The U.S. housing market appears to be at a turning point, with prices stabilizing, inventory falling and new construction picking up (Charts 1a-c). However, it is too soon to expect a sharp rebound, or to expect much of a contribution to growth from real estate activity. A detrimental factor has been eliminated from the economic and psychological picture, but the bubble that burst in 2006 was massive and will continue to affect the dynamics of the real estate sector for many years.
The level of existing home sales has improved in the past few quarters. If we adjust for population growth, existing home sales are about 20% below pre-bubble levels (Chart 2). Residential foreclosure rates have fallen from 4.5% in late 2010 to just under 4% today. Distressed sales have slowed, however, not as a result of inventory clearing. Legal mis-steps by banks have delayed the foreclosure process, and banks have become more adept at managing distressed sales to avoid saturating the market and further depressing prices. There is still a massive shadow inventory that is not reflected in current supply figures.
Banks are increasingly finding it attractive to hang onto properties and place them into the rental market (called real estate owned, or REOs), particularly given that the infrastructure and skills to manage this business has become well developed over the past few years. Many of the same banks responsible for securitizing toxic mortgages in the bubble years, are now finding opportunities securitizing REOs.