About Lem Marshall

Lem Marshall was counsel to the Virginia Association of REALTORS® for 25 years, and general counsel for 16 years. He has represented several local associations as general counsel as well. In 2000 Lem was appointed by Governor Gilmore to the Virginia Real Estate Board, and has been actively involved in every REB regulatory review and revision since 1989. Lem represents licensees before the Real Estate, Contractors and Real Estate Appraiser Boards, and has conducted over 2000 continuing education programs for REALTORS®, attorneys, and title insurance agents.

Where’s the Inventory? Part 1

We’ve all been hearing about the recent strength in the housing market, and we’re seeing signs of it in the real world.

In fact, signs have been flashing since early last year that prices were firming in most markets and moving upward nationwide. When signs of stabilizing prices first appeared a year or so ago, I noted, as Churchill did after the decisive victory of the British Eighth Army over Rommel at El Alamein: “This is not the end. It is not even the beginning of the end. But it is perhaps the end of the beginning.” I think we now have the power to make this a reality and enter the end of the beginning – a long end, to be sure – if we realize just what the numbers are really telling us.

As is usually true in journalism, the headlines grab our attention, but the details give us focus. In the details of many of the stories we read, and in the events of the last year, the focus emerges.
Home prices are indeed rising. But remember the essential truth of microeconomics: prices are set at the margin where supply meets demand. Now, we hear a lot about the demand side of the price equation in the headlines and lead paragraphs of typical news stories. The Associated Press trumpeted in December that, “More people have started looking to buy homes, encouraged by a gradually improving economy, a steady rise in home values [conflating cause and effect?], and mortgage rates that have been low all year.” But in the next sentence the rest of the story emerges. “At the same time, the inventory of previously occupied homes available for sale has fallen sharply….” In November, the Wall Street Journal noted that “prices are rising amid sharp declines in the number of homes listed for sale. Just 2.14 million homes were for sale at the end of October, down 22% from one year ago to the lowest level in a decade….”

Some cities are in near crisis condition in inventory. Phoenix, for example, has only a 2.4-month supply of homes for sale, Sacramento a mere one-month supply. Experts peg the healthy inventory level at about six months, while the national level is well below that amount and falling.

So, where’s the inventory?

First, there’s been a slowdown in foreclosures as banks work to restructure loans and straighten out the procedures that led to the massive lawsuits caused by the “robo-signing” kerfuffle. And it’s unlikely we’ll see much of the REO bought by investors in the period leading up to the foreclosure slowdown back on the market any time soon. “Rising rents,” says the WSJ, “have encouraged many such investors to rent out the houses, rather than putting them back on the market and trying to flip them for a profit.”

Second, new construction, while picking up, remains far below the levels of a decade ago. In fact, new construction is barely replacing that portion of the housing stock that falls into desuetude (you can look it up) because of old age, abandonment (see Detroit), or commercial development. New construction numbered some 360,000 units in 2012, while some 300,000 units fall into disuse annually.

Third, as 2013 begins, some 11 million homes are owned by folks who owe more on their homes than they are worth (some 200,000–250,000 in Virginia alone). The difficulty in selling a short sale is, of course, legendary (much more on this to come). The WSJ discussed this in an article last fall touting the “new vigor” in the U.S. housing market, noting that rising demand and slack in supply could signal that we’re past the bottom in the market. “However,” the article continued, “headwinds could keep a lid on rapid price growth. Millions of homeowners owe more than their homes are worth and can’t sell their properties. That has frozen the important ‘trade-up’ market … in many regions hit hardest by the housing bust.”

Fourth, mobility – the life blood of a healthy market – is substantially diminished by the sluggish economy, which most experts expect to continue to underperform ordinary recoveries. The fiscal mess in Washington and many state capitals has left employers wary of expansion, as consumers deleverage and employers grapple with higher taxes, the inevitable reckoning posed by unrestrained public debt, and the uncertainties of coming changes in health care markets.

Can we make sense of these discordant data? Here’s one way to look at them. A slowly improving economy has produced increased demand, as prices appear to have hit bottom. Sharp reductions in foreclosures, the reluctance of purchasers of REO over the last few years to part with high-yielding investment properties, and the millions of homes locked in underwater status have given us inventory shortages and price increases that suggest, on the surface, a strengthening housing market. In reality, rising demand and sharply reduced supply have led to price appreciation. The countervailing pressure of immobility caused by the sluggish economy and fiscal uncertainty, millions of homes in underwater status, and the need to deleverage take millions of buyers and sellers out of the market. The result? Price increases and quick sales of current listings, but relatively low sales volume and turnover. Some call this, optimistically, a rebounding market. I call it the end of the beginning.

The end begins, I believe, with de-leveraging. Next week I’ll talk about de-leveraging and unlocking that missing inventory I referred to above.

About Lem Marshall

Lem Marshall was counsel to the Virginia Association of REALTORS® for 25 years, and general counsel for 16 years. He has represented several local associations as general counsel as well. In 2000 Lem was appointed by Governor Gilmore to the Virginia Real Estate Board, and has been actively involved in every REB regulatory review and revision since 1989. Lem represents licensees before the Real Estate, Contractors and Real Estate Appraiser Boards, and has conducted over 2000 continuing education programs for REALTORS®, attorneys, and title insurance agents.