by Calculated Risk on 12/20/2011 06:34:00 PM

I'll be posting soon on the housing market (see Ten Economic Questions for 2012). In the meantime, here are two different views on housing ...

First from Daniel Alpert at EconoMonitor: Today’s U.S. New Home Starts and Permits Numbers: “Who Knows What Evil Lurks? The Shadow Knows”

Visible existing home inventory is not down for the right reasons (which would include a tightening in the inventory of unoccupied vacant units). It is down because of the enormous backlog in the aggregate “shadow inventory” of homes that are either in foreclosure, or are heading in that direction. The shadow inventory has grown because of a systemic and/or conscious slowing of the foreclosure and liquidation process in a market challenged by loan documentation problems and the general reticence of lenders to push collateral into the for-sale market at prices that result in sizable losses.

To help readers fully comprehend the dimensions of the shadow issue, I offer the following chart taken from the testimony of Laurie Goodman of Amherst Securities given to a congressional committee in September.

Click on graph for larger image in graph gallery.

Here is the chart for Laurie Goodman's testimony via Daniel Alpert. This shows some substantial shadow inventory (Goodman only included loans 12+ months delinquent or in foreclosure). However this isn't really "shadow" inventory because homes list for sale - that are 12+ months delinquent or in foreclosure - are not subtracted from the total. I don't think the situation is as grim as this chart suggests.

Alpert also presents a table from Goodman showing an estimate of supply and demand over the next several years (see Alpert's post). I think this is overly pessimistic. Most distressed homes are occupied, and when the occupants leave, most of them become renters. That doesn't increase the overall housing supply (many of the distressed home are bought by investor/landlords and rented - frequently to people who lost their homes in foreclosure).

On the flip side, John Talbott writes at the HuffPo: Homes - Buy Now! Talbott uses several metrics - home prices relative to construction costs, price-to-rent ratio, price-to-income ratio, real prices - and argues now is a good time to buy. (Note: Talbott wrote a book in 2003 titled: The Coming Crash in the Housing Market)

Unfortunately Talbott doesn't provide a graph for price-to-rent, so here is one:

This graph uses both Case-Shiller and CoreLogic house price indexes and compares the indexes to Owners' Equivalent Rent (OER) from the BLS.

The price to rent ratio was set to 1.0 in January 1998. The price-to-rent ratio has fallen significantly, but appears to still be elevated on a national basis. A price-to-income chart (nationally) would also show slightly elevated prices (not shown since income data is released with a lag).

Talbott then shows prices adjusted by the price of gold. Oops. Gold is not a good measure to deflate prices.

This graph shows the quarterly Case-Shiller National Index SA (through Q3 2011), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes in real terms (adjusted for inflation using CPI less Shelter).

As I've pointed out before, there is an upward slope to real house prices in many land constrained areas with increasing population - so just like for the price-to-rent ratio, this measure is close to normal, but still slightly elevated.

I'll post some more thoughts over the next couple of weeks, but I think it is location dependent now - although I expect to see some more price declines on the national repeat sales indexes. Some areas have a significant backlog of distressed homes, and there is no rush to buy in those areas. In other areas, prices have probably already bottomed (or are close enough that there will be some attractive prices).

Earlier:
• Housing Starts increase in November
• Multi-family Starts and Completions, Record Low Total Completions in 2011
• A comment on Existing Home Sales revisions