Friday, March 9, 2007

Subprime Problems May Increase Housing Inventory

From Bloomberg:

Rising mortgage defaults by subprime borrowers may add more than 500,000 homes to a residential real estate market already beset by slumping prices, according to CreditSights Inc.

In January, 4.09 million new and existing homes were offered for sale, down from 4.43 million in July 2006, the National Association of Realtors and the U.S. Commerce Department said. New homes accounted for 536,000 of the January total, down from a record 573,000 in July.

A five-year housing boom that ended a year ago was fueled in part by the growth of mortgage products marketed to borrowers with poor credit histories. Now, as defaults on subprime loans surge to a seven-year high, more than 20 lenders have closed or sought buyers since the start of 2006. The survivors are raising their lending standards.

``We estimate that the effect of looser lending standards could translate into another 533,000 homes coming onto the market as borrowers default -- an unwelcome phenomenon given the existing supply surplus,'' Sarah Rowin and Frank Lee of bond research firm CreditSights wrote in a March 1 report.

Existing housing inventory is one of the reasons I have been bearish on the housing market.

Housing inventory is expressed as "months available for sale given current sales rates." Another way to put this is "how many months would it take to clear existing inventory at current sales rates?" According to the Census Bureau there are currently enough new homes on the market for 6.8 months of sales at the current sales rate. This number has jumped around between 5.2 and 6.8 for the last year. Eyeballing the numbers, it looks like the lower 6s is about the median.

According to the National Association of Realtors there were 3.549 million existing homes on the market in January or 6.6 months of inventory. An increase of 500,000 would increase that level to a little over 4 million. Those totals won't come onto the market all at once. Instead, they will come onto the market gradually, which will make clearing existing inventory that much more difficult.