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Inventory Myth Busting: Why is Home Inventory So Low?

August 4, 2017 by · Leave a Comment 

When it Comes to Explaining Low Inventory Some Theories Are Better Than Others

By Ralph McLaughlin | Jul 26, 2017 12:01AM

Everyone agrees the U.S. housing market is being squeezed by low inventory. What they don’t agree on is why.

As home inventory sits near post-recession lows, there are many hypotheses on why there are so few homes for sale today. Here are the five leading theories: (1) investors bought up too many foreclosures during the bust and are hording them as rentals, (2) rising prices have made buying a home unaffordable, (3) owners don’t want to sell if they don’t think they can buy another home, (4) too many home-owning boomers can’t or don’t want to move, and (5) owners who want to trade up can’t find an affordable home at the next level.

To date, these educated guesses have primarily been tested in isolation through simple correlations with inventory, with little or no regard to analyzing what their impact is relative to other factors. When you wear statistical blinders, you run the risk of ignoring potentially more impactful factors when you’re trying to identify the cause of a problem. To be fair, we’re just as guilty as anyone of looking at possible reasons for low inventory in in isolation when we looked at rising home values and a widening price gap.

To remedy this, we tested each of the five major hypotheses while controlling for the impact of each other hypotheses. The good news is that we found a statistically significant effect for each, which means there is some direct correlation with inventory.

The surprising news? Homebuilding’s impact – or a lack of it in some places – is by far and away the biggest influence when it comes to inventory woes, outweighing other explanations by a large margin. Across the 100 largest metros, our findings show that:

  • New home construction is strongly related to inventory. Every one percentage point increase in a market’s housing stock between 2010 and 2016 is, on average, correlated with inventory that is approximately 13% higher.
  • Investor ownership is tied to lower inventory. Every one percentage point increase in the housing stock owned by investors in a market is, on average, correlated with inventory that is 2.8% lower.
  • Older households – by hanging on to their homes – aren’t necessarily driving down inventory, at least not yet. Every one percentage point increase in the housing stock owned by those aged 55 and over is, on average, correlated with inventory that is actually 3.6% higher.

The Hypotheses

To test the impact of five popular explanations of why inventory is low across the 100 largest housing markets, we ran a regression model (see below for details) on the number of homes for sale in a market in 2017 Q2. We standardized inventory by dividing inventory by the number of occupied homes in that market. Here’s what we tested:

  • Markets with a higher share of investors will have low inventory because investors sit on homes and rent them out;
  • Markets with a bigger recent price increases will have lower inventory because higher home values make affordability worse;
  • Markets with a larger increase in price spread – or the gap between prices for premium, trade-up and starter homes — will have lower inventory because as prices of expensive homes outpace less expensive ones it’s harder for existing homeowners to trade up;
  • Markets with a larger share of older homeowners will have lower inventory because older households don’t tend to move often;
  • Markets with more homebuilding will have more inventory because more new homes helps provide new supply that existing homeowners can trade up to.

The Results

We found that proponents of each of the five popular explanations aren’t wrong – at least not entirely: when controlling for the role that other explanations play, each individual explanation has a statistically significant relationship with inventory. The surprising news is that when it comes to relative impact, homebuilding and investor activity are about the only ones that matter – as they had the highest positive and negative impact of the five explanations.

Inventory Model Results
For every 1 percentage point increase in … …there is a __ change, on average, in inventory across the 100 largest metros.
Homebuilding +13.3%
Share of homeowners aged 55+ 3.4%
Price Spread 0.2%
Home Value Recovery -1.8%
Investor Ownership -2.5%
See methodology section for more details on our model.

First, the factor with the largest impact is homebuilding. Across the largest 100 metros, every one percentage point increase in a market’s housing stock between 2010-2016 is, on average, correlated with inventory that is approximately 13% higher. For example, if the Los Angeles metro had increased their housing stock by 2.6% instead of 1.6% between 2010 – 2016, we could have expected their existing home inventory to increase from 10,181 homes on the market to 11,504 in 2017 Q3: an increase of over 1,300 homes.

