In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Monday, June 11, 2012

CoreLogic: Impact of negative equity on the Supply of Unsold Homes

by Calculated Risk on 6/11/2012 08:59:00 AM

CoreLogic released their June MarketPulse Report today.

Here is a brief excerpt from a piece by Sam Khater, CoreLogic senior economist, on the impact of negative equity on housing supply:

While the rapid decline in months’ supply is typically good news because it indicates a better balance between demand and supply, this decline is occurring less because of an increase in sales and more because of a drop in unsold inventory as a result of negative equity. Negative equity is typically a demand-side obstacle to sales and refinances, but currently is also restricting the supply of homes for sale. Analysis of the 50 largest markets reveals the metropolitan areas with the lowest levels of months’ supply also have the higher shares of negative equity. Markets with negative equity share of 50 percent or more have an average months’ supply of 4.7 months, compared to 8.3 months’ supply for markets with less than a 10 percent negative equity share. The presence of negative equity not only drives foreclosures, reduces the availability of purchase down payments and impedes refinances, but also restricts the ability of owners to list their homes for sale as the demand side of the market improves.

Paradoxically, as the flow of REOs has slowed over the last 18 months, negative equity has become a positive force in real estate markets by restricting supply in the face of increasing demand.
Although negative equity is probably contributing to the decline in inventory - especially in certain markets with high levels of negative equity - I think price expectations are a bigger factor in the recent decline in inventory.