Real Estate & Mortgage Insights

Is Shrinking Housing Inventory a Sign of Recovery?

The U.S. housing market, which has been almost universally a buyer's market for the past few years, is now shifting in the seller's favor in many U.S. areas. Metro areas like Seattle and Washington D.C. now have buyers scrambling to get to new listings and engaging in bidding wars for available properties. Could this type of shift be indicative of a real housing recovery?

Here are the numbers: Nationally, new home inventory stands at 145,000 units, according to Commerce Department reports, accounting for a 4.7-month supply if sales continue at their current rate. In addition, existing home inventory fell 20.4 percent on a yearly basis in May, according to the National Association of Realtors. That represents a 6-month supply of houses at the current sales pace.

Real estate data is valid on the local level though, and there are several areas that have seen much more dramatic inventory decreases. King County, Washington (i.e., Seattle and its surrounding suburbs) was down 43.8 percent in May from the year before and the District of Columbia saw a 34.2 percent decline in the past year. Even areas that were hard hit by the housing crisis like Sacramento and Phoenix have seen major decreases in homes for sale.

Is this a sign that the housing market is truly on its way back to health? Not necessarily. There are several reasons that inventory is falling in many areas. For one, the number of foreclosed properties on the market has been dwindling in recent months, a byproduct of the robo-signing mess that caused major banks to halt or at least dramatically slow their foreclosure processes. That means fewer foreclosures have come through the pipelines in the past year, translating to a shortage of lower-priced homes in some areas. Distressed properties have been a big staple in the diet of investors and first-time homebuyers recently, and the lack of these has led to bidding wars.

That is not likely to be a permanent problem though. There are plenty of foreclosures waiting to be fully processed. The government reported that there were 2.54 million homes on the market in May, yet there were 4.05 million vacant units not yet up for sale. Those properties will be hitting the market within the next few years.

And another big reason for shrinking inventory is the epidemic of underwater homeowners. Because so much of the country's mortgage borrowers owe more on their loans than their homes are worth, they are unable to sell and add to the housing inventory.

"People who bought five, six, seven years ago, who in an ordinary market would be today's sellers, are stuck. They can't afford to sell," said Tim Ellis, an analyst with national brokerage firm Redfin. "There's hardly any market where prices aren't 20% lower than in 2005, 2006 and 2007."

The facts are pretty clear in the numbers: According to housing data company CoreLogic, in major markets where 50 percent or more of the homeowners were underwater, there was an average inventory of 4.7 months, while markets that had a 10 percent or less share of underwater homeowners had an average housing supply of 8.3 months.

Tight lending standards might also be keeping people from selling their current home and buying a new one.

In some markets, a stronger local economy is creating more demand for homes-and helping inventories dwindle. Take Silicon Valley, where newly created wealth (because of the booming technology sector) is boosting housing demand, said Lanny Baker, president of ZipRealty, a residential real-estate brokerage. Investors have swarmed some hard-hit markets in order to buy up as much property as they can-this has helped to chip away at inventory.

"In Phoenix and Sacramento, it's more like a glut of properties existed there a few years ago and has been gradually worn down," Baker said.

Why this doesn't mean a recovery

Some believe that these shortages, as well as any subsequent rise in prices, are likely temporary. "There is a whole mess of inventory out there-it's just not listed for sale yet," said Michael Feder, chief executive of Radar Logic. Radar Logic's Residential Property Index tracks daily home prices in 25 major housing markets.

"That's why we don't buy the idea that we're on the verge of a recovery. Any meaningful strength [in home prices] is going to bring out this inventory and will crush the recovery," Feder said.

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