It’s Just A Matter Of When
Readers suggested a topic on housing inventory. “I would like to see a topic on how much empty inventory we will end up with and what’s going to happen to it. Locally, builders are still building or trying to build. I’m in the DC area are the builders may have slowed down but they haven’t stopped. They’re still trying to build houses, condos, and office space. We have no need for more of any of that. Lots of office space or condos are sitting empty right now, but builders have submitted plans to build more condos and offices and tear down older office buildings to make larger office buildings. Some of the builders plans have stalled because of people complaining about various things like transportation issues but the builders are continuing to overbuild.”
“What’s going to happen to all this inventory? The answer is not that it will get used when the economy turns around. There is simply too much, period, and the builders are just adding to trying to add to the glut.”
“At the rate the builders are going, they will be building 20 floor condo towers in Wyoming in 2020. By 2030 they will be building condo towers in Northern Alaska, the Canadian Arctic, Siberia, and other remote places such as the Atacama desert and the Australian Outback. By 2050 they will be building condo towers in Antarctica. By 2060 they will be building condo towers on the ocean floor and/or moon. This has to fall apart at some point.”
A reply, “All-cash Asian, Australian, Canadian and European investors?”
Another, “Low-cost, high-density, and assisted-living/senior housing?”
One said, “The above situation reminds me of that ‘Ghost Towers of Bangkok’ video I saw a few years ago. It showed never-occupied office and apartment towers that were built before the Asian currency crisis of the late 1990s.”
The Wall Street Journal. “Friday brought a disappointing statistic: The National Association of Realtors’ seasonally adjusted index for pending sales of existing homes plunged 11.6% on a monthly basis to 81.9, the industry group said. As we report, the index, which tracks agreements to purchase homes, had increased the two previous months. A reading of 100 refers to the level of sales in 2001. The reading indicates more pain lies ahead.”
“Adrian Miller, senior VP, Miller Tabak: ‘Sales will continue to underwhelm at best and be outright horrible at worst as the decline in prices remains unabated. As long as we have a supply overhang of 6.5 months of new homes, 9.2 months of existing homes and an estimated 3.87 million of homes as part of the so called ’shadow inventory’ tied to foreclosures, home prices have no catalyst to begin to improve.”
“Daniel Oppenheim, analyst, Credit Suisse: ‘They key is that weak sales at the end of the spring selling season will likely lead to even further pricing pressure in the coming months, which in turn will pressure homebuilders to cut prices, or lose more sales.’”
“Adam Rudiger, analyst, Wells Fargo: ‘Overall, we believe this is just one more data point, on top of a multitude of others, that the housing market remains weak (both in the existing and new market) and that 2011 has not yet been the turning point for which some might have hoped.’”
The Arizona Republic. “Metro Phoenix has a “shadow inventory” of nearly 100,000 homes. These homes are either in foreclosure or the owners are behind on their mortgage payments, signaling that the houses could eventually join the supply of properties offered by lenders for sale at a deep discount. Analysts and investors have warily eyed the tough-to-measure shadow inventory since last year, when worries arose that banks were delaying foreclosures and holding onto large numbers of homes after foreclosing.”
“New data from California-based John Burns Real Estate Consulting, one of the nation’s leading housing researchers, puts the number of homes in the Phoenix area’s shadow inventory at about 92,000, the size of a small Valley suburb. But that number, which includes Pinal County, isn’t alarming housing analysts. That’s because the rate of sales is as important as the raw number of homes. If sales are brisk, the homes are snapped up quickly, meaning they won’t lead to lower prices.”
“Other markets racked by the housing downturn since 2007, including Las Vegas, Orlando and Sacramento, are in worse shape - sometimes much worse. Based on historical rates of home sales, the Valley’s inventory would clear out much faster than other cities’. ‘(Metro) Phoenix’s shadow-inventory figure may look scary, but the area is in much better shape than other markets,’ said Tim Sullivan, a principal with Burns Real Estate. ‘Foreclosure homes are selling and selling fast in Phoenix, which makes a big difference.’”
“Homes are selling at foreclosure auctions at record-setting paces, with more than 1,300 sold in Maricopa County last month. The number of foreclosure and normal resale homes on the Arizona Multiple Listing Service is a five-month supply, based on the long-term rate of sales. These homes, because they’re already listed, aren’t part of the shadow inventory.”
