Posted with permission, here are excerpts from the latest housing resale market analysis from Deutsche Bank research analyst Nishu Sood and his team. (Big thanks to them for allowing me to republish the hard-earned fruits of their labor!) From the summary (emphasis mine):
Weakening of demand into summer may not be fully reflected in resale statsOn shadow inventory:
The three major housing volume indicators - starts, new home sales and resales - all technically hit a bottom in January. While we are watching starts and new home sales carefully for signs of a real bottom in housing demand, we think resale volumes are far less useful. Demand is one part of resale volumes, but equally as important is the foreclosure driven transition of millions of households from ownership to renting. This second part may obscure what we expect to be a weakening of demand headed into the summer months.
Uncle Sam’s demand boosters may begin to wear off in the next few months
In the past few months, the housing market has benefited from a wide variety of government sponsored demand boosters, including below 5% mortgage rates, federal/state tax credit and an overall economic and confidence lift from massive federal intervention. Unless the economy rebounds strongly, the maximum effect of these measures is behind us. Mortgage rates have risen by nearly 100 bps, home seekers wanting to get the $8,000 credit will begin to face time pressures towards the end of summer and a sense of relief from avoiding economic calamity will begin to fade. The net effect of all of Uncle Sam’s booster shots was basically to level out demand for a few months; as their effect fades, we would expect demand to fade somewhat as well.
Home buying public doesn't seem to be fully cured of housing mania
In past episodes of excess home price appreciation in the US, local bubbles deflated gently and gradually over an extended period of time. This unremarkable but drawn out pace of decline had the effect of curing homebuyers of any unreasonable expectations regarding a rebound in prices. This time around, a bubble of historic proportions has been followed by a collapse of equally historic proportions. The collapse in prices has happened so quickly that unreasonable pricing expectations have been left strangely undisturbed. Investor buyers are the most obvious manifestation, with investor participation in some markets already exceeding the peaks reached at the height of the housing boom.
The spread of distress beyond subprime/low-end may boost price metrics
From most distressed markets around the country, we hear a similar story from our contacts on the likely future mix of distressed property transactions. To date, most foreclosures have been at the low-end of the price spectrum, and demand for these homes from investors/first-time buyers has been high. As the default wave has rolled into other mortgage types, there will be more mid- and high-price point distressed homes, which might skew upwards reported median price points. Repeat-sales indexes like Case-Shiller would exhibit a much smaller effect.
Shadow inventory amounts to nearly 95% of listings in the 27 markets below.On the reliability of inventory data:
In our view, the recent tidal wave of foreclosures has added another way in which MLS listings do not accurately reflect the resale market. Based on our analysis, MLS based listing inventory is significantly understating the extent of foreclosure inventory in many markets. In Figure 18 below, we compare distressed inventory vs. MLS listings in major metro areas across the US. A certain portion of distressed inventory is included in MLS listings – if it were all included we would expect MLS listings to be higher than distressed inventory. Clearly, not all distressed inventory appears in MLS listings. As shown below, in eight of the 26 markets in our analysis, distressed inventory is actually higher than MLS listings. In the Inland Empire and Las Vegas the distressed inventory figure is more than three times that of MLS listings. Overall, foreclosure inventory is equal to roughly 94% of MLS listings in the 27 markets in our analysis. However within the 17 bubble markets in our list foreclosure inventory is much higher, at roughly 116% of MLS listings, while within the 10 non-bubble markets foreclosure inventory is equal to roughly 61% of MLS listings.
Markets in California dominate the shadow inventory rankings.
Five of the top eight markets in terms of shadow inventory compared to MLS listings are in California. The Inland Empire is at the top of this list with for sale foreclosures amounting to nearly 371% of MLS listings. Las Vegas is another metro where for distressed inventory amount to more than 300% of MLS listings. Southern markets such as Dallas, Austin, Raleigh and Charlotte dominate the bottom half of our list where distressed inventory is a smaller phenomenon relative to MLS listings. In all of these markets distressed inventory is less than half of MLS listings.
Inventory of distressed assets includes 2.2% of households. Since MLS listings are a poor proxy for true resale inventories (see Inventory section), in this section we compare distressed inventory to other more reliable housing metrics in order to gauge how substantial it is. In Figure 19 below, we compare foreclosure inventories to the number of housing units in each metro. Overall, foreclosure inventory represents 2.2% of homes in the 27 markets we analyze. This list is headed mainly by the bubble markets that experienced the fastest growth in terms of new construction during the recent housing boom, including Las Vegas, Inland Empire, Phoenix Sacramento and Orlando. In the bubble markets foreclosure inventory represents 2.4% of homes while in the non bubble markets foreclosure inventory represents 1.7% of homes. Las Vegas has the largest percentage of distressed inventory to housing stock at 7.7%, followed by the Inland Empire with 6.4% and Phoenix with 5.7%. Baltimore has the lowest percentage of distressed inventory to housing stock at 0.3%, followed by New York, and Raleigh where roughly 0.6% each of housing stock is distressed inventory.
Details about our database of shadow inventory. We originally generated our list of 42 markets based on our proprietary builder community count in 1Q08. These were the top 42 markets by public builder community count and account for approximately 40% of all housing units in the US according to 2007 Census housing unit estimates. 23 of our 42 markets are classified as bubble markets (those where price appreciation was greater than 59% from 2000-2005 according to FHFA data). Within the largest states these metros account for: 74% of homes in California, 55% in Texas, 78% in Arizona, 88% in Nevada and 68% in Florida.
Bank owned inventory the bulk of foreclosures for sale. Out of the 1,061,000 distressed homes inventory, 44% are bank owned, 26% are in pre-foreclosure and 29% are awaiting auction (Figure 22). In total there are 467k bank owned properties on the market, while 311k properties are in auction and 281k in pre-foreclosure. Note: we determine shadow inventory from pre-foreclosures by assuming that 2/3rds will ultimately be foreclosed upon.
"Inventory" captured in MLS listings not as reliable as it once was. As the housing market has moved further into this downturn foreclosures have only just begun to add insult to injury. Below we reiterate two important points about the resale inventory trends:Finally, here's the Sacramento market data page, with the above quoted sections as they originally appeared in the report:
While we do believe that evaluating housing listings on a metro level basis is important, we feel that the two points made above are important considerations when examining inventory data.
- Occupied listings should not be considered a true unit of inventory since there isn’t a net addition or subtraction to the overall buyer pool; and
- More often than not, distressed vacant properties do not show up in MLS listings which may dramatically understate true inventory.