How Confident Are You That We Are In A Housing Market Recovery?

When I attempt to put a time frame on the housing market recovery, I start by looking at real estate supply and demand numbers for the entire country.

It is obvious to me that the supply of homes for sale still far outweighs the current rate of demand, yet when I read most of the marketing and blogs produced by real estate agents, the message seems to be that "the worst is now behind us and we are well into the heart of a housing market recovery."

I'm sure for some that is true, but I suspect that most are just like Tallahassee, and that is still seeking a housing market recovery.

Housing Market Recovery Begins With Supply And Demand

The real estate community is quick to report falling supply from coast to coast, but they are kidding themselves and anybody else who reads what they are publishing.

Don't fool yourself on supply. Sure, the number of homes for sale in Tallahassee and elsewhere is finally on the decline, but for most markets it is because many sellers have not re-entered the market after failing to sell (something we track regularly at the Tallahassee Real Estate Blog).

Think about it. In Tallahassee, our current rate of sales (# of homes selling each day) is about 55% of its historical average. Yet supply is falling?

The number of new homes being built is at an all-time low, but run the numbers ... it is not the reason for falling supply. Currently, for every 3 homes that do sell, there are more than 3 that fail to sell. And one of those failures leaves the market to wait.

Household Formations Is Not A Quick Fix

One thing that would certainly help bring about a housing market recovery would be an increase in the household formations that have cooled since the peak of the market.

Hopefully, millions of people this year are going to crawl out of their parents' basement and purchase (or lease) their own place, and this would definitely be a boon to the demand side of the equation. Of course, it was supposed to happen last year, but apparently these people need jobs before they are ready for a place of their own.

In reality, we are doomed if we think first-time homebuyers are going to be the bedrock of the housing market recovery. They will certainly be the driving force behind the re-balancing of supply and demand, but there is another problem that needs to be addressed, and household formations will not occur quick enough to bring about a recovery in less than five years.

Must Fix Demand Before We Can Diminish Supply

While new household formations will help chip away at the supply and help start a housing market recovery, there is something that causes me more concern right now.

We have to do something to free up the buyers who want to move, who have a history of owning a home, but have a certain condition that is currently stopping them from buying a home.

What condition could this be ... ?

They own a home and do not know how to get it sold.

The fact is they owe more on their home than it is worth, so they are not moving.

If they sell their home and bring cash to closing, then they do not have enough equity to buy a replacement home. If they short-sale a home (to save the cash), then they cannot get a loan for a few years and therefore cannot buy a home.

Rather than make a decisive plan of action, many of these "would be buyers" are sitting in their homes and waiting for a housing market recovery.

The image on the right is fairly accurate for current conditions in the Tallahassee real estate market. The image shows that for every 10 "historical" homebuyers in Tallahassee, 1 is a pure investor, 4 are first time homebuyers, and five need to sell a home before they buy.

Right now, more than half of these final five are underwater in their homes (or have too little equity to justify a move). And we know that the glut of supply is creating pressure on home values, so this situation is actually getting worse, not improving like we would expect during a housing market recovery.

Fewer and fewer homeowners are in a position to move. Home values in Tallahassee are down about 1/3rd from the top of the market, and that was over 5 years ago.

Kick-Starting A Housing Market Recovery

We need to modify the way we are handling short sales. There are plenty of homeowners who want to move and are upside-down on their mortgages, but are current on their payments.

Banks would be wise to work short sales out for these people and not brand them as credit risks. I have long-advocated for a short sale amnesty program, as it would accelerate the housing market recovery and slow down the real estate depreciation that is plaguing most US real estate markets.

Until we see something happen to free-up these trapped seller/buyers, we really must consider our current situation a crisis, and not a housing market recovery.