Supply Shortage Limits Home Sales

By Gretchen Wegrich

The supply of houses across the nation has nearly run dry during the past few months as investors and ordinary buyers race to seize available properties while taking advantage of rock-bottom mortgage rates.

The increased demand for houses is attributed to a gradually improving labor market and the Federal Reserve’s continuing support of the mortgage industry. Both factors are creating a more stable foundation for the economy to weather Washington budget cuts.

In February, the market held 1.94 million previously owned homes, a total of 4.7 months of supply. During the same time, there were 150,000 new single-family homes on the market, representing 4.4 months’ worth.

Typically, a six-month supply of homes is considered a healthy level of supply-and-demand. As the busy spring buying season approaches, real estate agents and economists are voicing their concerns about the supply shortage.

"If we don't see more people listing their properties, I don't think we will see the home sales volume increase that we are accustomed to seeing," said Glenn Kelman, chief executive officer of online real estate group Redfin, based in Seattle.

He added, "There are far more buyers than there are sellers on the market. We would have a huge boom spurred by low interest rates if there were more inventory on the market."

During the 2013 spring buying season, the National Association of Realtors (NAR) predicts that existing home sales will increase by 7-8 percent year-over-year. During 2013, NAR expects home sales to rise 7 percent to yearly rate of about 5 million homes. Currently, sales are at a 4.98 million unit level.

The number of foreclosed homes reaching the market has dropped considerably during recent months. Foreclosed homes are viewed as both a supply resource and critical obstacle to the housing sector’s recovery.

Meanwhile, a report released by CoreLogic revealed that shadow inventory –or homes in foreclosure or being held from the market by banks –was reduced by 15.4 percent to 2.2 million in January from a year earlier. In January 2010, the number of shadow inventory peaked at 3 million homes.

"Banks tend to remember the experience of 2008 when they rushed to sell off properties all at once and that caused a downward spiral in house prices," said Andres Carbacho-Burgos, an associate director at Moody's Analytics in West Chester, Pennsylvania.

"They are trying to be cautious about selling off too many properties all at once."

Supply and Demand

In cities like New York, Washington D.C. and coastal California region, the inventory shortage is causing homes to sell in hours. In coastal California, the supply is down to just 30 days. Last year, this supply was up between 6 and 8 months.

Real estate agents and sellers are reporting bidding wars.

"The demand for properties is insane. The bidding wars that are going on, there is not enough inventory and it has become truly a seller's market again," said Neil Garfinkel, real estate attorney at Abrams Garfinkel Margolis Bergson in New York.

In areas hardest hit by the foreclosure crisis, such as Atlanta and Detroit, investors are swarming and paying in cash.

"Investors will start to exit only after either foreclosure inventories are significantly depleted or sale discounts have fallen off so much that it's like buying a regularly priced home," said Moody's Analytics' Carbacho-Burgos.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.