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The ‘Inventory Shortage’ Myth

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When it comes to housing data something just doesn’t add up.

Consider housing inventory. How can it be that the U.S. Census reports there are 13.9 million year-round vacant homes in the U.S. while major media outlets like the New York Times reports that there is “not enough houses for sale to accommodate the recent  flush of demand?”

If you look at historical patterns for home vacancy rates, you notice it has been  steadily rising since the late 1960s. In the mid-1960s, home vacancy rate ran about five million units each quarter, according to the Census Bureau’s quarterly reports on vacancy rate. It peaked at 14.2 million in 2011, and now stands at 13.9 million year-round vacant homes, or 10.4 percent of the 133  million housing units.

So which is it: oversupply or undersupply?

If you believe the major news outlets there is a shortage of houses for sale. Or, to be more clear, a shortage of cheap houses for sale.

If you trust the government’s numbers then there’s a glut of vacant houses.

The  truth is somewhere in the middle. The artificial shortage of homes for sale and  the subsequent rising home prices are being driven by the two forces: major banks and their Wall Street buddies, many of whom were subprime lenders five years ago and now have transformed themselves into real estate “investors.” These all-cash foreclosure investors are buying distressed property at the low end of the price scale, muscling out first-time homebuyers and smaller mom-and-pop investors. Big  investors, like Blackstone, Colony and others, are snatching up low-priced foreclosures in  bulk and renting them out to people who can’t buy. By amassing thousands of rentals, the Wall Street landlords are putting a crunch on housing supply, driving up prices and lacing their pockets with profits.

Paradoxically, home sales and prices are up, but home ownership is down because it’s investors  — not first-time homebuyers — buying up the majority of homes.

RealtyTrac data shows about 3.5 percent of all home purchases in the first quarter were done by “institutional investors.” Institutional purchases are up 34 percent  from a year ago.

Meanwhile, the housing “scarcity” is a result of two factors: 1) borrowers who are “underwater”  and can’t sell, and 2) banks refusing to modify underwater mortgages. Since more than 25 percent of all borrowers — or 11.3 million homeowners — are underwater, these homeowners can’t sell, can’t refinance and can’t get a loan modification. So they’re stuck. Therefore, we have a lack of homes for sale.

Add to this paradox the fact that many homeowners are waiting to sell because  prices are rising in many markets, and you have the foundation of a bubble being artificially inflated by the architects of the last housing crash.

Here’s how one Sacramento real estate agent described the new investors flooding into his market: “In Sacramento, the investors are like locust. It’s a bubble in the  making. It’s a very complicated problem. Most of the homes they buy are vacant. They are unable to rent them. But they keep buying. It’s like the Richard Pryor movie “Brewster’s Millions.” It’s a Ponzi scheme. That’s what I see happening. Somebody is going to get caught holding the bag. We’ll be having this conversation again in three years, when everything blows up again.”

What  nobody knows is where this Monopoly game is headed. But one thing is for sure, this is not a normal real estate market driven by economic fundamentals.

So don’t get caught holding the bag.

Related News
America’s 14.2 Million Vacant Homes: A National Crisis
Is Real Estate Wealth Returning
Is the Housing ‘Recovery’ Real or a Mirage?

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