2013 Portland Metro Housing Inventory = Feeding Frenzy

feeding frenzyHow low can housing inventory go?  According to Oregon’s Regional Multiple Listing Service (“RMLS®”), May’s inventory dropped to 2.5 months.  To clarify, according to RMLS®, “inventory in months”:

“…is calculated by dividing the Active Listings at the end of the month in question by the number of closed sales for that month. This includes proposed and under construction homes.”

Here are the numbers from 2011 to date:


                     2011 2012 2013
January       11.3     7.0      4.7
February     10.9    6.5      4.5
March           7.1      5.0      3.2
April              7.2     4.7       3.1
May               6.8     4.2       2.5
June             6.0     3.9
July               7.0     4.6
August          6.2     3.9
September   6.7     4.6
October         6.8     3.8
November    6.2     4.2
December     5.3    3.6              

Why is this happening?  Several dynamics are occurring at the same time:

1.  Demand as been lagging for five years, as qualified buyers waited and watched from the sidelines and sellers were either unable [i.e. due to negative equity] or unwilling [i.e. waiting for prices to recover] to list their homes;

2. Now, half a decade later, new buyers or move-up buyers are ready to purchase.  The result is pent-up demand, causing available housing to “fly off the shelf” like a midnight sale at Walmart.

3.  Interest rates are still historically low, but ticking up, and no one really knows what Bernanke will do next.  However, I believe that most informed observers believe he will act before the end of the year.  [A fully explanation of what he will do will have to await another post.  But for those wanting a hint, I believe he will take his foot off the Quantitative Easing Pedal.]

4.  The result is that homes are selling faster than they can be replaced by new listings.  Now that we’re entering the prime selling months, we should be seeing more listings, not less.  However, despite what the pundits are saying, the foreclosure crisis – in Oregon, at least – is not over yet. Here’s what we don’t know because the banks aren’t talking:

  • The number of homes in default, but no foreclosure has yet been filed;
  • How soon the homes that are in foreclosure, will actually be taken to auction [Right now the banks are almost exclusively foreclosing judicially, and this process can take a year or more to complete];
  • How many homes the big servicers, e.g. B of A, Chase, Citi, Morgan Stanley, Wells Fargo, Ocwen, Nationstar, etc., have intentionally not foreclosed, for one reason or another;
  • How much REO inventory the banks are holding and how fast they are moving homes into the market; and
  • Whether the banks, post-Niday, revert back to doing non-judicial foreclosures, which are far faster and cheaper.

Unfortunately, so far, the banks are holding their cards very close to the chest.  Collectively, these factors are creating what I call, a “Pig-in-the Python Effect”  – foreclosure inventory is moving through the system far too slowly before it gets to market.   The Big Banks and Big Servicers have the ability to speak to these issues, but choose not to.  This lack of transparency frustrates our ability to really evaluate how much “shadow inventory” exists, and how long it will take to clear itself out.

Additionally, there are consumer-related unknowns:

  • How many potential buyers would like to purchase a home, but with the more stringent underwriting requirements, simply cannot qualify;
  • How many potential buyers need to first sell their own homes before acquiring another;
  • The number of homes on the cusp of default, but not there yet;
  • How many buyers are willing to purchase another home, but need to sells theirs’ first;
  • And lastly, we don’t know how many sellers are still on the sidelines waiting for the market to go higher.

Lastly, new housing inventory is coming online only gradually. Builders, and the banks that fund them, are much more cautious today.

The Take-Away.  Today’s market is not normal; a healthy market is 6 to 8 months of inventory.  The factors directly affecting today’s low inventory can only be guessed.  But waiting on the sidelines is not a good strategy.  Why?  Because current interest rate levels are artificially low.  Once the Fed’s bond buying slows, their will only be one direction interest rates can go… And the moment they begin to tick upward, there could be several unintended consequences:

  • It will have the effect of disqualifying thousands of potential buyer/borrowers, due simply to their inability to qualify for a new loan;
  • If more sellers don’t jump into the market, inventory will continue to drop as frantic buyers chase falling supplies;
  • Contrary to 2005 – 2008, when willing appraisers confirmed the rising prices, today’s appraisers may balk at bubble prices, created when buyer demand becomes frantic;
  • If inventory builds up too fast, it could outpace demand, causing a dramatic drop in prices;

So, for the prudent seller I believe now is the time to list; and for the prudent buyer, now is the time to begin a housing search.   ~PCQ