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Housing in 2010: Supply Will Grow, Demand Will Slow

When we talk about future pricing on any item we must look ahead and determine two things: supply and demand. It is a rather simple concept but one that often is forgotten when we talk about real estate. In a blog post last week titled Pricing a House in Today’s Real Estate Market, I touched on supply and demand. We all realize that as the Fed exits the mortgage market and the Homebuyers’ Tax Credit expires, demand for housing will probably wane.

Today I want to expound on the other component of the equation – SUPPLY.  The supply of housing inventory will be made up of existing supply and the shadow inventory about to come to market.

Existing Inventory

In regard to existing inventory, in a normal market there should be approximately 5 to 6 months inventory. Any less than that will result in price appreciation. Anything more than 5 to 6 months will result in price depreciation.

Currently there are 3.6 million existing homes and 236,000 new homes for sale in America; that equates to 8.6 months and 9.2 months of supply, respectively, based on current sales rates.

But that’s only half the story according to Stan Humphries, chief economist at Zillow. In an article on Yahoo Finance he notes:

The official inventory numbers “don’t capture all the foreclosures that are out there,” or the so-called shadow inventory of homes waiting to come on the market.

Shadow Inventory

Let’s begin with the distressed properties that will come to market over the next couple of years. The experts originally placed that number at approximately seven million homes. However now that we realize that over half of all borrowers who have received a loan modification in the last 12 months have already re-defaulted, could the seven million number actually be a conservative estimate?

How about the pent-up selling demand?  This constitutes all those families that have avoided placing their home on the market because of unfavorable market conditions over the last few years. Once the market shows signs of improvement these properties will appear. How many?

According to that same article in Yahoo Finance it is rather formidable:

So how big is the “shadow” hanging over housing? A recent Zillow.com survey shows 8% of homeowners, or about 10 million Americans, are “very likely” to sell if and as local conditions improve.

Ten million homeowners are ‘very likely to put their homes up for sale when the market improves. Based on today’s sales numbers that is an additional 24 months inventory.

What does this mean to you?

Let us again go to Yahoo’s story on Mr. Humphries:

This “pent-up supply” combined with foreclosures already in the pipeline and those yet to come because of negative equity and job losses means it will take three-to-five years “before we see more normal appreciation rates return to the market,” the economist predicts.

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