The Housing Market’s New Problem? Not Enough Homes to Sell
A worker stands in the early-morning sunlight on a home construction project in Newtown, Pa., on June 20, 2012.
It seems like just a few months ago, home values were plummeting as thousands of foreclosures flowed onto the housing market.
Now, the tables have turned. A huge draw-down in for-sale inventories around the country has tightened markets, fueling bidding wars and price increases. Housing, no longer blamed for dragging down the economic recovery, is being celebrated as the one bright spot amid a recent deluge of disappointing economic reports.
"It’s like the Twilight Zone, isn’t it?" muses Glenn Kelman, CEO of Seattle-based real estate website Redfin. "Consumer confidence and jobs are down, but real estate keeps going up. Now it’s the plank that the rest of the economy is clinging to."
Despite the head-scratching trends that seem to be more the norm than the exception in the housing market these days, there are a few explanations for the turn in real estate’s fortunes.
Here’s a look at what’s driving inventory down, prices up, and boosting residential construction:
Banks have left the building. Although new foreclosure filings have been creeping up lately, according to foreclosure information website RealtyTrac, the inventory of REO or bank-owned homes fell significantly over the past year from more than 817,500 in June 2011 to just about 630,000 this June. That leads some experts to believe that financial institutions are holding onto real estate assets until prices improve more.
"[Banks] aren’t providing any of the inventory or liquidity they once did through foreclosures," Kelman says. "There’s almost no one else to fill the gap."
Almost. With fewer foreclosures and previously owned homes for sale, more and more motivated buyers have bounced from bidding wars to the drawing board, plunking down deposits with builders who are only too happy to see a spark of demand in the downtrodden construction industry.
This week saw some heartening news from the homebuilding sector, with builder confidence taking its biggest jump in nearly 10 years. June housing starts echoed that confidence, with the Commerce Department reporting new constructions reached their highest level in almost four years.
"That’s an exclamation point on the inventory crunch," Kelman says, adding that it will be years before there is enough new construction to satisfy demand. "People who weren’t willing to wait for builders to finish a new construction project now are."
Indeed, reignited interest in newly built homes has produced a sizable increase in residential sales for builders over the past 12 months—almost 6 percent according to financial information firm Sageworks.
Sellers are sitting on the sidelines. In another inversion, it’s now sellers—not buyers—getting cold feet when wading into the housing market. With news that prices are inching up now, many sellers are waiting for property values to recover more before putting for-sale signs in their front yards again.
"Regular homeowners don’t want to sell their place because they think they can wait two years and get better prices," Kelman says. "Homebuilders are the only ones with product to sell."
Though there’s some concern that foreclosure inventory will start to tick up again, experts anticipate increased building activity to continue in coming months, especially since construction has been so anemic in recent years.
"There clearly is somewhat of a shortage of housing," says Earl Lee, president of Prudential Real Estate. "We need to be doing close to 1.5 million starts, and over the last eight years we’ve been doing less than 500,000 [a year on average]."
Investors. The investor share of the market has waned a bit in recent months, but that doesn’t mean the same benefits aren’t still there. With half of the country not able to qualify for credit, the stage is set for financially stable—and savvy—Americans able to obtain mortgages to scoop up properties at virtually unbeatable borrowing costs.
At last glance, interest rates on a 30-year fixed-rate mortgage were at a jaw-dropping 3.53 percent, according to Freddie Mac’s Primary Mortgage Market Survey.
"That’s why there’s such a spread between rents and mortgages right now," Kelman says. "You can get someone who can’t qualify for a loan to pay your mortgage. Investors know they’re going to get their money back immediately. Their property is going to be cash-flow positive and they’re hoping to get appreciation now."
That lucrative scenario has pitted investors against first-time homebuyers and other prospective homeowners, driving prices up and driving some would-be buyers out of the game.
Still, even with some encouraging news this week, most experts don’t think it’s going to be a smooth ride to the top for the real estate market.
"A lot of the trends are going to be saw-toothed," Kelman says."If people think we’re in a bull market for real estate and that prices are going to smoothly rise, I’m just not convinced of that. But there just isn’t any data to suggest that the bottom is going to be ripped out of the market the way we saw in 2009 and 2011 either."
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The Home Front
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