“So, Phoenix’s combined supply of homes, including shadow inventory and current inventory, should take 17 months to sell. Other cities with high foreclosure rates all have higher levels of total supply. Las Vegas has a 21-month combined supply, according to Burns.”
From Cincinnati.com. “Crazy deals are roiling the local housing market, turning the usually busy spring home-buying and selling season upside down. Michelle Greene bought a foreclosed home in Covington for $30,100 late last year, and it’s worth $80,000 today. Laura Schatz is thrilled to pay just $87,000 for a Pleasant Ridge fixer-upper, despite months of uncertainty on when the deal will close. And Jeff Bardua of Independence is just glad to finally sell the house he’s been trying to unload for a year, even at a $42,000 loss.”
“Realtors say they’ve never seen the local market so bloated with distressed sales - with foreclosures, properties owned by the bank or homes in which the sellers are in line to take a loss. Some houses will go for as much as 40 percent discounts. Median sale prices are at their lowest in years: Down 24 percent since 2006 to $106,000 in Southwest Ohio; off 6 percent to $126,000 in Northern Kentucky. So far this year, nearly one of every two homes sold in Southwest Ohio and one of every three in Northern Kentucky have been distressed sales.”
“‘It’s probably going to take three to five years for things to get sorted out,’ says John Glascock, economist and director of the University of Cincinnati’s Real Estate Center.”
“No one is willing to predict when the glut of distressed housing will be erased, giving the market the giant lift it needs. More than 20 percent of mortgage holders in Ohio and nearly 9 percent in Kentucky now owe more on their homes than their properties are worth. That imbalance, combined with high job losses, has led to the mounting inventory of distressed properties.”
“”The good news is that this inventory is being gobbled up, and it has to sell off in order for the market to continue to stabilize,’ says Pete Kopf, president of the Cincinnati Area Board of Realtors. The bad news? ‘More foreclosures are coming,’ Kopf says. ‘It’s just a matter of when.’”
“In Covington, Greene and her husband have become new landlords with the property they bought for $30,100 in October. Since then, they’ve spent $8,000 to install new central air, replace carpet, upgrade the kitchen and fix plumbing problems. ‘We had it rented in four days to a family that signed a year-long lease,’ Greene says. ‘It had just been sitting vacant before we bought it.’”
“In Pleasant Ridge, Schatz has been trying to negotiate a time-consuming and complicated “short sale” with Chase Bank for the home she wants to buy. Schatz says she’s not sure what the seller owes the bank, but her initial offer of $85,000 required the lender’s approval. Just after receiving a counter offer from Chase this month for $87,000, Schatz learned that the house had been broken into and all of its copper piping removed.”
“Schatz says the damage could have been avoided. ‘If the bank could move things more quickly, I could have already taken ownership of the house and prevented this from happening,’ she says.”
“For Bardua, keeping up with his monthly mortgage of $900 became out of the question after he lost his job last year. When his lender declined to rework his mortgage, he turned instead to pursue a short sale. Although he still owed $132,000 for his home on five acres, he listed the house for $90,000. In December, Bardua received an offer for $87,000 - roughly $45,000 less than what he owed.”
“Five months later, Bardua’s lender, Bank of America, accepted the buyer’s offer. ‘It was a long haul,’ he says. ‘It was a relief, but I still feel like my freedom is gone. I’ve worked for all these years to pay my mortgage, and then I got into a bind.’”
“At the end of last year, major lenders including Bank of America, JPMorgan Chase and GMAC put the brakes on filing foreclosures while they scanned over potentially flawed paperwork. That work has since resumed, and the foreclosures are moving ahead. ‘Some of the banks indicated that they were signing up to 10,000 foreclosures a month, which begs the question, ‘What kind of backlog is out there?’ says Realtor Rebecca Weber. ‘It would be a disaster if they released all of that inventory at the same time.’”
“It would be a disaster if they released all of that inventory at the same time.”
No it wouldn’t.
What would happen if they did?
Affordability would bust out all over in June.
