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Existing Home Sales Data Reinforces Artificial Supply Constraint

Existing home sales fell last month, but prices continued to rise year-over-year regardless (prices actually fell month-to-month by 0.5%). And this data point reinforces the story of the housing market, which is “recovering” based on constrained supply, in some cases artificially constrained supply.

Total housing inventory fell 20% year-over-year, and now stands at 5.9 months of supply, around 2.32 million homes, according to the data from the National Association of Realtors (which, like practically everyone that compiles housing data, exists to sell more and more homes. We have no independent data on the number of mortgages or foreclosures, a huge failure of public policy). That supply dropped 3.3% month-to-month.

What accounts for this? The charitable case is that foreclosures have slowed, and this constricts supply. Distressed sales actually increased in September, so let’s set that aside. And there are other factors. Underwater borrowers cannot put their homes on the market without a short sale agreement, and this incorporates at least 11 million homeowners. And most important, banks just keep the supply down by refusing to put large stocks of the homes they own on the market.

This constraint of supply is positive for home prices: the less the supply, the higher the price. Whether it’s positive for “housing” writ large is an entirely different question.

Moreover, we could see a dip in demand soon, to match the constrained supply. And prices would not hold up in that case. That’s because the expected gains from investor purchases of single-family homes for rent have not been totally realized. One major investor is pulling out:

Och-Ziff Capital Management Group LLC, the $31 billion hedge fund led by Daniel Och, recently told its investment partner, 643 Capital Management, that it wants to exit from the foreclosed homes business..

Earlier this year, proponents of investing in foreclosed homes were projecting a return of at least 8 percent a year from renting them out.

But the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California, the sources said. It’s not clear what kind of return Och-Ziff had expected to earn from renting out homes.

Och-Ziff was one of the industry leaders in scooping up foreclosed properties for rent, so a price rise has a stronger effect for them. But if a lot of investors pull out at once and try to sell, that may increase supply, but it’ll flood the market and depress prices. Moreover, this investor land grab accounted for a healthy amount of demand in the market. If the revenue targets aren’t being met, less and less investors will move into this space, and that cuts the legs out of the housing market.

So while banks are getting away with constricting supply for now, they may see a changed market in the coming months.

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David Dayen

David Dayen

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