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Monday, May 6,2013

A National Trend or just another dilemma to home buyers and sellers?


The shortage of available homes for sale has become a major trend before the busy spring home shopping season. The overall number of homes listed for sale nationwide on Zillow was down 16.6 percent year-over-year in late February. The drop in available homes for sale follows a similar downward trend exhibited in January, when the number of homes listed for sale nationwide on Zillow was down 17.5 percent year-over-year.


Understanding when inventory will be back to normal requires an understanding of what’s causing the squeeze first.

While buyers always want to buy as close to the bottom, sellers want to sell as close to the peak...

Drowning In Negative Equity

By far the largest single factor contributing to the shortage of homes on the market is the overall number of homeowners with negative equity, or so-called “underwater” borrowers – those homeowners that owe more on their home loan than their home is worth. In the fourth quarter of 2012, approximately 13.8 million – or 27.5 percent – of American homeowners with a mortgage were underwater. The negative equity rate has been falling steadily over the past few quarters, but remains far above historical norms.

The reason this matters to the current inventory shortage is because underwater homeowners have a very difficult time listing their home for sale. Because their outstanding loan balance is more than the home would likely fetch on the open market, a potential underwater seller would have to bring cash to the closing table to satisfy their obligations to their lender – a rare occurrence. Or they would have to negotiate a short sale with their bank, a normally long and often difficult undertaking.

As a result, many potential sellers are stuck where they are, and many potential listings sit unlisted, contributing to tight inventory.

Loss Aversion

Another reason for tight inventory can be traced back to simple economics: While buyers always want to buy as close to the bottom as possible to get a good deal, sellers want to sell as close to the peak as they can to maximize their profits.

Currently, the market is much closer to the bottom than it is to the top – while recovering nicely after bottoming in late 2011, national home values remain 18.5 percent from their 2007 peak. So many would-be sellers are holding out, convinced their home is worth more than it might currently fetch, or stuck on a figure they think they can achieve or need to achieve before selling.

Musical Chairs

The third major factor contributing to inventory tightness is a byproduct of the inventory shortage itself. Before sellers commit to listing their home, they first must be convinced they can buy another home after their current home sells. But because the inventory shortage is both so widespread (only 5 of the nation’s largest 99 metro areas had more homes for sale in February 2013 vs. February 2012, according to Zillow) and has been so well-publicized, many sellers fear they may not find a suitable home to buy after listing their current home. Think of it as a game of musical chairs – potential sellers currently sitting on an acceptable home are reluctant to stand up, lest they get stuck without another home once the music stops.

Individually, this is a perfectly rational reaction to the current inventory shortage. Collectively, the phenomenon becomes painfully selfreinforcing. Homeowners become convinced that inventory shortages will mean they won’t be able to find another home if they decide to sell, so they keep their home off the market, which contributes to still more inventory shortages.


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