The market would clear and it would be behind us…The lenders would lose their a$$ meaning that the stock price would be severely hurt…So what…Its better than this torturous slow bleed that we are going through…
How would the FDIC handle the bank failures?
Raise the Insurance cost on the remaining banks left standing…
“How would the FDIC handle the bank failures?”
Issue bonds to cover the cost of deposit insurance claims — same as the RTC did in the wake of the collapse of the FSLIC.
“Issue bonds to cover the cost of deposit insurance claims ”
Oh. Kick the can down the road with borrowed money. I guess there’s nothing that can’t solve.
“Kick the can down the road with borrowed money. I guess there’s nothing that can’t solve.”
What’s your superior alternative? Or were you just ranting…
“What’s your superior alternative? Or were you just ranting…”
I was looking for something superior to (ie cheaper than) extend and pretend. I don’t think we’ve found it yet.
“I don’t think we’ve found it yet.”
Really? So you are on board with the plan to drain the Treasury in order to fund ongoing zombie GSE losses in the hundreds of billions of dollars?
I simply refuse to believe that putting a wrap on the housing collapse sooner would not be cheaper than this ongoing debacle, even if it requires issuing new debt to pay for the mess. With interest rates at generational lows, now would seem to be an ideal time to settle matters.
“I simply refuse to believe ”
That doesn’t matter. What matters is letting the mortgages amortize, and keeping housing- and our economy- from entering a deflationary death spiral.
“…from entering a deflationary death spiral.”
Said like a true believer in the Bernanke deflation bogeyman…
I don’t see much harm in borrowing money to back up FDIC accounts. How much cash can people possibly have in their checking accounts at these failed banks?
“Said like a true believer in the Bernanke deflation bogeyman…”
Those who don’t know history…
How much cash can people possibly have in their checking accounts at these failed banks?
I assume you realize that in a larger crash there would be many more banks failing.
wikipedia
As of June 30, 2008, the [FDIC] insured banks held approximately $7,025 billion in total deposits, though not all of those are insured.
“Those who don’t know history…”
Of what history do you speak?
I can point to the recent example of Japan: After 20 years of deflation, plus a devastating tsunami to boot, their economy is bruised and battered, but still chugging along.
The U.S. also endured many episodes of inflation and deflation back in the 1800s and managed to extricate itself each time. Only after the Fed showed up (in 1913) did the U.S. economy become mired in a depression that seemingly would never end. Perhaps the factor that mattered in the 1930s Depression was the very establishment of the Fed, followed by too much easy money during the Roaring 20s (similar to the Roaring 90s easy money episode). Deflation may have merely been a symptom, not the root cause. You can’t rerun history in order to determine how the 1930s would have turned out without the Fed in the picture.
The roaring 90’s was fueled by the Internet jobs and money gained from labor, not so much from credit. Those who invested, and lost, in the Internet bubble lost cash. And those IPO companies were allowed to fail.
It was the roaring 00’s that did us in, when people borrowed for everything from houses to college educations to tax cuts for the rich to wars to Escalades (since cash-out refi was just more borrowing.)
“Of what history do you speak? ”
I speak of the Great Depression. A worldwide decade-long deflationary spiral that didn’t end until the massive government spending of WW2.
“Only after the Fed showed up (in 1913) did the U.S. economy become mired in a depression that seemingly would never end.”
wikipedia
“In the United States, economists typically refer to the Long Depression as the Depression of 1873–79, kicked off by the Panic of 1873, and followed by the Depression of 1893, book-ending the entire period of the wider Long Depression
“At the time, the episode was labeled the Great Depression, and held that title until the Great Depression of the 1930s.
“At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression’s 43 months of contraction.”
you can point to the recent example of Japan: After 20 years of deflation, plus a devastating tsunami to boot, their economy is bruised and battered, but still chugging along.
Funny you mention that this morning Professor:
Dollar And Yen Fall - Moody’s Warns Of Japan Downgrade & UN Warns of Risk Of “Collapse” Of Dollar (ZH)
I’m surprised to read you believe that picture of a “chugging”economy is accomplished with anything but smoke and mirrors. There’s lots of gallows humor to be found online questioning what exactly would have to happen before “they” would allow it to be reflected in the markets.
