RealEstateEconomyWatch.com

The national inventory of homes for sale is hitting long time lows, prompting both grins and grimaces among housing economists.

NAR reported yesterday the total unsold listed inventory in December has trended down to 2.31 million existing homes available for sale from a record 4.04 million in July 2007, and is 20.6 percent below a year ago.

More current reports on January inventories suggest the trend is going to continue for at least another month. Realtor.com earlier reported its inventory of listings was down 23.2 percent year over year and down 6.59 percent from December. Altos Research’s 20-city composite was down 14.46 percent in January from January 2011 and down 3.87 percent month over month.

The decline in NAR’s numbers drove the national inventory picture down to s 6.1 months supply, the lowest it has been in years. A six months supply is considered balanced between a buyers’ market and sellers’ market. Realtor.com reported the median time in inventory for listings fell to 103 days.

Simple supply and demand analysis suggests a lower inventory level will lead to stronger prices, but not everyone is smiling.

“The drop in inventory as a phenomenon may or may not pass quickly but one thing is clear – weird changes in market behavior happen for a reason – I don’t see declining inventory as a particular sign of strength in the housing market,” wrote Jonathan Miller of Miller Samuel Inc. last week.

Miller argues the drop result from a waning in seller confidence, low interest rates extended by the Fed for the next two years that have removed any sense of urgency and an artificially created, temporary lull in foreclosures .

“Declining foreclosure volume is one of the key reason inventory levels are dropping. The 1/3 decline in foreclosure volume in 2011 has resulted in a sharp drop in foreclosure inventory resulting in a sharp drop in total inventory. Distressed sales have been running at about 30 percent of total sales nationally for a few years but fell to about 20 percent in 2011. With a 2 million more homes expected to go into foreclosure over the next 2 years, a year-long internal review of procedure after the 2010 “robo-signing” scandal and the 50 State AG settlement with the largest services/banks, distressed inventory is expected to rise sharply over the next several years.

“Weak seller confidence is causing property not to be released into the market unless the need to sell is not optional. The 2011 home seller and buyer was bashed with the debt ceiling debate, the S&P downgrade of US debt, 400 point daily swings in the financial markets, the European debt crisis, the AG/Service settlement drama and the political stalemate on housing policy in Washington. What do people do when faced with the unknown? They sit and wait. Buyers had a lot more incentive to act with falling mortgage rates to record levels but mortgage underwriting grew tighter over the year as well.

“The extension of the low interest rate policy by the Fed through the end of 2014 has obliterated any sense of urgency by sellers. I am getting a lot of feedback from real estate professionals about this as well as seeing it within my own appraisal practice. There is a lot going on the world right now and the action by the Fed suggested that they weren’t particularly encouraged by the economy. To many this may seem as an incentive for sellers to get going and sell. But many of those sellers have to buy,” he wrote.

Scott Sambucci, COO of Altos Research, disagrees.

“It wasn’t long ago that the world was worried about millions and millions of foreclosed homes hitting the open market and crashing home prices another 30 percent. Now we’re worried there’s not enough supply. Huh?

“The problem with the housing market in the first place was too much supply at bubble prices and demand levels. Because housing supply is difficult to destroy or spoil (Greenspan’s suggestion to burn down houses and rotting REOs aside…), I’d much rather be in a place with very low supply – even a shortage in terms of “homes for sale relative to demand” – that causes prices to rise in the short-to-intermediate term. Trying to fine tune the “right” supply level is very dangerous,” he says.

Sambucci adds that other factors are influencing active market inventory. Some of the “lowness” in the active market inventory is due to the shadow/distressed inventory which will leak out this year via the continued short sale push from the GSEs and banks. Second, the REO-to-Rental bulk sales project by FHFA will keep sigmicamt inventory off the market in the short-to-intermediate run. Finally, when a shortage develops and lasts long enough, prices will rise. Then, home sellers and firms will re-enter the market as suppliers when they see prices stabilize.