The Demographic Dividend and the Threat of Phantom Home Inventory‎

‎And the truth is that still five years later, one of the main factors that prevent a complete recovery of the American economy is the volume of properties to be sold.‎

‎After all, housing is the main asset of families, and, in housing, as in all sectors that produce goods, an excessive level of inventories is the worst enemy in terms of valuation. It's that simple. Lower prices are needed to unload the stock, but lower prices in turn increase the inventory of increasingly anxious sellers. And the anxiety of sellers and the reluctance of buyers is reinforced by the realization that prices may fall further, while activity, confidence and asset prices deteriorate... and debts are maintained. They call it a vicious circle.

‎In the case of the US, we currently have a visible inventory (on the market) of 3.6 million houses for sale and an invisible one of another 1.5-1.7 million "ghost" houses, an amount that includes houses that have remained in banks but have not yet gone on the market. The current situation of the "visible inventory" has been normalizing although it is still far from being at what is considered a healthy level: it is at 9.4 months of sales compared to the 6 months that is estimated as a normalized market. However, the price of homes and therefore economic activity, given the strong weight in family assets and in the economic structure of this type of asset, has not improved: so far this year, the Case-Shiller index has accumulated a fall of -4.5% compared to 2010. Obviously, it is difficult to expect improvements when the sector is pressured by that significant amount of "phantom inventory": 1.5-1.7 million off-market homes that represent no less than 45% of the visible inventory (30% of the total inventory). And it's really this phantom inventory that shows what needs to be filtered through the market before the American economy normalizes and can walk again without having to carry a heavy backpack full of bricks.‎

‎How long will it take for this surplus to disappear? It depends. From the supply side, the adjustment has been brutal. It is clear that no one is going to produce anything when there is already plenty of it. Consequently, we have seen how the construction of new homes has slowed down over the last 3 years around an annual rate of 550,000 homes (a really depressed level if we compare it with the 1,500,000 annual houses averaged since 1960). But in addition to the builders, also in the offer you have to count the banks, mainly interested in buying time to take real estate assets to market without lowering the price of them, for obvious reasons (they have them on the balance sheet). On the other hand, from the demand side, we have two drivers to absorb the stock and normalize prices: on the one hand the inflationary policies of the Fed (the price of the rest of the assets must change so that everything remains the same) and on the other, a more important and real one: the demographic dividend, that is, the number of people. If we assume a reasonable population growth of 1% per year (in line with the last 20 years), we would have a creation of about 3 million new claimants per year, which at an average of 2.6 people per household according to census data, would generate about 1,100,000 new households per year, something that compares relatively well with the historical average of 1,250,000 households per year and the 1,300,000 that were created over the course of the last decade. It is true that during crisis the rate of family formation is reduced, but it is also true that this demand does not disappear, it simply remains latent and implies potential demand that accumulates and that, at some point in time, will balance the mismatch people / housing via increase in rents first and sale of houses later.‎

Thus, assuming these figures, 1,100,000 of new demand and 550,000 of new production, in the US about 550,000 homes a year could be eliminated from the phantom surplus, which would take about 3-4 years of normalization and orderly liquidation of inventories, which is really the only way out that the sector has (Standard & Poor's, much more accurate, speaks of 47 months). From there, economic activity would be reinforced both by the improvement of family balance sheets (the main wealth asset will return to value and there will be more disposable income) and by the return of a progressive normalization of construction activity (which as we have said, is currently at very depressed levels), and of adjacent industries (both industrial and financial), in addition to the "stock market effect" that will anticipate this recovery.‎

However, it has always been said that ghosts roam in the gloom confusing themselves with the shadows of the night, and this case is no exception: according to statistics, there are about 2 million additional houses (practically an amount similar to the current phantom excess) in which the value of the debt exceeds that of the asset, with a drop from the peak of the cycle greater than 50% (or about $150,000). If the cycle twists and the conditions of those mortgaged deteriorate, these houses could be foreclosed, which would increase this "phantom inventory" in a very significant way...‎

‎However, the positive side is that for the moment, that is something that is not happening: despite the circumstances, the ratio of formation of new households has practically normalized, quickly reversing towards the historical average after having marked the minimum in March 2010 with only 357,000 new homes. And we are also seeing how despite the circumstances, the "phantom inventory" has been slowly reducing after having peaked in January 2010 with 2 million homes (vs the current 1.5-1.7 million). That is, it seems that we are witnessing the scenario of orderly liquidation of inventories. Releasing ballast and gaining time until reaching balance. All in all, it is likely that there are still 3-4 years of demographic dividend and deleveraging ahead to see if this ghost continues to fly over our heads or if it finally fades. Let's hope the train doesn't derail and we can reach that light at the end of the tunnel.‎