While he has written about some of the elements in
the past, Mark Fleming neatly summed up the current state of housing's supply
and demand constraints in the latest edition of CoreLogic's Market Pulse. That issue, the company's chief economist
said, is one of the factors underlying the current faltering housing recovery
and contributing to what he calls the new housing normal.
First there is a pent-up supply of housing - that is
homes that might be but aren't available for sale. The shadow inventory, homes in the process of
foreclosure (some definitions include homes with the potential of foreclosure) has
worried economists since the start of the foreclosure crisis. While the fear has been that these homes,
once they become bank owned, might overwhelm the market they have instead come on
the market at a fairly measured pace as foreclosure time-lines stretched into
years and have provided a source of low-cost homes for both first-time buyers
and investors. The inventory is now
becoming concentrated in a few judicial foreclosure states and REO (bank-owned
homes) are available for sale.
What Fleming calls "the interest rate lockout" is a
second constraint on supply and can also be considered a second source of
shadow inventory. The wave of
refinancing as interest rates bottomed out has resulted in almost half of all
mortgaged homes having a mortgage rate under 4.5 percent. As rates rise these homeowners will have a
disincentive to sell and lose that rate.
The third source of pent-up supply is the large
numbers of homes that are underwater--or rather, under-equitied--with loan-to-value ratios of 81
percent or higher. While it doesn't require any special process such as a short sale to sell these homes, the lack of equity serves as disincentive for the owners to attempt selling in the first place, as it limits their financing options on their next home. This, of course, assumes that the prospective home-sellers don't have additional cash to bring to the table for their "move-up" purchase.
Fleming says that many of the causes of pent-up
supply are mirrored on the demand side.
Underwater houses are missing from the available supply of homes but
their owners are also absent on the demand side. Even if they manage to sell their existing
homes they have lost what has always been a significant source of the
downpayment on the next one. While
low-downpayment mortgages are still available they come at the price of FHA
loan guarantees or private mortgage insurance.
Tight underwriting is another constraint on demand. Few
loans are being originated for those with credit scores below 640 meaning that about
one-fourth of the traditional credit-eligible populations is having problems
accessing credit. Higher downpayment requirements (or the cost of the
alternative) also keeps buyers on the sidelines.
Institutional investors turned to the single family
market when prices and interest rates were low and rents were rising, shoring
up the market at the lowest point in the housing bust. Now those investors are pulling back from the
market, further lessening demand.
Finally, the decline of homeownership has led to an
increase in renters, particularly among the young although renting has
increased strongly in the pre-retirement age groups. The coming-of-age Millennial generation
should be providing first-time buyers but many in this generation either have
not formed their own households or are renting.
Fleming says the
combination of these factors has resulted in modestly less demand this year
compared to last. The decision to buy
and/or sell are purely financial decisions he says, but "even so, they could
continue to reduce turnover in the housing market for years to come. Welcome to the new housing normal."