A steady drop in distressed home sales may spell a better future for builders, Capital Economics analyst and property economist Paul Diggle says.
In a US Housing Market Update released by the firm, Diggle notes that while “a substantial overhang of properties still in the shadow inventory” will keep distressed sellers in the market, the peak in distressed supply appears to be well behind us, giving homebuilders more room to grow with less competition from discounted existing homes.
“The continued drop in the supply of distressed homes on the market is encouraging homebuilders to break ground on more sites,” Diggle said.
Distressed sales made up 22 percent of all sales in September, down from 33 percent at the start of 2012, the update says. Furthermore, September’s share of distressed sales is the lowest reading in the five-year history of the data.
Meanwhile, starts shot up in September by 15 percent, hitting a four-year high of 872,000 annualized.
Diggle notes that a shift in distressed sales has also been helpful for builders. Short sales—typically sold at a smaller discount than foreclosures—have been gaining traction as foreclosure sales drop, creating “less of a depressing influence on the new-build market.”
While the shadow inventory may threaten the balance currently forming, the impact isn’t expected to be severe.
“Even after the signing of the foreclosure agreement, foreclosure timelines are still measured in years rather than months, and banks are showing little appetite to swamp the market with repossessed homes,” Diggle said. “So it seems unlikely that the shadow inventory is going to drive a large enough surge in supply to seriously dent housing starts.”
In addition, tightening supply in the new homes market has created a foothold for growth, Diggle remarks. September saw a 4.5 months’ supply of unsold new homes on the market, down from the long-run average of more than 6 months. While the current tight supply “has been a necessary corollary of the overbuilding in the boom years,” it provides a boosts for starts as demand improves.
While a resumption of normal homebuilding volume—in the region of two million yearly starts—looks unlikely in the near future, Diggle expressed confidence that the homebuilding recovery will continue to gain strength over the next few years.
“Our forecast for 750,000 housing starts during 2012 as a whole, first made in 2011, looks broadly on track. But our current forecast, for 850,000 starts in 2013 growing to 950,000 in 2014, may now be on the low side,” Diggle concluded.