Real Estate Forum: What’s up with housing inventory?
Ryan Summerlin March 23, 2013
I am excited to have Chip Wagner, an icon in the appraisal industry and friend of “Keeping Matters Current” as a guest writer today. Although Chip’s observations are primarily about Chicago – it’s a great “primer” to remind us of how the housing sector works and it is relevant to the majority of the country. I’ve said it before, and I’ll say it again – remember that the Summit County real estate market tends to lag behind Denver and the national economy by about 18-24 months, historically. Enjoy this information from Chip!
In classical economic theory, the relation between these two factors determines the price of a commodity. This relationship is thought to be the driving force in a free market. As demand for an item increases, prices rise. When manufacturers respond to the price increase by producing a larger supply of that item, this increases competition and drives the price down.
In real estate appraisal context, the principle of supply and demand states that:
The price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply.
My most simple explanation of supply and demand is: It is the relationship between sellers present in a market, which is the supply; and buyers looking, which is the demand. This relationship is reported in months’ supply of inventory.
Some (or most) might say that there are not enough “good” homes for sale. This could represent a shortage of supply, something we have not talked about for several years. It is allowing sellers to raise their asking prices and buyers who have been ‘shopping around’ are now willing to pay higher prices based on other homes they are comparing and/or contemplating to the home that they want.
There are several contributing factors:
1. New construction – We are seeing new construction picking up again at all price points, which is certainly a positive. But with fewer builders, and more conservative approaches after getting burned, builders are not keeping up with the demand that is present. This is leaving buyers searching for resales. And because of the slowdown in new construction, (few new homes were built between 2007 and 2012) the nearly-new resales rarely exist.
Lack of new construction is a contributing factor as many builders folded or downsized significantly over the past 5-6 years.
2. Foreclosures – Foreclosures are a trend that is affecting supply of inventory. Banks are slower at foreclosing, in some cases taking over 3 years through the process. In some cases, the buyers aren’t even interested in these properties, and the investors are picking up these properties and flipping them at a profit.
Foreclosure properties, once viewed as a deal perhaps 25% to 40% under market values, are now being sold at only a 7 percent discount according to
3. Investors – Investors have entered the market at greater levels, some to purchase properties to rent, others to rehab and flip them. With the high inventory, investors were able to seek out the best deals, now there are fewer homes available for them.
4. Few people really want to sell at the bottom – Personally, I think the biggest reason that our inventory is low is simply because everyone wants to buy at the bottom; but what seller really wants to sell their home at the bottom of the market? That being said, there are many sellers who cannot sell.
Recently, I heard Steve Harney speak at the Leading Real Estate Companies of the World Conference; he stated there are over 10 million people that are still under water and cannot sell their homes. That is a significant number – these are ‘move-up buyers’ that will create a domino effect. A portion may also represent the potential downsizing buyers who have that upper priced home to sell. This is a very complicated situation. There are many opportunities in the market as demand continues to surge.
Move-up sellers have pent up demand and are ready to buy – if they can sell!
Remember, our market dropped 37.6% as a region since 2007 (some areas fell less than 20 percent, and other areas fell greater than 50 percent). The buyers with 20 percent down lost equity in their homes. Buyers with 5 percent or 10 percent lost substantial equity in their homes. If they sell today, they don’t have the down payment necessary for that next home.
Various predictions by “experts” suggest our recovery may be anywhere between 2 percent and 8 percent annually. At a conservative 4 percent annual rate of recovery, it is five more years before we can reach 20 percent. Those who last purchased their home between 2006 and 2008 are being hurt the hardest in today’s market.
One positive is that renters are ready to purchase. Generation X and Y buyers now believe in homeownership; they want to get out of renting apartments because rents continue to go higher than taking out a mortgage. Interest rates remain at historic lows, with no indication of a significant increase of rates on the horizon.
Back to supply and demand …
A balanced supply of inventory is considered to be four to six months. A balanced supply is going to be neutral in pricing, while an undersupply is going to lead to upward pressure on prices – a seller’s market. An oversupply will lead to downward pressure on prices – a buyer’s market.
Our supply of inventory is at its lowest level since the end of 2006 and most areas have been reduced to a balanced supply of inventory, with undersupply observed in many sub-markets in the region.
The anticipation is that the pricing will continue to be pressured upward as the desirable properties (in terms of location and condition/modernization) will be gobbled up. Remember the multiple-contracts driving up values last decade? Many agents are now experiencing these trends again.
Get ready for a wild and crazy ride as our real estate market is pulled and pushed in all directions in 2013
Here are a few things to watch…
> Watch the days on market (DOM). Take time to understand if an area’s high DOM may be due to stale listings of homes that are overpriced, distressed and/or in inferior condition.
> Trend the increasing sales price-to-list price ratios – in many sub-markets that I appraise in, I have seen these trend from 93 percent to 96 percent or higher just in the past year.
> Track the number of pendings in relationship to the number of listings? One appraiser friend of mine tracks this and calls this “market velocity.” Right now, I see some areas where there have more pendings than listings in a given sub-market.
> Are the pendings priced higher than the previous sales prices? Another indication of an increasing market that I am seeing in many areas.
Welcome to, we all hope, the slow and steady housing market recovery!
For answers to your real estate questions, call Allison Simson at (970) 468-6800. Email – Info@SummitRealEstate.com. Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours. Want to know the value of your Summit County property? Visit www.SummitHomeValue.com.