Second, the factor with the second largest economic significance is investor ownership. Across the largest 100 metros, every one percentage point increase in the housing stock owned by investors in a market is, on average, correlated with inventory that is 2.8% lower. For example, if investors in the Boston metro reduced their ownership of the housing stock from 43.7% to 42.7%, we could have expected their existing home inventory to increase from 3,290 homes on the market to 3,382 in 2017 Q3: an increase of nearly 100 homes.

Third, and surprisingly, we find the share of owner occupied homes owned by boomers is actually positively correlated with inventory. Every one percentage point increase in the housing stock owned by those aged 55 and over is, on average, correlated with inventory that is actually 3.6% higher. Why is this? It’s tough to say exactly why, but we think the effect is driven by the fact that markets with the largest share of boomers just happen to be in retirement destinations such as Florida and Arizona – states that haven’t much been impacted by low inventory because they tend to build a lot of homes. This also isn’t to say that boomers owning a larger share of the housing stock won’t become problematic in the future. Their decision to either age in place of move to a retirement home could have a substantial impact on home inventory as well as the broader economy.

Last, we find that relative to these other explanations, home value recovery and price spread have relative small economic significance. A one percentage point increase in home value recovery is correlated with a 1.6% decrease in inventory across the 100 largest metros. A one percentage point increase in the price spread is correlated with just a 0.2% increase in inventory, which renders the correlation close to being economically insignificant. Both effects, however, are small relative homebuilding and investor activity.

Where Myths Do, or Don’t, Play out in the Biggest U.S. Housing Markets

The Conclusion

The takeaway here is that not all explanations for low inventory fully explain why the national home inventory is at or near historic lows. While our modeling of all five of these theories are not definitive, they do provide a step forward in explaining which explanations matter most. It turns out the leading explanation for low inventory is that investor activity and a lack of homebuilding are both significant predictors of low inventory. On the contrary, home value recovery and price spread play a much smaller role while an aging population plays a countervailing one. The silver lining from these results are that homebuilding and investor activity are factors that could be made more attractive through a combination of strategically targeted land use, tax, and financial policies.

Methodology

We tested for the impact of five popular explanations on inventory using a multiple linear regression, which is a statistical method used to test for correlation between several variables (factors) on an outcome of interest. Multiple linear regression methods allows us to estimate the impact of each of the major explanations for inventory while taking into account the effect of the other explanations. We used an Ordinary Least Squares (OLS) regression to predict how each factor would affect inventory across the 100 largest metros when controlling for the potential effects of the others. Our measure inventory is the number of homes for sale in a market as of 2017 Q2 divided by the number of occupied homes in that market. In doing this, we standardize inventory levels by the size of a market’s housing stock.

We quantitatively measure each explanation is as follows:

  • Homebuilding: percentage change in a metro’s housing stock between 2010 and 2016, sourced from the U.S. Census;
  • Boomer control: share of owner-occupied housing stock owned by a head of household who is aged 55 and over, sourced from the 2015 American Community Survey (ACS);
  • Price spread: percent difference between the median priced premium home and the median price starter home, per our 2017 Q2 inventory report;
  • Home value recovery: the total value of a metro’s housing stock relative the its pre-recession peak value, sourced from Trulia’s home value estimates;
  • Investor ownership: share of a metro’s occupied housing stock that is rented, sourced from the 2015 (ACS).

Below is a table of the regression results.

Regression Model Results.
Variable Coefficient (T-Value)
Homebuilding 0.133 (6.44)*
Share of homeowners aged 55+ 0.034 (4.49)*
Price Spread 0.002 (4.73)*
Home Value Recovery -0.018 (-7.24)*
Investor Ownership -0.025 (-4.10)*
     Diagnostics
           R2 .6
           Observations 100
NOTE: *Denotes statistical significance at the < 1% level. The dependent (outcome) variable is Inventory per occupied household in Q3 2017. The full data used in the regression model is available for download here.

As seen at: https://www.trulia.com/blog/trends/inventory-myth-busting/

Yellen Raises the Possibility of a “High-Pressure” Economy

October 19, 2016 by · Leave a Comment 

from National Mortgage Professional Magazine, Friday, October 14, 2016

Federal Reserve Chairwoman Janet Yellen took a dramatic departure from her usual talking points to wonder aloud if a “high-pressure” economy would be able to erase the lingering economic wreckage created by the 2008 crash.

