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Why Sheila Bair (and Tim Geithner) Are In For A Wait...

Following up on the previous post about the home-selling troubles of our senior economic officials, I figured it might be worth elaborating on why the housing market is still pretty grim. In a word (give or take): Massive excess supply. Yesterday's Goldman Sachs daily research report (not online) makes the case better than I ever could:

In the first quarter of 2009, the homeownership rate stood at 67.5%.  This was almost two points below the 69.4% peak reached five years ago but still well above the stable 64% level that persisted for about a decade prior to 1994.  According to a research report released by the Federal Reserve Bank of Atlanta shortly before our 2007 paper, more than half of the roughly 5-point increase from 1994 to 2004, and possibly as much as 70% of it, was due to “the introduction of new mortgage products [while] demographic factors account for between 16 percent and 31 percent...”  ...

On the assumption that most (if not all) of the portion due to innovations in the mortgage market is in process of reversal, we expect the homeownership rate to keep falling, to 65.5% or possibly further.  This figure would be consistent with a 70/30 split of 1994-2004 surge in homeownership into mortgage-related (transitory) and demographic (permanent) factors.  It would also be consistent with the behavior of the homeownership rate prior to the mid-1990s; in the 30 years before the mid-1990s surge, this rate never rose much above 65.5% nor fell much below 64%.  In fact, we suspect it might fall toward the lower end of that range given three factors: (a) the poor state of the economy, which is hardly conducive to home purchase, (b) uncertainty about the prospects for house price appreciation, and (c) financing constraints. ... 

[T]he [resulting] inventory overhang will take a long time to work off. Conservatively, we estimate this overhang at one million units as follows: Since our November 2007 analysis, we have focused attention on the homeowner vacancy rate—the ratio of homes for owner occupancy that are currently vacant and on the market to the total stock of such housing—as the best “core” measure of excess supply.  In the first quarter of 2009, this vacancy rate stood at 2.7%, about one percentage point above the level that prevailed, with little variation, for the two decades preceding the latest run-up.  If we take that 1.7% base as the frictional excess that always exists in a well functioning market, then the excess number of units for sale is about 750,000 units.  However, the number of homes that are vacant year-round but have been held off the market “for other reasons” has also surged over this period, to a level that is about 500,000 units above its trend line.  We strongly suspect that many of these units (in addition to foreclosed units that may be for sale but still occupied) are a “shadow” portion of the overhang. 

Even if this shadow supply were a phantom of our imaginations, the excess supply on the market is worth about 2 years of average net demand, as calculated above.  The shadow supply would add almost two years more.

Obviously housing-market conditions vary from place to place. But it doesn't sound like Sheila Bair should expect to get her asking price on that five-bedroom Amherst home for several years at a minimum.

--Noam Scheiber