“The market would clear and it would be behind us…”
Would it though? As mentioned, there are simply too many houses in absolute terms, as in more houses than households. With the love affair with second houses fading, too much inventory could stall the market clearing for an extended period.
I’d still rather see the inventory for sale so the market can decide what to do with it however long it takes, and give further incentive for the builders to slow down or stop.
And that’s the problem, Al. There are simply too many houses, too many condos, and too much office space. (and probably too much retail space too). The builders are just making the problem worse. They are building homes and offices that no one needs.
The problem isn’t just the shadow inventory. It’s the shadow inventory plus the “glut inventory” that the builders are now building.
“As mentioned, there are simply too many houses in absolute terms, as in more houses than households.”
That wasn’t a problem back in 2005, when everyone seemed interested in owning two or more houses; why would it be a problem now, if prices were allowed to drop to market-clearing levels?
Affordable bank stocks would represent a great investing opportunity, especially if failed megabanks were carved up into smaller, more economically efficient, less systemically-risky pieces.
I’m sticking with my two and a half lost generations prediction; last 1/2 of Gen X, Gen Y and for sure Gen iPod/curse at the grocery store/tattoo.
Delay is king.
“What’s going to happen to all this inventory? The answer is not that it will get used when the economy turns around. There is simply too much, period, and the builders are just adding to trying to add to the glut.”
You’ll see developments, or sections of developments, being plowed under, turned into “nature” preserves, with marble statues of Geithner, Paulson, Bernanke et al.
Isn’t this going to be a natural outcome of so many new “virtual” companies? There is not much need for a lot of office space.
The amount of mobile work is increasing significantly. And yet I am not a great one for time management and sitting in my $1500 Gunlocke chair.
Yes I am a chair fanatic Gunlocke make almost all the court type chairs judges lawyers heavy sold almost indestructible…but they cost.
Last one i paid over $200 on eBay and had to drive past Phily to get it. Get me a chair like this….
http://www.worthpoint.com/worthopedia/mahogany-and-leather-lion-office-chair-swivel
All the ergonomics in the world mean nothing if your feet can’t touch the floor. I have yet to find an office or cubicle with a comfortable foot bar or footrest. And no, the bars UNDER the chair, like a barstool, don’t work.
I would like to see that minus the statues.
I think a lot of the badly built houses will simply be bulldozed. Especially those that are empty and abandoned for any length of time.
How many Chinese dry wall houses are out there? 200,000? 500,000? 1,000,000?
Speaking of empty houses, here’s one in mine own neighborhood. I don’t think it’s been occupied for, oh, two years now.
It’s been up for sale since a year ago May, and, obviously, there haven’t been any takers. Before that, the property was sporting a NOTS.
Now, in case any of you itchy-fingered types want to bid on this creampuff, a word of warning: This property will probably be plowed under during the forthcoming widening of Grant Road. This widening project is already underway and it’s coming this-a-way in 2013.
the “hiding” of the shadow inventory will go on for years, maybe decades. Govt. has lied through this whole mess; why should anything change now?
Decay will deal with it before it gets to decades. Hunker down, align your investments to diversify in various tax shelters, and buy popcorn. It is a good show to watch. Many of the people who laughed at us silly renters already sent in the keys. A few of them are still under the effects of cool-aid.those are the ones I watch while I dip my paw into a bowl of buttery popcorn.
Also, you know very well the government will raise taxes significantly to pay for the bailouts. I will be downsizing my income around then.
Don’t know about that; it’s a lot harder to hide empty houses than, say, cheese, which can easily be hidden from view in caves.
“Based on historical rates of home sales, the Valley’s inventory would clear out much faster than other cities’. ‘(Metro) Phoenix’s shadow-inventory figure may look scary, but the area is in much better shape than other markets,’…The number of foreclosure and normal resale homes on the Arizona Multiple Listing Service is a five-month supply, based on the long-term rate of sales.”
Why all the references to the (seemingly-irrelevant) ‘long-term rate of sales’? Could it be the that the current sales rate sux rocks?
“Homes are selling at foreclosure auctions at record-setting paces, with more than 1,300 sold in Maricopa County last month.”
With a shadow inventory of 100,000, that’ll only take 6.5 years to clear.
