Inventory Increases Threaten Price Appreciation

The inventory deficit that jump started the recovery is now filling up fast with new listings as home sellers get the message. But are they hastening the day prices slow down?

The current January to April year-to-year to date increase in the supply of existing homes is the third highest in nearly 30 years writes CoreLogic Deputy Chief Economist Sam Khater in the current issue of CoreLogic’s Market Pulse newsletter.

“How much further can the rapidly appreciating markets go?” he asked, noting that most states are currently close to their fundamental long-term price trends relative to long term inflation-adjusted trend.

Khater suggested that the “invisible lid that has been on supply” is in the process of being removed. A key factor has been the fact that more homeowners not only are above water but also have reached or exceeded their “reservation price”-the price lowest price at which an owner is willing to sell. “For homeowners with positive equity, the reservation price condition is met when their willingness to sell is at a higher price than the market currently supports.

The process of adjusting to changing conditions is moving at a faster pace in the current real estate cycle than it has in the past. Real home prices increased 62 percent in the three boom years leading up to the peak and fell 47 percent in the following three years, about three-quarters of the increase.

The combination of a faster adjustment process and very low rates caused a rapid upturn in national prices in lae 2011 and early 2012, and rapid price increases helped bring many owners into positive equity and within reach of their reservation prices.