It looks like we are headed for the third season in a row when shortages of homes for sale will drive prices up too high for first-time buyers, keep renters renting and make it tough for move-up buyers from to move up.  Where have all the sellers gone?

NAR’s chief economist, Lawrence Yun, chooses his words carefully and is careful to qualify statements he cannot support with hard data.  Here’s what he said in a recent assessment of the inventory picture:

“The spring buying season is right around the corner, and current supply levels are not even close to what’s needed to accommodate the subsequent growth in housing demand,” says Yun. “Home prices ascending near or above double-digit appreciation are not healthy – especially considering the fact that household income and wages are barely rising.”

To make the matters worse, reports suggest the buyer season is startng earlier than norma, reported the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey March 21.

“Buyers are flooding the market earlier than usual and inventory hasn’t caught up, creating somewhat of a bidding frenzy on any quality listings,” said an agent in Kansas.

Realtor.com’s Chief Economist Jonathan Smoke sees the same signals. “Our analysis of February data on realtor.com indicates that the real estate market is seeing increased market velocity early this year amidst strong demand and slow inventory growth. The median list price in February increased slightly from January. Inventory volume is slowly increasing, but demand is growing faster.

With listings entering the month lower than last year, February must provide an extraordinary influx or new listings to prevent shortages more severe than those of last year. The news is bad:  listings are up, but not enough.

• NAR reported total housing inventory at the end of February increased 3.3 percent to 1.88 million existing homes available for sale, but is still 1.1 percent lower than a year ago (1.90 million).
• Realtor.com, the largest online listings database, reports February active listings are down 3.3 percent from last year and rise only 1.9 percent in January;
• Redfin reports new listings in February are up 10.8 percent over January, but active listings are still down 3.7 percent from last year;
• RE/MAX reports February active listings fell 1.3 percent from January and are now 12.2 percent below February 2015.
• RBI (MidAtlantic Region) reports new listings in February were 5.7 percent higher than a year ago, but total active listings are still 5.7 percent below February 2015.

Supply and Demand in Reverse

Under the rule of supply and demand, rising prices should motivate owners to sell, especially price sensitive owners who have the luxury to pick the best time to sell. The nationwide median price for an existing single-family home was $213,800 in January, up 8.2% from this time a year ago, according to NAR. Price appreciation was at the highest rate since April 2015 and part of a 47-month upward trend of gains.

 

 Though highly seasonal, inventory levels have not recovered from their 2013 decline.

 

One reason that supply and demand break down in real estate is that few sellers are primarily motivated by price.  In fact, one out of four must sell immediately no matter what how the market looks.  Owners facing job relocation; family changes like divorce, marriage or birth of a child; or inability to afford the mortgage or upkeep accounted for 26 percent of home sales in 2015.[1]  The remaining 74 percent sell for such reasons as their home was too large or small; they want to move closer to work or family; leave a deteriorating neighborhood; or retire.  They may be able to wait a few years for the best market conditions—but each still has a time limit.  The median tenure for owning a home is nine years.

Since one out four owners are forced to sell every year, millions who would like to sell are choosing not to do so despite rising prices.  Here are six reasons that might explain what’s keeping owners from selling.

1. One of five homeowners with a mortgage still doesn’t have enough equity to sell.

Much attention has been paid to the impact of negative equity on sellers.  Negative equity peaked in 2012 when 31.4 percent of all homeowners with a mortgage were underwater, declining to 10.7 percent today.  However, selling and closing costs make it difficult to sell a house with less than 20 percent positive equity.  Nearly one out of five—18.9 percent- of owners with a mortgage are considered “under equitied” because they have less than 20 percent positive equity.  That amounts to about 9.5 million owners.[2 oi

Outlook.  Price increases are expected to moderate this year, slowing the pace of rising equity.  A significant number of owners will continue to be equity-challenged for several years to come, especially in the former “sand state” markets in Arizona, California, Florida and Nevada that lost the most value during the crash.

2. Buyers who bought during the 2004-2006 boom are waiting to make a profit.

In the boom years of 2004 to 2006, about 16 million families bought homes.  Most still own the homes that they bought at peak or near-peak prices a decade ago.  CoreLogic now estimates the national median price will not reach the peak of 2007 for another year; most of those hardy boom buyers who kept current with their mortgage payments all these years would like to sell at a profit when it comes time to sell—and they are not there yet.  Homes.com reported that through the third quarter of last year, only 57 percent of the top 300 markets had reached or exceeded their peak prices.   Ten years is a long time to wait to break even on a home.

“People trap their savings in a home. They’re running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?” said Nobel laureate Robert Shiller in 2013.  For thousands who paid top dollar for their homes in the years leading up to the boom, those words sting.   Few would disagree with Shiller that, from a purely investment perspective, they would have done better in baseball cards or comic books.  Now that prices are rising,m even at the slower pace of  3 or 4 percent this year, who can blame these survivors if they wait a little longer to realize a small portion of the profits they expected  when the bought a decade ago?

