What’s Behind the Real Estate Inventory Drought


If you’re scratching your head over the slim pickings for short sales, pre-foreclosures and REOs in your market, you’re not alone.  Virtually every residential category except luxury is in the same boat.

There’s a drought of inventory out there that is so widespread and deep that now it is seen as one of the leading factors limiting demand along with limited access to credit and unemployment.   Realtor.com’s total US for-sale inventory of single family homes, condos, townhomes and co-ops in May stood at 1.88 million units, down by 20.07 percent compared to a year ago and well below its peak of 3.10 units in September, 2007, when Realtor.com first began tracking these data on the national level.  On an annual basis the number of homes for sale fell in all but two of the 146 markets tracked by Realtor.com.  Nearly half of all markets saw a 20 percent year-over-year drop in the number of homes listed for sale, led by Oakland, Calif. (down 56.6 percent); Fresno, Calif. (48.8 percent); Bakersfield, Calif. (48.6 percent); Phoenix (44.7 percent) and Seattle (42.7 percent).

Surely, many sellers are still waiting until prices improve, but prices actually ARE improving in many markets.  Even Case-Shiller, the most conservative of the major indices, yesterday announced April prices were up in its 20 and 40 market indices.  A survey of economists released Monday found that most expect prices to rise for the balance of the year.  Yet nationally Realtor.com’s May inventories rose only 1.72 percent over June.

Shadow Foreclosure Inventories Not Reaching Markets

The foreclosure picture is even more severe—and more complicated.  REOs that need no major repairs or renovations to be resold or occupied are increasingly being snapped up, with an average time on market of just 10.6 weeks in May, the lowest of any property category, according to the latest results of the monthly Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.  Average prices for home purchases were mixed from April to May, shown in transactions reported by HousingPulse survey respondents. The average price for non-distressed properties rose 1.7 percent from April to May, while the average price for short sales slipped 0.7 percent. For damaged REO the average price increased 1.8 percent and for move-in ready REO the average price fell 1.5 percent.

Foreclosure starts are up generally since the AG settlement was signed in March by a shadow inventory of about 1.5 million properties that accumulated during the 18 month slowdown in the wake of Robogate is still stuck in the pipeline, especially in judicial states.  Now would be a perfect time to market these properties, but many lenders are waiting until new processing standards are in place, which may not occur until next year.  In Florida, the state supreme court should rule soon on the fate of 380,000 plus foreclosures.  Whichever way it rules, the result will further distort local markets by releasing a flood that will swamp price or by continuing the drought.

The Negative Equity Factor

At the National Association of Real Estate Editors conference last week, Stan Humphries, chief economist at Zillow, had a fascinating explanation for the inventory shortage.  He suggested that with more than a quarter of homeowners with a mortgage underwater today, they are frozen not just from buying but also selling. Lower inventories lead to price increases and at some point values rise sufficiently to move number of owners above water, and making it possible for them to sell, resulting in a temporary increase in inventories. Prices might plateau temporarily until demand reduces inventories again and prices resume their climb. The result is a “staircase” rather than a “u-shaped” recovery.

A new study of some of the hardest hit markets like Phoenix suggests that prices have been so low that they have been offering bargains for buyers because they became detached from economic fundamentals and now prices are rising as inventories reach record lows.

“Phoenix provides a good case study of a market which has been in transition over the past year,” said Tom O’Grady, CEO of Pro Teck Valuation Services.  “Market drivers here have all turned positive for home prices, with months of remaining inventory (MRI) dropping to the lowest in the country.  The big drivers are that these homes are selling at significantly below their replacement costs and rents, and the rental yields these homes can generate are far above historical levels.”

Phoenix Overshot the Downside

Looking at historical employment numbers and the median single family prices in Phoenix since 1985, the authors note a correlation up to 2004, at which time home prices went into bubble mode and became completely detached from the employment picture.  After the peak of the market in 2007, the median price began to revert back to a more sustainable level such as what would be suggested by the employment numbers.  However, as is typically the case with bursting bubbles, Phoenix home prices sank not only to the economically based level, but significantly below it.  Since home price cycles are measured in years not months, the authors note that it isn’t surprising that the Phoenix market (and other bubble markets) have spent the last several years in a bottoming out process before they begin to revert back to their fundamentally driven values.