I assume by record setting pace, they’re referring to the sales of foreclosures relative to sales of foreclosures in the past, not relative to all sales. Those record setting sales of foreclosures are most likely a function of the massive record number of foreclosures, not because total sales are robust, of which foreclosure sales are a part.
“Michelle Greene bought a foreclosed home in Covington for $30,100 late last year, and it’s worth $80,000 today.”
Does that mean that Michelle refuses to give it away for below $80K?
Look at the photo of the house.
No way that it’s worth 80K. More like $38K.
Good luck selling that dump for 80K
“‘It’s probably going to take three to five years for things to get sorted out,’ says John Glascock, economist and director of the University of Cincinnati’s Real Estate Center.”
I’m looking forward to a major overdose of Schadenfreude five years from now, when we get to read about the too-clever-by-half all-cash investors who lost a bundle buying into the collapsing housing bubble’s dead cat bounce.
A bunch of new CRE just came online here and is sitting on the market. one place, a law firm, tried to play the hero role for keeping the trades in work. But really I think the bldgs were in the planning stages a long time, and when the owners broke ground they just assumed RE would come roaring back by now.
What I don’t get is why build a big downtown restaurant space, and just assume someone’s going to rush in to lease it?
Its like applebees in Astoria…off the main street 2 story corner location NO parking in sight yet they are busy .. its across the street from the Kaufman Astoria video production studio.
They must have decided there is enough foot traffic to make a restaurant profitable
Ahh… the old….. “build it…. & they will come” rationale
Sometimes.. we never learn
CRE is a HUGE problem hiding in the closet. There is an enormous amount of debt maturing in the next few years. The only way we avoid a banking crisis (yet another) is by relying on bogus appraisals. Bankers hang their hat on that “oh yes, the deal is a dog, but at least we’ve got adequate collateral support if we have to liquidate.” The banks have been modifying CRE loans (Troubled Debt Restructures) like crazy, this just kicks the day of reckoning/foreclosure down the road.
“The only way we avoid a banking crisis (yet another) is by relying on bogus appraisals.”
Let’s be clear: Extend-and-pretend served to hide the banking crisis from view, but as of the present it is still lurking, looming, and unresolved.
Dan, you are correct about CRE. Locally here in the DC area builders want to build more office space and replace office buildings with larger office buildings. There are already massive amounts of office space around here sitting empty. I’m sure if you asked the builders they would say, “once the economy turns around…” or “the government always spends more…” (because this is DC. The government is looking for things to cut. I’m not sure how effective that will be but soon we will reach the tipping point and things will get cut. That means contractors being laid off and government employees being laid off too. With those people unemployed there will be less and less of a need for office space locally.
Government employees will not be laid off, except for attrition buyouts, or some really useless support staff. My section is handling it by thinking of offering buyouts and stopping any chance of significant promotion.
After that, gov will cut travel, then research (watch out, national labs!), then contractors. Employees go last.
“I would like to see a topic on how much empty inventory we will end up with and what’s going to happen to it. ”
My observation after looking around at houses what that the new stuff is still selling fairly well because the old beat up stuff isn’t. Too highly priced for what you get. Eventually the old crappy stuff will fall in price enough to really put the screws to the builders; they haven’t yet fully felt the pain IMHO.
That’s what I’ve been seeing too. Yeah we’ve got lots of inventory but the amount that are in good shape vs the demand from those that only want a home in good shape, now that’s a different story.
Has anyone else noticed the flavor of the posts here seem to allude to old Housing Crime Syndicate lies like “rents are going up”, “inventory is falling”, “sales are occurring”, etc???
Anyone?
The title of this thread should dispell anymore Realtor myths. Inventory is massive and the type of inventory really doesn’t matter. It’s massive.
They aren’t lies where the jobs are. My rent DID go up last year. By 12%. And that was AFTER I got the city government involved. Those b*st*rds wanted to raise my rent 20%. I can’t WAIT to see what they do this year.
Unless I speak Spanish, want to run a crack house or meth lab, or want to move every year, I’m stuck with high rents. There are enough Sections 8’s, military, and double-up roomates to fill the rental inventory to where apartments never have to drop rents to get tenants.
The way this is going, I’ll buy a house just to escape the high rents.
I’m assuming you’re referring at least in part to my post. I’ll make 3 points.
