Pent up Supply???? June Housing Report In.

First a couple of facts: People want a new (different) car every 2.5 years and a new (different) house every 5 years. After these time periods pass consumers develop an "itch" to change. In economics this is called pent up demand, it is the reason we usually explode out of recessions. We HAVE to have the latest, greatest car/neighborhood etc. Since "the consumer" is 70% of economic activity in this country this itch coupled with easy credit is a recipe for economic success. Unfortunately I am not seeing this happening right now.

From Barron's (Click on blog title to go to article):

The median price of an existing single-family home dropped to $174,100, the most in records dating to 1979, the National Association of Realtors said today. Total sales rose 3.8 percent to a seasonally adjusted annual rate of 4.76 million from the first quarter and fell 2.9 percent from 2008’s second quarter.

So we must be at a bottom right? Prices are going to rocket from here, right?

“I don’t think we’re at a bottom yet in home prices,” said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis. “There’s also a pretty big shadow supply of houses. People are kind of waiting for the bottom but there’s a pent-up supply out there.”

Pent up supply???? Don't you mean pent up demand? Most people have mortgages on their properties, when they sold their house in 2006 the could do 2 things with the equity: Spend it on jetskis, cars, vacations, or a myriad of other things they didn't really "need" or they could have rolled it into their new house letting them buy a bigger house than they could otherwise afford in a sense leveraging themselves up. Turns out home values have gone down and all that equity is gone, how much the homeowner is underwater is dependent on how much they put down on their "new" crib. Between being underwater, having the moving itch, and/or being unemployed the consumer just wants the pain to end and is looking for any bounce in the market to sell their property. In the stock market they call it "being trapped" and believe me there is tremendous supply above these levels with people waiting to liquidate their 401k's.

That is just consumer supply. The banks also have alot of supply on their books and also are looking for any sort of market bounce to unload their foreclosures/delinquent loans. Theoritically they should just take the hit and liquidate them but then they would have to realize the loss on their books. Once these loans enter the stormy waters of mark to market accounting ( a fancy word for how much something is actually worth) then the banks would be exposed for the insovent insitiutions they are.

From the Congressional Oversight Panel (http://cop.senate.gov/documents/cop-081109-report.pdf )

The uncertainty created by the financial crisis, including the uncertainty attributable
to the troubled assets on bank balance sheets, caused banks to protect themselves by
building up their capital reserves, including devoting TARP assistance to that end. One
byproduct of devoting capital to absorbing losses was a reduction in funds for lending and a
hesitation to lend even to borrowers who were formerly regarded as credit-worthy.

As far as I can tell the only way out of this dilemma for both the banks and the consumer is inflation. On the plus side the Federal Government is excellent at spending money.....