Posted by Jonathan J. Miller -Tuesday, February 7, 2012, 6:30 AM
Barry Ritholtz of Big Picture does a nice narrative on why housing isn’t done falling. I agree with him and I’ll point additional few other things that aren’t mentioned.
But first, in a super macro perspective, Bill McBride of Calculated Risk predicts a housing bottom for March 2012. Like The Big Picture, Calculated Risk is required econ reading, and Bill takes exception to Barry’s view that the market has further to fall – the idea that the housing market needs to overcorrect (it always does).
To be clear, Bill’s forecast is based on prices of the key housing indices i.e. Case Shiller and CoreLogic without seasonal or inflation adjustments. He is very clear about the definition of a housing bottom which is key to the argument – in fact, there are two housing bottoms:
First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.
- New Home Sales Bottomed in mid-2010 (moved sideways ever since).
- Housing Prices Will Bottom Around March 2012 (will move sideways after that).
He provides a logical argument but I think he’s missing a key ingredient in the logic – how will the market be impacted by distressed properties and how they will impact the price trend:
- 2M additional foreclosures in 2012-2013 per RealtyTrac
- Falling inventory is masking significant shadow inventory built-up during the credit crunch. Inventory is declining to more manageable levels, not because there are fewer homes to sell, but because sellers are holding back until conditions improve – big difference.
In other words, the call of a bottom is missing a huge element from the equation – supply. The forecast of a housing bottom could certainly be right in the short term, and housing prices could bottom in March temporarily, but there is a lot of excess supply to be dealt with and I suspect that prices will begin to slide as REO activity begins to slowly enter the market. It simply has to – there is too much of it.
No gloom and doom here, just that the market still has a lot of distressed inventory to absorb. Distressed real estate (foreclosure) volume has fallen by about one third in 2011 as lenders/servicers held back releasing more units into the market largely because of the “robo-signing” scandal in late 2010 and the potential AG settlement that has been languishing for much of the year.
The housing market got an REO reprieve in 2011 and has caused housing bulls to get ahead of themselves and the housing market, way too focused on demand, and not enough focus on supply.
UPDATE – Noah at Urbandigs.com chimes in:
The Bigs Talk Housing / Calc Risk: “The Housing Bottom is Here”