NAr’s Lawrence Yun doesn’t understand cloud housing inventory

MLS Inventories are low because underwater owners and those will low equity aren’t listing their homes.

Back in 2011 lenders changed their loss mitigation policies. Rather than foreclosing on delinquent borrowers and selling the subsequent property as REO, banks made two major changes that dried up the MLS inventory: (1) lenders modified every loan they could and (2) lenders stopped approving short sales if the borrower had assets. By modifying loans and denying short sales, distressed inventory disappeared, buyers in the market competed with each other for scarce inventory, and prices rose rapidly. The simple fact is that low housing inventory is a direct result of the changes in lender loss mitigation policies.

Demand has not picked up notably over the last several years as sales remain weak, first-time homebuyer participation remains well below historic norms, and the homeownership rate continues to decline. If not for the change in lender policy, prices would still be going down.

Low MLS inventory is a direct measure of residual mortgage distress. People who are underwater or struggling with payments are not listing their homes for sale. The NAr and other housing analysts offer various reasons other than residual mortgage distress, but none of these add up.

First, when house prices were rising rapidly, everyone blamed rapidly rising prices for the lack of inventory. The idea was the people refuse to list if they don’t believe they can buy a replacement home; however, that isn’t supported by data from the past. In 2004, prices went straight up due to the proliferation of the Option ARM. Inventory held its long-term trendline suggesting that discretionary sellers do not withhold their listings just because prices are rising rapidly.

When house prices stopped rising rapidly, pundits began blaming low interest rate lock-in as a cause of a lack of inventory. The idea is that move-up buyers don’t surrender their low-rate mortgages to make a move up trade. This fallacy of this idea became apparent as mortgage rates drifted down back near record lows, and inventory still didn’t come to market.

The latest nonsense put out by realtors is that owners won’t sell because they don’t want to start over as buyers.

California housing market is hot, but sellers aren’t listing their homes

by Kristen Leporedistressed_borrowers

The California Association of Realtors says there were fewer homes on the market in March than there were in February.

The association’s chief economist Leslie Appleton-Young said the dip in supply is largely because California homeowners are choosing to stay put to avoid having to start over as buyers, something that many consider to be an expensive trade off.

“There’d be a high price to pay in terms of giving up your mortgage, giving up your tax bases — and … fighting other buyers,” said Appleton-Young …

“There’s just a huge impediment for people to make a change at this point,” said Appleton-Young. “So they’re staying put and rehabbing and remodeling again instead of listing and moving.”

This argument has a kernel of truth in it because as loanowners first emerge from underwater, they don’t have the equity to make a move-up trade. While they may finally have the ability to sell, since they won’t be able to move up, they simply stay where they are. These effectively underwater borrowers aren’t distressed in the classic sense, but they are not participants in the move-up market because they are nursing the wounds of the housing bubble.

The NAr has repeatedly and incorrectly attempted to explain the lack of inventory, which I find amusing because the answer is so obvious. I can’t see any reason the NAr consistently fails to report the obvious, but Woody offered this in the astute observations yesterday:

The NAR will not say anything other than “everything is awesome.” In their minds owning a home is the greatest thing a human being could ever do with their life. They would never want to report anything which might put home ownership into a negative light, especially that millions of people are trapped in their debtor prisons.

Disappearing Shadow Inventory

Lawrence Yun, PhD., Chief Economist and Senior Vice President on April 24, 2015

One broad trend across the country has been a consistent and steady decline in shadow inventory.

Shadow Inventory was rendered powerless by lender can-kicking. Must-sell shadow inventory has morphed into can’t-sell cloud inventory. I first wrote that in early 2013, and Lawrence Yun still doesn’t understand how this works.


There is already a shortage of visible inventory. So a shorter shadow – those properties with serious mortgage delinquency or in some stage of the foreclosure process – will not help relieve the inventory situation.

He is right, but for the wrong reasons. He contends shadow inventory won’t become inventory because it no longer exists, which isn’t true. Cloud inventory won’t become an inventory problem because when it comes to market, it’s priced in the clouds and doesn’t provide the damaging must-sell inventory that drives prices down.

With new home construction still sluggish the housing inventory shortage could last longer. Home price increases in many parts of the country are nearly assured as a result. The price gains in some cases will be too fast and not good for the overall health of the local real estate market.

I agree with him here. Prices rose faster than rents or wages over the last several years due to the lack of for-sale inventory. While this bails out loanowners and lenders, it harms new buyers and reduces sales volumes.shadow_inventory_monster

The shadow made up 4.5 percent of all mortgages, down from nearly 10 percent few years ago. In terms of foreclosure starts, the latest figure of 0.46 percent is essentially back to normal. Due to the thinning out of the shadow as well as from rising home values, the share of distressed property sales is now hitting the single-digit percentage. This means, home prices will strengthen (since there will be fewer deeply discounted properties). It also means that those practitioners who specialize in foreclosures or short-sales need to start thinking about a change in business models to normal home buyers and normal positive-equity home sellers.

Like politics all real estate is local. Some states still carry a large dark shadow. New Jersey and New York are two examples. Home prices as a result will only rise very slowly in these states with long shadows.

Shevy is setting up an operation to deliver cashflow properties in Florida. With the overhang of unprocessed foreclosures, the window of opportunity may persist there longer than it did in Las Vegas or other West Coast markets.

Since shadow inventory will not turn into visible inventory in the future, what must occur to relieve a housing shortage? Investor-owned properties through a flip could show up on the market. However, most institutional investors who bought a few years ago are indicating a long-term hold to get rent gains which have been nice and profitable.

a_housing-bubble-clearance-saleThere won’t be any mass liquidations of houses by REO-to-rental companies.

The only true source of more supply is from homebuilders. Unfortunately, they are still not ramping up production to meet the market needs.

Homebuilders aren’t ramping up because they need volume, and the number of homes demanded still isn’t very high. The lack of volume is evidence of the artificial nature of the recovery. In a real recovery, resurgent demand for housing outstrips supply. In a fake recovery, restricted supply causes competition in spite of tepid demand.

Consequently, home price gains this year could be too fast for the country, easily rising double or triple the rate of income growth.

He touts this as a potential scare tactic realtors can use to motivate buyers, but if prices keep rising faster than income growth, it’s going to pummel home sales. We no longer have affordability products to prompt sales when houses become unaffordable, which is a good thing because artificial affordability is what housing bubbles are made of.


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