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The Housing Glut Becomes the Rental Glut

Cheers to the Wall Street Journal for publishing Brett Arends excellent piece on the housing market: “Home Prices: There’s No Quick Recovery Ahead.”

Arends makes a quick summary of the bullish points for the housing market: The Case-Shiller Home Price Index has more or less flattened after falling for three years, while some cities actually showed mild improvement.  Inventories of unsold homes have also improved, falling to 3.8 million from 4.5 million the month before.  This improvement is deceptive, however.  As Arends writes,

The picture on inventories isn’t as good as it sounds, either. A lot of unsold homes have simply been put up for rent instead, especially in the most difficult markets like Miami. The result? A glut of empty rentals as well.

It is likely that many of these money-losing rentals will be put back on the market within the next few years, nipping any would-be recoveries in the bud.  Arends continues,

New waves of foreclosures and distressed sales may be coming, too. In states such as California, it can take many months for delinquencies to turn to foreclosures, which means last winter’s bad news may still be coming down the pike. Meanwhile, vast tranches of teaser-rate mortgages are due to reset later this year and in 2010.

So, while there is indeed some improvement in the housing markets (and by improvement, we mean going from truly horrid to just plain bad), it’s still not time to break out the cognac and cubanos.   Demand from Echo Boomers will eventually absorb the excess supply of starter homes and rentals in many areas, even creating a mini-boom in some.  But we expect weakness to persist in McMansions for years…if not decades.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy