March 11, 2009 (Housing Market Monitor)

Hidden Inventories Will Haunt Housing Upturn

By Dean Baker

March 11, 2009

Renting provided enormous returns relative to owning over the last year.

All the news on the housing market is about as bad as it can possibly be right now. However, in the event that the market does start to turn later in the year, a flood of hidden inventory will likely come on the market and further depress prices.

The evidence for this hidden inventory can be found in both the new home sales data and the existing homes data. In the case of new homes, the inventory of started and completed homes for sale has fallen by 121,000 (28.4 percent) even though housing starts have consistently outpaced sales over this period. This indicates that builders may not be putting their homes up for sale in the current environment. The median months for sale of a new home rose to 9.3 in January, compared with a median period of just 4.0 months in 2005 at the peak of the bubble.

The story with existing homes is that the inventory of unsold homes has fallen by 970,000 from July to January even though the annual rate for monthly sales over this period was 4,800,000. Given the current population, this rate is approximately the sustainable rate of existing home sales (ignoring the extraordinary economic times), which means that the drop in inventory likely represents homes that people expect to put on the market when they perceive conditions as improving.

The latest proposals for helping homeowners are unlikely to materially affect the state of the housing market any time soon, although they are likely to help some people remain in their homes who otherwise would face foreclosure. The Obama administration’s plan has also been good news for investors. Moody’s announced this week that they were reducing their loss projections for a variety of mortgage-backed securities.

Plunging house prices means that renting continues to be the best way for families to build wealth. This is especially true for moderate-income families, since less expensive homes continue to see the sharpest drop in prices.

In Los Angeles, the price of homes in the bottom third of the market has fallen by 37.3 percent in the last year, and the rate of decline has slowed to a 27.6 percent annual rate in the last quarter. This means that someone considering buying a house for $400,000 a year ago would have saved themselves almost $150,000 by renting for a year. Prices for houses in the bottom tier in Los Angeles have fallen by 48.9 percent since their peak in early 2007.

In Chicago, prices for homes in the bottom tier have fallen by 17.4 percent over the last year, meaning that a person considering the purchase of a $250,000 home a year ago would have saved themselves $43,500 by renting for another year. The annual rate of price decline in the bottom tier has accelerated to 24.1 percent in the last quarter.

In Boston, the price of homes in the bottom tier has fallen by 15.1 percent in the last year. The rate of decline over the last quarter has accelerated to 21.8 percent. A person who was considered buying a home for $300,000 a year ago would have saved more than $30,000 by renting another year.

While the sharpest rates of price decline are in the bottom end, the fact is that prices are falling rapidly across the board almost everywhere. This means that buying a home, when renting is an option, will almost always be a very bad decision in the current environment.

Even the $8,000 tax credit for first time home buyers does not change this calculation to any great extent. For a home that is currently priced at $200,000, this tax credit will offset only about four months of price decline. There may be some noticeable effect from the first time homebuyers credit toward the end of the year when it is at the edge of expiring, but it is unlikely that it will prompt many people to buy homes in the current market. In this economy, waiting to buy a house is the surest bet around.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.