Fed Study: Hot Prices in 2013 Promise Better Inventories in 2014

This year’s hot price increases could be more important than rising rents, credit availability or even underwater homeowners in freeing up the inventories that stifled hundreds of housing markets last season and kept sales from reaching their potential, according to a new study by two Federal Reserve economists.

Price increases and job growth are more important than buyers’ access to credit, freedom from negative equity, owners’ decisions to wait to achieve greater gains and the loss of large numbers of owner-occupied homes to rentals in a market when it comes to building inventories.

Last season opened with inventories at near-record lows in February, down by 15.97 percent nationally compared to a year ago and is less than half its peak of 3.1 million units in September 2007. Inventories increased in 100 out of Realtor.com’s 146 markets and even markets, spurring price increases and seasonal increases in homes for sale.

“Current inventories of homes for sale are low given more than a year of house price appreciation,” concluded the study Fed by economists William Hedberg and John Krainer released recently. “County-level data suggest that many homeowners are waiting for prices to rise further in their markets. Markets that have seen the strongest house price appreciation and job growth are the ones where for-sale inventories have declined the most.”

The economists analyzed a number of widely discussed causes of the inventory decline beginning with the transformation of about 3.5 million formerly owner occupied homes into rentals since 2007. “It is impossible to say though whether declining sales are pushing down homeownership rates or falling homeownership is pushing down sales, or both are interacting with each other in a complicated feedback process,” they concluded

Nor could they find strong evidence that homeowners are keeping their homes off the market in hopes prides will continue to rise. “On balance, counties that experienced relatively large increases in house prices over the past year also experienced relatively large declines in inventories available for sale,” they said.

As underwater homeowners being locked out of the market due to their lack of equity, the economists agreed impact of negative equity is significant, but “its strength diminished as the recession ended and the recovery got under way. Underwater borrowers may have been locked into their houses in a way that impaired the normal functioning of the housing market. But that effect seems to be waning.”

“It turns out that variables such as recent house price appreciation and changes in employment are the most robust predictors of recent changes in housing inventory. In other words, once we account for changes in house prices and employment in a county, other variables, such as changes in the for-rent inventory, the underwater share, or local price-rent ratios, do little to explain the inventory of houses for sale. Thus, current homeowners may be making a rational choice to postpone selling in the hope that prices will rise further. However, this behavior tends to be short run. In the longer run, the link between the level of house prices and for-sale inventories is strong. If prices continue to rise, inventories for sale should eventually rise too,” they concluded.

Source: Census Bureau data