something like 6 out of 7 occasions since 1960 (the only exception being 1966, which wasn’t such great shakes either, considering that many use that year as the beginning of 16 fruitless years in the stock market). We are nevertheless told that there is no contagion this time, or that the effects will be limited to sectors directly related to housing (building supplies, mortgage companies, furnishings, etc.).

    Such a good track record would seem to deserve more respect, especially because of what the sale of a home represents: mobility of people and capital. Add up all those unsold homes and you have one hell of a lot of people who cannot proceed with their lives — cannot take a new job, accept a transfer, retire, move closer to (or further from) family, realize their dream of living in , or simply get their damn money out of the pit that 70% of us call home.

    What does it mean when a sign goes up saying “No return of equity for the next 3 years”? It is the essence of illiquidity — which is ironic, considering that liquidity has been the rallying cry for market optimists. In the big picture, it would be surprising if only housing-related sectors suffered from our collective inability to get our hands on our equity and do what we want with it.

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