Housing and Wealth – Part I (Supply and Prices)

Tuesday, September 22, 2009

Executive Summary

Tracking the housing market helps us see where the economy is headed.  Two categories of data that are useful to focus on are house prices and housing supply.

House Prices

Measuring the value of housing is critical, because the amount of foreclosures and the economic fallout from them are both tightly linked to the difference between the current value of a house and the mortgage held on it.

Housing Supply

To appreciate housing supply, there are three things we need to track:

• Total number of existing homes for sale (expressed in either a raw number or in “month’s supply,” which takes the raw number and divides it by the current sales pace)
• Total number of new homes for sale (expressed the same as above)
• Amount of “shadow inventory,” which are homes that are on the books of the banks but have not been released into the market for sale

This is Part I of a two-part report.

There are hundreds of moving pieces that we could track to divine where the economy is headed.  But to know what’s coming, we really only need to track four or five of them.

The housing market is one of these.  We are going to dive into housing in this Martenson Report, because as goes housing, so goes the nation.  We did this a year ago and it’s time to do it again.  This report will scour the data for clues about where we are in the cycle so that we might predict what comes next.

Suffice it to say that the single largest source of financial leverage for the average family is found in its mortgage.  And upon that leverage is piled still more leverage, in the form of exotic Wall Street securities (CDOs, etc.), most of which have not gone away, but remain stuck on bank balance sheets.

Above all, house prices are the most important element to track, because those determine the size of the resulting foreclosure losses and also how likely people are to “walk away” from their homes.

Like any asset, houses move up and down in price in relation to the laws of supply and demand.  And, because houses are a leveraged asset, ample liquidity must be available to lend.