According to a Reuters report, Yellen used a speech today before an economics conference to outline potential solutions to the continued problems that have prevented a complete recovery from the last recession. Yellen stated whether a fix could be achieved “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market. One can certainly identify plausible ways in which this might occur. Increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending, especially if accompanied by reduced uncertainty about future prospects. In addition, a tight labor market might draw in potential workers who would otherwise sit on the sidelines and encourage job-to-job transitions that could also lead to more efficient—and, hence, more productive—job matches. Finally, albeit more speculatively, strong demand could potentially yield significant productivity.”

Yellen did not speculate on what this scenario would mean for the housing market, which has seen home prices rising far ahead of wages. Nor did she address what has become the new guessing game in economic political circles: when will the Fed start to raise interest rates with greater regularity? Instead, her comments pointed to a new toolbox that central bankers would be able to use in the event that the 2008 situation were to happen again.

“If strong economic conditions can partially reverse supply-side damage after it has occurred, then policymakers may want to aim at being more accommodative during recoveries than would be called for under the traditional view that supply is largely independent of demand,” Yellen said, adding that it would “make it even more important for policymakers to act quickly and aggressively in response to a recession, because doing so would help to reduce the depth and persistence of the downturn.”

Loan Delinquency Rate Up, Potential Home Sales Improve

August 23, 2016 by · Leave a Comment 

by Phil Hall, August 22, 2016 as published on National Mortgage Professional Magazine

The week is getting off to a bit of a decent start, at least in terms of the latest housing market data.

Black Knight Financial Services’ “first look” at July’s mortgage environment has determined that the U.S. home loan delinquency rate rose 4.78 percent from June, although it is down 3.38 percent from July 2015. There were more solid numbers regarding foreclosure starts—61,300 in July, down 11.54 percent from June and down 14.27 percent from a year ago—and on the total pre-sale foreclosure inventory—1.09 percent, down 1.68 percent from the previous month and down a significant 28.36 percent from one year earlier.

However, the number of properties that are 30 or more days past due but not in foreclosure reached nearly 2.3 million, up 108,000 from June but down 70,000 from July 2015.

Separately, First American Financial Corp.’s proprietary Potential Home Sales model determined that the market for existing-home sales underperformed its potential in July by 1.3 percent or an estimated 92,000 seasonally adjusted, annualized rate (SAAR) of sales. This an improvement over June’s revised under-performance gap of 1.8 percent, or 104,000 (SAAR) sales. First American also reported that the market potential for existing-home sales grew last month by 0.15 percent compared to June, an increase of 8,000 (SAAR) sales, and increased by 5.4 percent compared to a year ago.

However, Mark Fleming, chief economist at First American, noted that a thorny problem that has bedeviled the housing recovery is showing no signs of abating.

“Low inventories still remain an issue, dropping to a 4.6-month supply, down from the 4.7-month supply seen in April and May, and from the 4.9-month supply of June 2015,” he said. “The constrained supply in this sellers’ market continues to frustrate potential homebuyers and adds further upward pressure to nominal home prices, which rose an estimated five percent year-over-year in May, according to the Case-Shiller House Price Index.”

Buyer’s Agents Needed Now more Than Ever

June 8, 2016 by · Leave a Comment 

http://www.theresource.tv/homepage/rebuttal-buyers-agents-dying/

Better Details Needed for FHA Back to Work, Conv “Extenuating Circumstances”

May 6, 2015 by · Leave a Comment 

Better Details Needed for FHA Back to Work Program and Conventional “Extenuating Circumstances”

 

By Pam Marron

For past short sellers who have gone through the loss of a home and are eligible to return, criteria needed for a new mortgage is vague. The result is a partial story.

Proving “extenuating circumstances” and confining the timeline for an economic event is a struggle for loan originators and underwriters trying to comply with vague criteria. Because of so many variables, lenders deny new loans for borrowers with a short sale or foreclosure in their past even when they may be eligible to repurchase again.

We HAVE to get this right. Detailing WHY the loss of a home is the hardest thing for affected consumers to provide… not because they can’t remember, but because they relive it.

In attempting to originate the FHA “Back to Work” loans, it would seem the process is simple. The criteria for “Back to Work” is to show a 20% reduction in income sustained for 6 months minimum that resulted from a loss of employment or reduction in income, which is considered the “economic event”.