1. The realtor myths are particularly effective because they tend to have an element of truth. Take the old line that sales were going back to ‘a more balanced level.’ Not a lie, but they’re hoping you’ll assume that means stable prices. But there are two reasons it doesn’t. Moving towards a balance doesn’t mean achieving a balance, and slowing sales means falling prices regardless if they are slowing towards a balanced market.
2. My comment in particular I think is interesting in that it highlights a dynamic in the market. The builders are still able to build because the used market isn’t working properly. Occassionaly there were stats showing an increase in sales of new houses which was touted as a sign of recovery. It’s really a sign of poorly functioning used market.
I find it much more satisfying to dissect the spin than to dismiss it out of hand.
ABREAST OF THE MARKET
MAY 31, 2011
Danger of Greek Contagion Climbs
BY TOM LAURICELLA
As European leaders wrangle over Greece’s debt crisis, investors are scrambling to assess the damage any imminent restructuring would have on the rest of the region.
Investors have long expected Greece to default on its debts, but most were anticipating it would happen sometime next year. Now, skirmishes among European leaders last week have raised the prospect that a default could come as early as mid-July—not enough time for Europe’s other debt-ridden economies to right themselves.
That scenario would make contagion more likely and dangerous, sending bond yields in affected countries soaring and hurting investors.
…
Emerging Markets Report
May 31, 2011, 1:17 a.m. EDT
China developers to write down asset values
By Chris Oliver, MarketWatch
HONG KONG (MarketWatch) — Falling land prices may prompt Chinese property developers to write down the value of their assets, forcing a sober reassessment for those with vast land holdings, according to a survey released Monday by Credit Suisse.
Most at risk are those mainland Chinese and Hong Kong developers who added aggressively to their land banks in 2009 and 2010, the prices of which could come under pressure amid Beijing’s ongoing credit tightening, the investment bank said.
The findings were part of a poll of both listed and unlisted companies conducted by an independent research company and commissioned by Credit Suisse.
Samsung plans more tablets despite ongoing legal battles with Apple, and Computex, Asia’s answer to Las Vegas’s Consumer Electronics Show, starts this week, with Acer and Intel expected to make a splash.
Among concerns are the potential impact on smaller developers, many of which don’t have the financial resources to weather leaner times.
“The potential exodus of small developers could be overwhelming, and result in a surge in land supply that may bring down land prices further,” said Credit Suisse’s Hong Kong-based analysts.
Prices for land sold at auction were down 20% so far this year, the report cited one industry expert as saying. Other data indicated price declines of up to 50% for the year to date, although the figures were affected by slumping transaction volumes in cities such as Beijing, possibly overstating the true rate of declines, the report said.
Meanwhile, the tighter credit conditions are having a “double impact” upon developers, Credit Suisse said.
On one hand, delays in mortgage approvals mean developers are having to wait longer to get paid than they did in earlier times. Today’s leaner environment has also resulted in a rise in buyers backing out of purchasing commitments on new projects because they can’t secure financing.
In response to the government’s austerity measures, unlisted developers have had to turn to private loans and trust loans, requiring annual interest rates of up 20%, according to Credit Suisse.
Another worrying trend cited by the analysts involves a rise in disputes between developers and construction companies over late payments, although they added that the delays were not considered widespread.
The survey found construction companies see things getting worse in the months ahead. Many of these companies expect to receive more requests to slow down the pace of their work, reversing conditions previously when developers had pressured them to speed up.
In China, construction companies often fund the building and material costs and then get paid in phases as the project nears completion.
In a sign of the times, many construction companies are allocating more resources to chase up overdue accounts, filing lawsuits or even considering halting work on projects where they are skeptical contracts will be honored, Credit Suisse said.
Hedge-fund manager Robert Howe of Hong Kong-based Geomatrix said there are“bubble aspects” to China’s housing market, citing data that apartment prices in Beijing and Shanghai were unaffordable for about 80% of the local population.
He said many Chinese investors had bought second homes as a store of value, content to leave the homes vacant as part of a long-term investment or as a future home for their children. Still, he see a correction rather a big downward spiral in prices.
“There’s not the leverage in the system that there was in say, the U.S. … It’s less dangerous,” Howe said.
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