There is much discussion about how housing prices have stabilized lately, implying the housing market is progressing forward into recovery mode. Econ 101 says differently. Instead, the industry is amidst a “false bottom,” propped up by a lack of inventory.
Macroeconomics says supply and demand determine prices. An increase in demand with a constant supply will increase prices, and a decrease in supply with a constant demand will also increase prices. Currently, the housing market is in the latter situation.
According to the Multiple Listing Service, the demand (purchases) for housing in the top two foreclosure counties of Arizona show that home purchases this year are flat and consistent in volume with the monthly sales activity seen in 2011, while there is a reduction in the volume of homes listed for sale across the state and also across the country.
What is more disturbing is the recent surge in cash buyers. But, why is this happening? FHA home purchase prices are constrained by the appraisal values since lenders will not underwrite loans for more than the value of the home. For this reason sellers are showing a preference for cash offers. There is no problem selling more than the appraised value to a cash buyer, which in turn bumps out the FHA buyers—many of whom are first-time homebuyers.
There will be no housing recovery without owner occupants taking over the empty properties, and unfortunately most first-time homebuyers do not have access to significant amounts of cash. Thus, many potential buyers are becoming disheartened by being on the losing end of dozens of offers for the same property and are starting to sit out these bidding wars.
This increased trend of cash buyers makes sense given the excellent returns generated by residential investment properties at the current purchase prices, but it is putting neighborhood stabilization on hold.
Improvements in the housing prices will continue while there is a chokehold on inventory, but hold on to your hats when inventory is finally released into the market. Maybe then will begin the real work of neighborhood stabilization.
Eric Lichtenheld is president of Tucson, Ariz.-based Integra Group Real Estate LLC. He is currently president elect of the National Association of Hispanic Real Estate Professionals Arizona Chapter. For more information visit www.integratucson.com.