Friday, January 16, 2009
More Evidence of Lumpiness in Housing Inventory
A while back, I took a look at the distribution of housing inventory across the U.S. and found great disparities. Some regions of the country show little oversupply; others are completely glutted. This lumpiness of the data makes the housing crisis more difficult than aggregate numbers might suggest. It is not clear that lowering of mortgage rates, aiding select homeowners in avoiding foreclosure, and similar measures will be sufficient to create the demand for years worth of housing inventory in overbuilt market segments (resort areas, beach condos) when consumers are pulling back from even modest retail purchases.
Indeed, there is some indication that much of the recent demand for homes has been fueled by speculators who purchase homes in foreclosure. Should these speculators find that the housing market remains weak beyond their projections, we could get a second wave of selling, as a "shadow inventory" of homes comes to market.
Someone recently told me that my own local housing market in Naperville, IL is in relatively good shape because there is only about one year of inventory for sale based on 2008 sales figures. If, however, we break down the inventory by price (see chart above), we again see evidence of lumpiness. There is little inventory problem at the lower end of the housing spectrum; speculation in that market had centered on the luxury end, where there is more than 3 years of inventory. At year end 2008, annual sales of homes above $1,200,000 in Naperville were 36, but 114 homes were on the market. Stated otherwise, about 3% of housing sales in that market have been above $1,200,000, but 15% of the inventory is priced at that level.
In my looks at other suburban communities, from Washington to Florida, I have seen similar lumpiness in inventory. The high-ends of the market, which was where the money was, generated the greatest overbuilding. In an environment in which aging baby boomers are downsizing, consumers are retrenching, and home values are falling, it is not at all clear that there is the demand to meet such supply, leaving builders and local banks at serious risk.