Housing’s "Recovery": Where Will Demand Come From?

If housing is to recover, we need buyers, and lots of them to soak up the existing inventory. Or I guess we could just keep bulldozing them into the ground.

Anyway, this from Zillow.com:

U.S. home values continued to slide for the ninth consecutive quarter, declining 14.2 percent from a year ago, and falling 21.8 percent since the market peak in 2006. Additionally, one-fifth (21.9%) of all homeowners in the United States is in negative equity, and one in five homes sold in the past 12 months was a foreclosure.

So, homes are more affrodable, good news right? Dig deeper folks.

From the Big Picture:

About a third of homes have no mortgages whatsoever. The unencumbered properties improve the homeowners equity data from the Fed’s Flow of Funds report. Add in 33% of homes with 100% equity and it skews the data. The total looks better.

before you say “So What?” co the following: We know that those homeowners that do not have mortgages — i.e., 100% equity — cannot default. So if we want to understand the potential further mischief real estate land can cause, it is the mortgaged properties we should be watching. Back out the third of home owners that have no mortgage — the 33% of homes with 100% equity — and the Fed’s measure of 43% net equity drops precipitously.

What is the number then? 67% of homes with mortgages have an equity of 15%. The worse number? 37% of the homes with mortgages are underwater.

Has anyone been able to secure a mortgage today on a new purchase for under 20% downpayment? Simply put, when you subtract broker commissions 2%-5%, it is safe to say selling home “a” and buying home “b” with the proceeds are over unless the buyer is doing a significant trade down or putting up near 10% of the new purchase price themselves.

This rolling of equity into a new purchase was a huge part of the bubble in housing as prices appreciated. It is gone for the most part now.

Here is the dilemma. Falling home prices are making homes more affordable, of that there is no argument. The problem is that falling home prices also sap equity from those sellers looking to use it to afford the next purchase. When you add tighter lending and higher down payment requirements you further restrict demand as you eliminate more marginal buyers from the pool.

Now, lets add the 2 million additional homes estimated to be foreclosed on this year, and another near 3 million people to become unemployed as the unemployment rate creeps to to the 10.5% level  now estimated. The pool of potential homes buyers? It is becoming a puddle…

“BUT”, you say. “what about the mortgage free homes, they may sell and the proceeds used to buy new ones”. What about that?

From Realtor.com

According to an analysis of census information by USA Today, there are 123 areas of the country where 40 percent or more of home owners don’t have a mortgage.

Many of those areas also never had any sort of boom in prices, either because they are in declining areas that have suffered job losses and dwindling population or because they are thriving retirement communities.

Cities with the highest percentage of owner-occupied properties that are mortgage free:

• Bluefield, W. Va.: 57 percent
• Sebring, Fla.: 56 percent
• Odessa, Texas: 54 percent
• McAllen-Edinburg-Mission, Texas: 54 percent
• Weirton, W.Va.-Steubenville, Ohio: 53 percent

Unless anyone thinks they convince me why/how economically depressed residents of Odessa, TX or retirees in Sebring, Fla. are going to pack up and move to Southern California and buy enough homes to soak up huge inventories, lets just put that argument to bed now.

Housing busts take years to work through, not months or a couple quarters. Please keep that in mind when using housing in projections….we are nowhere near done with this yet.

Disclosure (“none” means no position):