Here’s the bigger problem. Most who had an “economic event” tried to hang on, wiping out assets along the way. But, while trying to hang on, homeowners accumulated more debt to stay solvent and in most cases, to stay current on their mortgage. Then, another “economic event” hit, assets were gone and debt is so excessive that there is no choice but to short sell.

As a mortgage broker in Florida where it is common to see Boomerang Buyers (those eligible to re-enter the housing market after a short sale or foreclosure), I often hear the full story for those who have lost a home and want to re-try home ownership again. An economic event followed by a prolonged period of trying to stay put, finally ended with another event where funds were no longer available and the only choice was to short sale, occurred in a great deal of these cases.

Proof also exists to show a good number of these folks had excessive debt that pushed up debt to income ratios incredibly high prior to the sale of their underwater home.

But, it gets confusing for a new mortgage. For the FHA “Back to Work” program, HUD approved counselors are able to determine hardship and can provide those who attempt a re-purchase one year after a short sale, foreclosure or bankruptcy with a housing counseling certificate.

However, that doesn’t mean the mortgage company will approve the mortgage. Because the economic event may have occurred years ago and short sale processes took months or years, documentation such as tax returns and bank statements needed to show a lack of assets may stretch over the previous five to seven years rather than the most recent two years that lenders are accustomed to evaluating.

Mortgage companies who offer FHA “Back to Work” are reluctant to promote this almost two year old program due to few of these loans getting approved. Part of this is because loan originators don’t provide enough documentation, and the other problem is that there seems to be wide discrepancy between underwriting opinion on these files.

Varying opinion also exists for “extenuating circumstances” noted in Fannie Mae and Freddie Mac guidelines for eligibility of a new mortgage under four years. Underwriting interpretation of these guidelines vary greatly from lender to lender for the few mortgage companies who offer these loans.

For loans submitted with what seems to be an iron clad “extenuating circumstance” or proof of the 20% reduction in income for 6 months minimum for FHA’s “Back to Work” program, underwriter opinion seems to vary widely. Some underwriters think the decision to short sale was too soon, while others wonder why homeowners waited. It seems they are trying to justify the sale was “not strategic”.

The income, current credit and assets of borrowers who have gone through a short sale and are trying to re-enter the housing market is more than acceptable per current guidelines. They have to be next to perfect, and they know it. Other than knowledge of the past short sale, these are loans that any lender would want to have on their books.

Those who make policy need to talk directly with affected past short sellers. They need to come to where underwater home problems still exist and see for themselves what is really happening. This can truly help the housing industry recover.

 

 

 

 

Short sales show up on credit reports as foreclosure, sellers unable to get back in housing market

May 25, 2013 by · Leave a Comment 

Posted: 05/09/2013

abc action news.j callaway2 Click on picture and link to video

 

TRINITY, Fla. – More and more short sales are turning up as foreclosures on credit reports. The issue caught the attention of Senator Bill Nelson who this week asked for a federal investigation into why the mortgage industry does not have a separate credit reporting code for short sales.

Like some of his Trinity neighbors, George Albright unloaded his underwater two-story thru a short sale.  A short sale damages credit versus a foreclosure that slashes consumer scores.

It’s been more than two years since Albright sold his home, and now’s he ready to buy again, but can’t.  It’s showing up as a foreclosure on his credit.

Veteran mortgage broker Pam Marron found it’s a scenario repeating itself over and over again.  Short sellers discover they can’t get back into the housing market because their credit report shows a foreclosure.

Why? The banks and credit bureaus have no special code to report a short sale, according to Marron, who recently traveled to D.C. to educate lawmakers and lobby groups like the Consumer Protection Bureau to do something about the glitch that could affect many.

Experian says the problem is not theirs. In an email, a spokesperson explained.  “The short sales and foreclosures are being coded correctly on Experian’s credit reports.  Where we have found the discrepancies occurring is in the underwriting process.”

Short term, Marron says, short sellers must demand a letter from their lender that states that the property closed is a short sale and any marking of a foreclosure should be deleted.

Copyright 2013 Scripps Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Read more: http://www.abcactionnews.com/dpp/money/consumer/taking_action_for_you/short-sales-show-up-on-credit-reports-as-foreclosure-sellers-unable-to-get-back-in-housing-market#ixzz2ULORB9SL