Horsemen of the Apocalypse

Inventory is the horse pulling a mean army into multiple real estate markets. There are numerous local inventory blogs around the web that I've put into my links, so we can get far superior data to what the used house salespeople want you to read. This January's inventory is breaking previously known trends and only by looking at the graphs can you really understand how broken the system is. What you will understand by the end of this post is that there will be no soft landing in real estate. Its not different here no matter where here is. Some areas won't be as hard hit, but the most bubbly will see prices drop a lot between now and 2014. Don't want to wait that long? You'll see the biggest price drops in 2009.

National




This is the national picture. Notice something? Large gains year over year. Now, this is from ziprealty; they do not cover all areas. In fact, only about a third of all homes for sale in the US. But it covers enough to give a great national trendline. See the large gains in inventory in January? You might want to rethink the chances of a 'spring bounce.'

Sales peaked at 7,072,000 in 2005 nationally. What about last year? 5,652,000. Right now, we're at ~10 months of national inventory. That's huge! It should be 5 or 6 months of inventory. So let's look more into 'problem areas.'

Greater Los Angeles: Horseman #1



Bubbletracking (better known as BMIT) is probably the grand daddy of all the inventory tracking blogs. OCrenter runs it and has provided good data for a long time and thus has been in my links forever. I've chosen to pull his data for LA inventory and sales. Same trend as the national inventory: Constantly increasing inventory.


Inventory in LA is now at a full year! Sales have stalled at a new low. Yes, the fed is trying to boost them, but as soon as more Jumbo loans are available, LA will soak everyone of them up that it can. Expect LA alone to weaken the national market.



Washington DC: Horseman #2


DC is climbing like it never did last year. Something has "broken away." For fun, I plotted Houston on the same graph: Houston is almost back up to peak inventory already (but everywhere is following that trend...).



People say Arlington is different. Nope. Read the following blogs "decade of sales." That is where this data is from:
http://novabubblefallout.blogspot.com/
I tried putting into my sidebar links, but blogger hasn't updated... I'll figure it out later. ;) I picked 2000 as a normal year, 2005 was the peak year, 2007 is when it started to fall apart. Just in case you want to see everything and see how 2007 has undercut everything:



Yep. 2007 wasn't a great year. 2008 will make used home salespeople pine for 2007. I've watched people from 'high end areas' crying on couches because their homes lost 40% of their 'value' in nominal dollars before. Is not something I want to see again, but its coming.

Its different by the beach, NOT!


Look at this area where everyone wants to live south of LAX in LA. Notice something? A sharp spike up. Now this could be due to the writer's strike shutting down TV, ad, and some movie production in greater LA. But look at the slope up! My data has no comparable increase in inventory in 2007. That wasn't a great time to sell a home; 2008 is going to be far worse. Did I mention LA will soak up any jumbo loan bail out package?

Phoenix: Horseman #3


Phoenix is definitely one of the four horesemen of the Apocalypse: California, Florida, and "DC" round out the bad boys. This chart's data is from BMIT again. That's at least 18 months of inventory (sales at 3,290 in December)! Yes, plotting months of inventory and inventory on the same chart is a bit crowded. But look at the trend. From low inventory in 2005, break away inventory in 2006, even worse in 2007, and now its out of control in 2008! (Note: I assumed January sales matched Dec 2007 for graphing purposes just to show how much worse this year is starting off!)

Comment on Florida

I didn't have the heart to publish charts on Florida. West Palm Beach has 10 years of inventory and things are getting worse every month. :( Orlando and Tampa could stop building homes and still have a surplus in 2011. Miami is expected to sell ~10,000 homes this year yet will build 16,000+ condos alone!

Peak inventory is usually late in the year (August or September Nationally). We're on track to exceed last year's peak inventory by end of May. That implies we'll see 20% more inventory in 2008. Combine that with an expected drop in sales to ~4.5 Million homes/year, it wouldn't be unreasonable to expect 10% to 20% national home price declines per Case-Shiller.

As long as the government insists on keeping home prices elevated, builders will continue to flood the inventory. Cities are losing jobs as 'house poor' owners have no choice but to cut back on anything but debt service. Let's also not forget that it is once again socially acceptable to walk away from mortgage debt. Why not, there isn't any way 20 million of the homeowners will every pay it off... Nothing to surprise the housing bears. Meryl Lynch is getting out of the CDO market, without that huge liquidity source, the 'gold rush' to buy homes is over!

Edit 2/3/08: Updated graphs, cleaned up some spelling. We should now be close to the bottom of the inventory for the year, but most areas are high this year. Yes, around the superbowl is when listings should drop off in such numbers in order to 'refresh' for the 'spring selling season.' I even saw a superbowl Sunday open house today... Hmmm...

Edit #2: See Calculated risk The article is interesting. Real estate commissions have fallen to normal boom levels. If the normal pattern repeats, RE commissions will drop from the current ~0.5% of GNP to 0.25% of GNP. Don't even think sales are bad now; its taken 30 months to drop to a boom level of real estate sales. The historical pattern is that it will take another 24 to 36 months to hit minimum sales. Since we're in uncharted territory... it will be interesting. Could RE commissions drop to unprecedented levels? I don't know, but I wouldn't be surprised.

Neil