“The Phoenix market recovery shows many positive leading indicators including the number of active listings in Maricopa County down 39.4 percent from a year ago, months of remaining housing inventory down to 2.5 months and foreclosure sales down 50.4 percent percent,” added O’Grady.  “In many areas of the Phoenix market, we are seeing nearly every ZIP code classified as “strong” or “good” according to our most recent Market Condition scoring system.”

Photo: Stefan Munder

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. I’ll be curious as to what others say but your quote from Stan Humphries mirrors what I have been saying for a while now. Employment alone can not bring back the housing market. You also need mobility and credit worthiness. Given the high number of people underwater, people can’t move. If they can’t move, demand will stay low regardless of whether they are employed.

    Here’s the fun double side to that sword… if people can’t move, how can we fix the economy? Ideally, we’d be geographically shifting… out of areas where jobs and industries have left and into the new industries and boom areas. Of course, if you can’t sell your house, or can’t sell your house without damaging your credit, you’re not likely to move. That leaves us with job shortages in certain areas and high unemployment in other areas.

    Cart… meet horse…

    Chicken… meet egg…

    Circular problem, no easy answer.

  2. Nathan,

    Excellent point and another reason why negative equity is such a vexing problem.

    Here are some more factoids on mobility that I found for a presentatino last week:

    -The average time a homeowner stays in a home has increased by from 6 to 10 years since 2007.

    -The majority of homeowners who bought the 33.5 million homes sold between 2001 to 2006 and have been frozen in place for five years or more.

    -More than two thirds of homeowners frozen in place have reduced their daily expenses in order to pay their mortgages in homes that they can barely afford.

    -Some 34 percent of homeowners have delayed expanding their family as they had planned and 32 percent report crowded living conditions because they don’t have enough space.

  3. Pingback: » Why is inventory so slow? It’s artificial. » South OC Housing News

  4. Many people remodeled their homes a few years back when the market was at a stand still. There’s no need for them to move anymore now that their home fits their needs better. To the ones that still want to sell… that eye sore kitchen they just dropped 20-30k on doesn’t bother them as bad so they can wait till the market improves.

  5. For Las Vegas…. a new “Robo-Signing” law that took effect in October of 2011 has dramatically decreased the current inventory available for sale. Since this law took place, inventory has been decimated and median list prices have gone up over 50% year over year.

    Absolutely terrible for buyers and agents because there is hardly anything to buy. Great for homeowners not paying their mortgage and great for the flippers buying properties at the Trustee sales…..

    Not good for anybody else.

    It is artificial….

  6. For us in California, REOs all but stopped when the robo-signing issue came into play in 2010. We buy at trustee sales so it’s not unsual for us to see people staying in the homes for years without making a payment.

    Even though the settlement is now through, some of our REO agent friends still see very little inventory and we’ve heard that several asset managent companies are being laid off. Short sales and trustee sales seem to now be the liquidation method of choice.

    Interesting to note that we also have several very well funded hedge funds buying at full market price in several California markets. They are beating out the smaller investors at trustee sales, listed REOs and some short sales. This is have-to-spend money and it will be interesting to see how long it lasts. Look for rising prices in some markets.

    This market is fake as fake can be. Keep an eye out for the imminent domaining of loans issue out of San bernardino. That will put a very fun wrinkle in the system. While technically this isn’t inventory yet, it addresses what could have been inventory.

  7. Negative equity is the overwhelming number here at 11m, dwarfing the shadow inventory of 1.5m, but assumes a given default rate. If current inventory is at 20-40% below for 2007 -2010, listings should be within the range of 2.28m to 2.66m so you only need to release half the shadow inventory to bring levels back to previous years. Negative equity would rise, and refuel the downward spiral. However, 25% of homes don’t have a mortgage so are not underwater. Any retirees sidelining for a recovery are going to be disappointed. There is, and only ever has been one solution, and that is to allow a full correction. Anything else merely kicks the can down the road, and exposes any small recovery to unforeseen, a major one being rate changes.

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