Outlook. Even when the national median home price reaches the peak set in 2007, roughly half of the nation’s homes will worth less than buyers paid during the boom.   Owners in hotter markets are seeing their homes act more like a a good investment but  those who  bought at or near peak prices in markets where prices rose fastest during the boom years.  Many owners will have to wait another five years or more before they realize much profit on their homes.

3.  Inventory shortages are squeezing move-up buyers.

The housing economy does not work unless move up buyers can sell and buy at virtually the same time.  During the five-year housing depression, from 2007 to 2012, growing families created a pent-up demand for more space. Rising incomes and rising prices have finally made it easier to sell, especially for families in their first homes.  However, inventory shortages are forcing prices and limiting choices for move-up buyers looking for median priced homes, especially in hotter markets like Seattle, Portland and many California markets.

Move-up buyers need stable markets where they can sell and buy without any unpleasant surprises.  Tight inventories and rising prices are creating uncertainty.  Homeowners who want to sell are worried that they will not be able to find another property that’s affordable. These fears are creating a vicious cycle in many markets.  Fewer homeowners do not think they can buy so that they do not want to sell.  The bottom line is there are even fewer properties available—especially the entry-level home in such great demand from young buyers.

Outlook.  Over the long term, the recovery has been stabilizing markets and price swings are moderating, despite the inflationary impact of inventory shortages.  The “vicious cycle” problem will ease as more inventory of mid-priced homes slows price increases in that tier.

4.  There are five million fewer homes to be sold

During the five years of the Foreclosure Era from 2007 through 2012, more than 5 million single-family homes switched sides from ownership to rental.  The single-family rental share of the entire housing stock has increased by 44% from just over 9% a decade ago to more than 13% today.^[3] Today they are owned by investors, most of them small local entrepreneurs with ten properties or fewer.  With rents rising hand in hand with home values, these new style landlords are simultaneously making money from tenants and appreciation.  Don’t expect them to sell their mini gold mines to homeowners any time soon.  In fact, they are providing thousands of young prospective owners an affordable alternative to a house where they can start their families while they wait to find an entry level home they can afford to buy.

Outlook.  For the forseeable future, the new single family rentals will remain rentals even if the handful of hedge funds who entered the single family rental market depart.  They never accounted for more than 5 percent of all conversions.  However, within five years or so, the dynamics may change for smaller investors as well.  Massive apartment construction is already slowing rental increases and in two or three years, especially in overbuilt markets, investors might find returns on single family rentals to be less attractive. 

5.  New home construction was decimated by the housing crash and hasn’t yet recovered.

New homes could deliver enough the mid-priced homes to take the pressure off of move-up buyers, but it will take a few more years.  Home builders suffered more in the housing downturn than any other industry, with the possible exception of mortgage brokers. After the crash in 2007, thousands of smaller builders closed down, and many of those who survived did so by selling off their inventories of prime real estate earmarked for future construction.  Difficulties getting the working credit builders need to build houses, and a growing shortage of skilled workers have hampered the home building industry’s recovery.  Since 2012, builders have increased the new-home inventory by 50 percent, but production will not reach its near-normal level 1 million until around 2020.[4]  (See New Vs Old—Who’s Responsible for the Inventory Shortage?)

Outlook.  New home construction will make a signifcant difference mid and upper tier inventories over the next three years.  New construction will help the inventory picture even more if enough builders address the need for more affordable housing with condo conversions and townhome developments.

6.  The Boomer timetable has been delayed.

For a number of reasons, including later retirement ages, longer careers, better health, loss of household wealth during the Great Recession and the decline in home equity, Boomers are downsizing later than forecasted and many arent downsizing at all.  As a result, the flood of sales from the second largest generation hasn’t happened that some demographers predicted would hit in 2015 hasnt happened-at least yet.  The average retirement age has been increasing about one year every year. Selllers are getting older-the median age of sellers has risen from 45 to 54 over the past nine years.  Yet as many as 38 percent of Boomers aren’t planning on moving at all.  A new study by the Bipartisan Policy Center predicts that an extraordinarily large number of Boomers want to age in their family homes and are not downsizingf.  The BNC found that between 2011 and 2013 the average number of rooms per home actually increased, both for all older Boomers and for younger Boomers born between 1956 and 1965.

Outlook.  Rising values will make it difficult for thousands of Boomers to delay converting their equity into cash while they can stil enjoy it.  Most cannot afford the retrofitting necessary to age in place.  Sales by Boomers will increase in direct proportion to rising equity.

Ten years ago, when every day brought more bad news about the housing economy, several economists tried to focus on the future by describing the shape the housing recovery would assume.  Some said it would look like a “V”, with a rebound as steep as the decline had been.  When that did not happen, someone else suggested the recovery would be slower, more like a “U” shape.  Then the pessimists chimed in with an “L” shape, because they believed the peak levels of the boom years were gone forever.  Finally, five years ago Scott Sambucci, who was at Altos Research at the time, came up with the theory of the Catfish Recovery.  He said that the old myths would not work anymore.  The recovery would be volatile and unpredictable, sometimes unpleasantly surprising, like a catfish who lies quietly on the muddy bottom of a river and then suddenly lunges to the surface to catch an insect.  Perhaps today’s inventory shortage is nothing more than a final lunge of the catfish before he calms down for good.