Despite home price increases taking place in many real estate markets this year, potential sellers are still reluctant to list their properties for sale, therefore creating tight inventories for prospective buyers.
According to CoreLogic, the biggest year-over-year home price increase occurred in six years as values rose 12.1% nationwide in April, which should spark homeowners who want to sell their assets to do so. But this is not happening throughout the country.
At the height of the housing boom, in July 2007, 3.4 million single-family homes were for sale, according to the National Association of Realtors. In April 2013, only 1.9 million single-family properties were listed on the open market, a year-over-year decline of 11.9%.
So a major question to ask is why are so few homeowners making their properties available for buyers to acquire on the open market?
Gordon Crawford,
Negative equity—when borrowers owe more on first mortgages, second liens and home equity lines of credit than the value of the property—may be the biggest factor limiting the supply of available properties. Crawford said a household with negative equity needs to bring cash to the table to pay off the loans associated with the property at sale, therefore limiting the number of homes that can be sold because homeowners don’t have this money if they are in negative equity.
In the first quarter, 13 million homeowners, or 25.4% of all homeowners with a mortgage, were underwater, according to Zillow. Meanwhile, another 18.2% of mortgage borrowers, or 9 million homeowners, likely do not have sufficient equity to be able to purchase a new home, which stops them from selling their current residence.
The primary reason why people have negative equity is due to the substantial home price declines from 2006 through 2009, when property values fell by 45% to 60% in some of the hardest-hit markets. Even though home prices have been rebounding over the last year or so, net peak to current home price declines remain large.
“The negative equity situation will probably take several more years to play out,” Crawford told this publication in an interview. “The degree of negative equity that people have will take a substantial amount of continued growth in order to be gone, especially in markets that have had substantial home price declines.”
Another factor impacting overall supply is limited construction activity since 2008. Data from the U.S. Census Bureau shows that the number of building permits from 2006 to 2008 dropped significantly during this time period. Since this downfall, the number of monthly building permits has remained below normal rates, resulting in record-low new home inventories.
“Homebuilding is on a trajectory towards a normal level, but there’s quite a ways to go to get to this point,” Crawford added. “The long-term average for housing unit starts per month is about a million and we are right now at 600,000. It will still require quite some growth from where we currently are to get back to a long-term average level.”
Lastly, during the current housing recovery, borrowers are having a difficult time valuing real estate which dampens the activity of both buyers and sellers. Crawford noted that people are seeing home price increases taking place and don’t know whether or not to sell now or wait in order to capture even greater appreciation.
“People are making a pretty complicated forecasting decision in holding off on selling their property,” Crawford said. “They want to maximize their revenues that they are going to get from selling their current property, as well as they want to be able to have the next residence they move into be affordable and obtain financing for this property.
“So if there is a risk of interest rates rising, that could affect their ability to pay financing for their next residence,” he continued. “Home price forecasting and interest rate forecasting is always particularly challenging, but even more so now since we have a unique situation where interest rates are being maintained artificially low for long periods of time.”
