Every discussion of today’s housing market begins and ends with the observation that listings continue to lag last year by 20 percent. That’s a huge number that has been consistently high for at least the past three to six months.
Clearly, prices have been improving and local markets have been stabilizing as a direct result of unusually low inventories. Upon closer examination, however, there’s good reason to be concerned about the causes of the inventory shortage and what we might expect when conditions change.
One factor that’s keeping properties off the market is negative equity. Despite government programs like HARP about 27 percent of all homeowners with a mortgage have been frozen into their homes since 2006 because they are underwater or close to it. No doubt many, perhaps most, would sell if they could afford to. One theory suggests that as improving prices raise values, volumes of previously under water properties will be listed, causing prices to plateau, at least temporarily. (see What’s Behind the Real Estate Inventory Drought)
However, neither the negative equity factor nor the simple unwillingness of sellers to risk this market until prices improve beyond their current levels explains the drought of foreclosures. According to the Campbell Surveys/Inside Mortgage Finance Housing Pulse, distressed sales are nearly half the market, but short sales are accounting for about half of distress sales. Foreclosure starts are up generally as lenders get back to business after the AG agreement was signed in March. Campbell reported that move-in ready REO properties are increasingly being snapped up, with an average time on market of just 10.6 weeks in May, the lowest of any property category. Where have all the foreclosures gone?
The government’s June monthly housing scorecard brought the issue front and center. Inventories of homes are at their lowest rate since October 2005 and the number of vacant units held off the market, largely foreclosures, reached over 4 million in the first quarter. That total is higher than it has ever been, a 12 percent increase from last year and about twice the size of the national inventory of homes for sale. By way of comparison, total home sales this year are expected to be less than 5 million. In other words, right now in America there are nearly as many vacant single family homes as all the homes that will be sold this year.
At the height of the boom in the summer of 2006, virtually everyone, including the most gung ho real estate bulls, realized the crazy price increases had lost touch with reality and could not continue forever. I’m starting to get the same feeling about today’s inventory picture. Houses have being kept off the market for reasons that have nothing to do with supply and demand.
When the floodgates open and release the backlogged foreclosures and underwater properties that are artificially reducing inventories— and they surely will — what should we expect? Will demand be adequate to absorb volumes of new listings or will we once again take another step backward in this prolonged and painful recovery?