The closely followed Case-Shiller Index reports improving sales for the 3rd straight month, with national home prices improving 1.6% for from June to July for the 20 city index. For Chicago the improvement was 2.7%. All this is positive news, but everything is relative. Prices on a national basis are down over 18% from a year ago. The price level puts us back to 2003 pricing levels. The biggest concern is whether these improvements have any sustainability, especially if the $8,000 first-time home buyer credit is not extended.
Unfortunately, housing has a tough road ahead. The reality is that there is a huge and growing shadow supply of available housing that is bound to flood the market. Adding these homes brings the stock of for sale housing to nearly 7 million units, which is about 2 years worth of stock. Here are some figures that should be considered before thinking that housing is out of the woods (courtesy of the WSJ)
- In July 1.2 million homes had just entered the foreclosure process
- This is in addition to 1.5 million homes that are in some stage of foreclosure with their lender
- There are another 217,000 homes for which the owners are over 1 year behind on mortgage payments, but the lender has yet to file a foreclosure suit
At some point this stock will hit the market. This is why many well-respected economist see further home price deflation in the future. Projections are anywhere from 10-20% decreases in value as real possibilities.
All this bodes rather poorly for multi-family rental owners as well, at least in the near term. We learn from urban economics that rents and prices respond to vacancy rates. In cities like Chicago which are burdened by a large and growing supply of condos that are waiting to get sold, landlords now realize that they are competing against all forms of available housing unit, whether or not they are listed for sale or for rent (the denial stage is over). Until vacancy rates reach equilibrium, rents and housing prices will feel downward pressure across all housing assets. Of course each submarket has nuances and different levels of new or vacant supply, but the numbers don’t paint a very pretty picture. So while housing shows some positive signs of improvement which are certainly welcome, trying to now climb out of the housing hole will be a challenging task for both rental properties and the for sale market. It’s as if we’ve stopped digging down and want desperately to climb out, only now the problem is that some of the dirt, comprised of overextended leverage, over zealous building, and inflated values, is starting to slide back into the hole and bury us. Let’s hope that employment starts improving and that the first-time home buyer tax credit gets extended to help us out of this hole.
