IN MY MARCH COLUMN (“BEWARE THE VACANT Overhang,”), I talked about serious deficiencies in standard measures of housing inventory and pointed out that comprehensive government information regarding vacant housing units on the market showed development of a historically heavy overhang by the end of 2006. And in my May column (“Bad to Worse,” page 114), I discussed the subprime mortgage mess that figures to cut into the effective demand for homes.
I regret to say that recent data show further deterioration of the supply-demand balance in housing markets nationwide. The deterioration reflects not only the further buildup of vacant housing inventory, but also heavier impacts of tightening mortgage market conditions on housing demand. These revelations have prompted downward revisions to the NAHB's forecasts for home sales, housing starts, and house prices over the balance of this year and in 2008.
VACANT INVENTORY The unsustainable housing boom of 2004–2005 was propelled by overly stimulative financial market conditions, and the combination of easy credit and rapid house-price appreciation attracted hoards of investors/speculators into single-family and condo markets. The result was gross overproduction of housing units, and we're still getting a heavy flow of completions in markets that were already oversupplied by late 2006. Those investors/speculators are now trying to sell or rent increasing numbers of vacant single-family and multi-family units in the face of flagging demand.
The Commerce Department reports that the number of vacant year-round housing units on the market (excluding those for seasonal or occasional use) surged to another new record in the first quarter of this year, continuing the sharp upward trend that began early last year. The ratio of vacant units on the market to the total housing stock also surged to a new record in the first quarter. While it's hard to know what a “normal” ratio is at this time, it appears that there's an excess of at least 1.3 million vacant housing units on the market.
The recent run-up in vacant housing inventory on the market has been concentrated in for-sale units—both single-family homes and multifamily condos. But it's important to note that the number of for-rent units on the market also has climbed to a new record, reflecting recent increases in rental vacancy rates for both the single-family and multifamily sectors.
Rental units naturally compete with for-sale units on the market, and vacant units for rent can easily convert to vacant units for sale as market conditions shift. Indeed, many investors/speculators presumably will unload the units onto the for-sale market—with negative implications for new-home sales and house prices.
SUBPRIME PRESSURES The meltdown of the subprime mortgage market has continued apace, and credit standards for new loans have been tightening in the subprime and “near-prime” (Alt-A) markets and even in the prime segment. It turns out that inadequate documentation of borrower income and debt ratios infected a broad swath of mortgage lending during both the housing boom and the 2006 housing retreat, and various types of risk layering became quite common as well.
The NAHB surveyed builders of all sizes in April, following up on our initial survey of mortgage lending impacts in March. We found deepening adverse effects on home sales from tightening lending standards compared with the March results.
We also found adverse effects on sales cancellations, heavily concentrated among big builders. Indeed, two-thirds of companies starting more than 100 units per year reported adverse impacts on cancellations, and these companies (on average) said the upswing in cancellations had wiped out 10 percent of their backlog of signed sales contracts.
The tightening of mortgage lending standards may not yet be complete, and it's clear that we will not see the exceedingly easy credit conditions that prevailed last year. Fannie Mae and Freddie Mac have announced efforts to keep credit flowing to higher-risk borrowers, and the FHA program is regaining some market share as the subprime component shrinks. But the net effect of the subprime blowup on home sales will be heavily negative for both 2007 and 2008.