On the Path to Recovery

The strong spring and summer housing markets helped to reduce inventories nationally and the same dynamic has played out in local markets. Somewhat surprisingly, many housing markets that were hardest hit by the housing bust are sharing in the benefits of reduced inventories.

The months’ supply of housing, supply divided by the current rate of sales depicts how many months it would take to exhaust the current supply of homes at the current rate of sales. This measure has fallen sharply in Atlanta, Chicago, Las Vegas, Phoenix, Tampa, and Palm Bay. Over the four-quarter period ending in the 2nd quarter of 2012, the months’ supply of housing had fallen by more than 20% in each of these markets.

From a historical perspective, the months’ supply in several of these markets is approaching levels last seen in the period from 2000 to 2002. The months’ supply during the 2nd quarter in the Phoenix market was at 2.3, nearly half the 3.9 months of inventory listed in the 2nd quarter of 2000. Phoenix had experienced a peak months’ supply of 9.9 in the 2nd quarter of 2007.

The boom in sales has been in both the traditional and distressed portions of these markets. According to Corelogic, the months’ supply of homes has fallen in nearly all of these markets over the 11-month period ending in June and notably in Illinois, a judicial state [1], which has experienced long foreclosure timelines and backed up pipelines as a result. Not surprisingly, Phoenix experienced the sharpest decline in distressed inventory of 34.8% to 4.5 months over this period. Both Riverside-San Bernardino and Sacramento experienced declines greater than 22% over this same time period.

The sharp decline in inventories raises the question of how markets will be impacted by plans at the FHFA for expanded bulk sales (each of the markets listed above is part of the FHFA’s initial REO bulk sale pilot program). With both demand and prices having risen since the pilot program was proposed and supplies down sharply, many markets appear to be experiencing a nascent or mature correction. What’s more, with prices on the rise in the face of heightened confidence of both investors and traditional home buyers, bulk sales may be difficult to execute at an efficient price relative to a free market transaction. NAR has voiced concerns to regulators about bulk sales earlier this year and in the fall of 2011. [2] Unfortunately, there is little known about the pricing of the sales to date, but the FHFA has suggested that it will release more information in the coming weeks. With time we’ll have clarity on the program, but it is clear that investors will continue to play an important role in buying homes for rental or remodeling to be re-sold into the market, whether through bulk or individual transactions.

[1] Other judicial states like Florida appear to be doing better, but results are mixed as evidenced by the divergent experiences of Tampa and Orlando, suggesting that more done on this front could help to liquidate backlogs.
[2] http://www.ksefocus.com/billdatabase/index.php

Ken Fears, Director, Regional Economics and Housing Finance

Ken Fears is the Manager of Regional Economics and Housing Finance Policy. He focuses on regional and local market trends found in the Local Market Reports and the Market Watch Reports . He also writes on developments in the mortgage industry and foreclosures.

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