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Housing Fundamentals Improved, But Not Enough

Housing data in the past couple of months has been mixed. Lagging closed sales data shows prices declining. The problem with that is that the most current data represents sales closed in November, which for the most part were sales that went under contract in September. That tells us nothing about the current market. Real time listings data, which over time has correlated well with subsequently reported sales data is actually up on a year over year basis, suggesting that the decline in prices may have ended, at least for the time being.

What is driving that is not an increase in demand. Most demand markers remain extremely weak. The number of willing buyers may have increased, but huge numbers of sales are falling through because of problems with financing. And while there are hints that the employment picture may be improving, employment has not improved enough to cause a sustained increase in demand that would lead to rising house prices.

The supply of existing houses on the market has been radically reduced, but builders continue to build. As a result, there’s no evidence of any real improvement in the supply demand imbalance. That being said, the shadow inventory problem that everyone is so worried about is overstated, for the reasons I have discussed in the past, and have reposted below. While shadow inventory is still a huge problem for the financial system, as long as people are willing to pretend that the banking system isn’t a walking corpse, shadow inventory won’t have much impact on prices in most markets from now on.

If people lose confidence in the system, then it’s game over, and none of this will matter. For purposes of this analysis, I will assume that that’s not going to happen. The land of make believe looks like it will persist for a while.

A real bottom in prices and the beginnings of a housing recovery will require a sustained increase in demand coupled with continued reductions in supply. The market isn’t yet where it needs to be in that respect. Housing remains at risk, and the financial system will therefore remain under pressure for as long as it takes to recognize the reduced value of housing collateral, a process which, in spite of 4½ years of declining prices, hasn’t even begun.

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