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Wednesday, March 19, 2008

"Pent Up Supply": Will Housing Markets Contribute Another Word of the Year in 2008?

Many are aware that The American Dialect Society chose "subprime"as its word of the year for 2007. It is doubtful that the housing market will spawn another winner this year, and pent up supply is more than one word anyway. But there is reason to believe that the term could have a higher profile in the coming months.

Two Sides of the Coin
Google the phrase "pent up demand", and the roughly 430,000 search results demonstrate how firmly this term is entrenched in our lexicon. The idea was one of the main engines of the Post-WW II boom in the USA. The concept frequently permeates market talk, and is one of our oldest and best economic friends.

Google the term "pent up supply" on the other hand, and a user will see only around 2,500 results; 99% less than its more renowned and respected cousin. So where is the case to be made for this term to gain recognition?

A Possible Definition
For purposes of the housing market, one might define pent up supply along these lines:
Properties that are not current, active listings, but likely to become active at some point in the future. These may have been held back intentionally, by sellers unwilling to list in a soft market. Or, as in the case of foreclosures, properties likely to enter the supply stream by way of circumstance over intention.
Tying Up Some Threads for Pent Up Supply
In recent months, certain threads or memes have popped up in the rhetoric of real estate analysis. In more "normal" markets, their impact on supply might be discounted.

But with present conditions they will exert a greater than usual influence, perhaps making the idea of pent up supply a factor in its own right for 2008. Let's take three different looks.

1) Vacancy Rates
Vacancy rates are disseminated quarterly at this page from As with many indexes related to housing, it too is in record unfavorable territory.

In October, 2007, Mish's Global Economic Trend Analysis spelled out a very preliminary way to asses the data. In short, the number of US homes sitting vacant, minus the number that are currently listed for sale equals:
...a huge potential supply of homes that for some reason or other is, (sic), not listed yet.
Seeking Alpha has also been on the case of vacancy rates and their impact on supply. Vacancies for Q4 2007 were around 50% more than two years ago, and represented more than 2 million idle homes:
Think back to Econ 1A and 1B, when we learned about how when there is too much supply, what must happen to price in order for demand to be filled?
The obvious reply is that prices must fall. Current numbers are "the highest vacancy rate in U.S. history", and thus represent a significant source of supply from this sector for 2008.

How large? Larger than in the past, possible arithmetically up to 50% larger, seems like a reasonable first answer to that question.

The most current census document is here.

2) Foreclosures and Supply
Foreclosure in its various stages, acts as a conduit for vacancy rates and/or future active listings. It is a source of pent up supply that will see new highs in 2008 adding further softness to prices.

CNN Money shows us that the year 2007 registered 51% more homes foreclosed than in 2006. The main thrust of this new supply however took place after July, 2007. Foreclosures in Q4 2007 were the highest on record. Interest Rate Roundup pegs the latest February, 2008 report at 60% more than 12 months ago, via Realty Trac.

The Big Picture had this to say about the impact of foreclosures on supply:
The projected supply of foreclosed homes is about ~45% of existing home sales -- adding four months to the supply of existing homes. According to Dale Westhoff of Bear Stearns, this is a "fundamental shift" in the housing supply...

Looking in the near term, the pattern of mortgage resets, and thus potential foreclosures, is depicted in the chart at the right, (which is all over the web). We will not return to Spring 2007 levels until August, 2008. (Reset numbers in billions $).

3) Sellers in Waiting

This is an intuitive, and admittedly anecdotal category, less empirical than vacancies or foreclosures, but one we suspect is several times larger than in past markets. It is in our part of the world, the sellers in waiting.

We would identify a couple of sub groups here:
A) Listings that have been taken off the market, to "give it a break" so to speak until the market improves.

B) Sellers who never listed at all in a soft market, either by their own choice, or they were advised to hold off.

It seems to us that all one can really do here is play with numbers to determine if sellers in waiting is a worthy idea. If for example, 1 in every 4 agents had a seller in waiting, that would add something like 325,000 homes, or around 8% to the supply of existing homes.

What's the real number? Take your pick.

And In The End....
The market has been trying for many months now to cut supply with, declines in production of new homes, and record price decreases for both new and existing homes. Supply, and now pent up supply, are still winning that race.

On the flip side, the existence of pent up demand has been demonstrated, the real question is demand at what price before buyers return.

Thanks for stopping by,
Black Bear Realty Website
828 689 2055
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