I was speaking at the New York Real Estate Bar Camp recently and asked the audience what to call the state of housing market right now, since I objected to the use of the word “recovery” and “a period of better stats without underlying fundamentals” wasn’t catchy. Philip Faranda came up (more like shouted out) a brilliant suggestion. We’re in a “Pre-Covery!” I loved it and it stuck.

I thought about the new word when I read a great Robert Shiller piece in the New York Times this weekend called: A New Housing Boom? Don’t Count on It.

Shiller questions the substance of the happy housing news we’ve all been reading about:

It’s hard to pin down, because nothing drastically different occurred in the economy from March to September. Yes, there was economic improvement: the unemployment rate, for example, dropped to 7.8 percent from 8.2 percent. But that extended a trend in place since 2009. There was also a decline in foreclosure activity, but for the most part that is also a continuing trend, as reported by RealtyTrac.

What’s missing from all the metrics being tracked and discussed is sharply falling inventory – that’s what is driving prices higher even though little else has changed.

The reason for falling inventory? Sellers, when they sell, become buyers (or renters) and with >40% of mortgage holders having low or negative equity, they don’t qualify for the trade up. We have been so focused on negative equity that we’ve paid short shrift to the impact of low equity.

Not only don’t many sellers qualify – they simply aren’t under duress i.e. they haven’t lost their job, don’t need to move, etc. so what will they do when they realize they don’t qualify?


They expect/hope hope the market improves eventually.

This has created yet another form of “shadow inventory.”

Although I certainly agree that the long term trend of mortgage rates doesn’t really correlate with housing prices since rates have been falling for years, weak employment and personal income are not justifying the last 6 months of housing market improvement.

I see falling mortgage rates as simply keeping demand steady (but rates can’t fall much further) and falling inventory is either pressing prices higher or to stabilization depending on the market.

Here is a simplistic generic but typical scenario in most of the markets I follow over a 2 year window:

– The number of sales in a market rises 2%.
– The number of listings in same market falls 30%.

In this scenario the rise in sales is NOT working off inventory – the math doesn’t work so something else is in play – low or negative equity is choking off new listings entering the market against steady demand caused by falling rates.

Since low inventory is not a local market phenomenon but is happening in nearly every housing market I can think of (sales rising modestly and listing inventory falling sharply) it makes this a credit phenomenon. I like to say “housing is local but credit is national.”

To make this discussion really crazy we could even say that tight credit conditions are actually prompting the pre-recovery something that on the surface is very counterintuitive. But in reality, tight credit is choking off supply and low rates are keeping demand constant. Then prices rise.


  1. […] last two data points come from Jonathan Miller, who calls the current environment a “Pre-covery.” “Sellers, when they sell, become buyers (or renters) and with >40% of mortgage […]

  2. The Katy Texas Housing "Pre-Covery" - Why NAR Doesn't Understand Their Own Data January 28, 2013 at 3:12 pm

    […] more critical factor behind the lack of homes for sale is the still large supply of underwater borrowers or those with little or no equity.  As appraiser […]

  3. Chaya Schwartz January 28, 2013 at 7:57 pm

    The last two lines actually sum up the entire question as to why the inventory is so low. Thanks

  4. Dennis January 29, 2013 at 1:01 pm

    There are new delvelopment near to completion all over New York

    • Jonathan Miller January 29, 2013 at 1:05 pm

      Yep there sure are. We’ll see a lot of new development enter the market starting now through 2014. But it’s not enough at this point.

  5. hangemhi January 29, 2013 at 5:21 pm

    As the saying goes “housing leads recoveries”. And it has to get started some way or another. Today it is tight credit = tight supply, therefore prices rise. Great, who cares. What matters is what happens next – and IMHO that is likely to be a loosening of credit standards which will allow BOTH more buyers and more sellers. And away we go.

  6. Home prices up, inventory down January 31, 2013 at 4:56 pm

    […] “Pre-covery” in real estate: would be sellers not selling because they can’t get a loan for their next move.  This limits inventory which leads to higher prices – which, one would assume, will eventually lead to the post-pre-covery otherwise known as the Recovery […]

  7. Kristian Andaker February 2, 2013 at 11:57 am

    Something doesn’t add up for me in this description.
    If inventory is low because people can’t trade up, shouldn’t demand also be really low (especially in higher price tiers)?
    If ‘people staying in their current houses’ is what’s going on, what’s driving demand to be so much higher than inventory, causing prices to rise?
    Around Seattle (see case Schiller index) prices rose last fall, when seasonally prices always fall.
    Something else strange is going on…

    • Jonathan Miller February 2, 2013 at 2:50 pm

      Actually that’s not what I’m saying. Sales are rising, not spiking in response to low mortgage rates. Inventory is falling much faster than sales are rising, because of tight credit, hence the upward pressure on prices.

  8. […] #Precovery […]

  9. J. Philip Faranda February 28, 2013 at 10:50 pm

    Thanks for the shout out Jonathan (maybe that is an awkward way of putting it). I think your analysis is prescient- we seldom consider the macro effect of credit on the big picture.

    • Jonathan Miller March 4, 2013 at 10:43 am

      You bet – your “pre-covery” phrase was brilliant.

  10. Interesting real estate links for week ending January 29, 2013 March 11, 2013 at 10:37 am

    […] Falling Inventory Has Created a Housing “Pre-Covery,” not “Recovery” […]

  11. Originations: Housing Sucks. No, It’s Great! | The Basis Point April 8, 2013 at 7:40 pm

    […] Julian Hebron, April 8th, 2013 Housing analyst Jonathan Miller likes to say that the U.S. is in a Pre-covery instead of recovery, a phrase which underscores the debate that’s going on with housing right […]

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