U.S. home values continued to tumble in October, falling 0.6% from September levels and 5.0% from levels one year ago (see Figure 1).  Home values were down 25.8% from peak levels, just shy of the 25.9% that home values were estimated to have fallen during the Great Depression.   October marked 52 consecutive months of declines in home values at the national level.

Foreclosure liquidations receded slightly in October with 1.14 out of every 1,000 homes in the U.S. being liquidated in the month, a likely by-product of the various moratoriums put into place in order to investigate documentation issues in the foreclosure processes in various states.  See Figure 2.

A quick overview of the factors continuing to confront the housing market can be broken down into supply- and demand-side factors.

Supply-side:

1. High supply of existing homes for sale. According to NAR, the inventory of homes for sale was 3.86 million in October, up 8.4% from October 2009.  Monthly supply of inventory was 10.5 months.

2. High supply of vacant homes.  We current have 9.8 million vacant homes that are for sale, for rent or held off the market for reasons other than occasional or temporary use (see Figure 3 for rates).  Based on historical levels of frictional vacancy (the normal level of vacancy which exists as people move between homes, new homes are built but not occupied, etc.), we estimate that current levels of vacancy represent 1.7 million excess housing units.  See Figure 4.

3. High supply of shadow inventory. LPS Applied Analytics estimates that there are more than 7 million loans delinquent or in foreclosure, and Corelogic estimates that 2.1 million of these will ultimately be liquidated (the Corelogic number actually contains REO properties not yet listed which are not included in the LPS number).

Demand side:

1. Negative equity reduces demand. As of the end of 2010 Q3, Zillow estimates that 23.2% of single-family homes with mortgages are in a negative equity position.  These homeowners are typically not in a position to buy new homes.

2. Unemployment reduces demand.  With the unemployment rate 9.8% in November, lots of households either have an unemployed worker or continue to worry about the prospect of unemployment, making them unlikely to want to undertake a home purchase right now.

3. Low mortgage rates (4.5% in the Zillow Mortgage Marketplace as of Dec 7) and improved affordability (national home values back to November 2003 levels) are helping the demand picture a bit but not nearly enough to offset other negative factors.

Bump Ahead thumbnail image courtesy of Flickr/christinericks.