Are cloud inventory homes really for sale?
If a home seller asks a price buyers are unwilling or unable to pay, is the house really for sale?
One of my goals for the writing and analysis on this site is to provide readers a vision of the future of the housing market. Where are prices going? What will happen with sales? How do the variables affecting housing cause changes in prices or sales? I do this because I believe people should have accurate information to make sound decisions on what will likely be the largest single purchase of their lives, buying a home.
Most of what I write is opposed to the feel-good, Pollyanna nonsense served up by the financial media, a biased group beholden to realtors who pay their bills. Today, we look back on a topic I started covering back in early 2013, a topic the financial media only recently began to understand and write about — the causes and impact of cloud inventory.
In the post Must-sell shadow inventory has morphed into can’t-sell cloud inventory from March of 2013, I detailed the overriding set of circumstances created by the banks, the federal reserve, and government regulators that caused the elimination of must-sell REO inventory and maintains the restricted inventory condition causing prices to rise.
Every underwater loanowner is a potential loss for the lender. If that borrower stops paying or asks for a short sale before prices reach peak valuations, the bank will take a loss. Banks don’t want to recognize losses either by foreclosure or short sale. They would far prefer to borrowers to stay in their homes, pay something, and wait for house prices to reach the peak where lenders have no exposure. Most loanowners are happy to play along.
As I pointed out in Las Vegas: a case study in successful housing market manipulation, the relaxation of mark-to-market accounting rules circumvented the normal market-clearing mechanisms that would have forced the sale of millions of properties. As a result, shadow inventory kept waiting in the shadows, and it never hit the MLS. Finally, lenders went “all in” betting on success of loan modifications because each modified loan is one less unit languishing in shadow inventory, and one less potential sale for a loss through foreclosure or short sale.
In the post Inventory up, demand down, the standoff over cloud inventory begins from August of 2013, I noted the following:
We had a large number of cloud inventory listings. These sellers can’t reduce their price because they need to pay off a big loan. So no matter how much of this inventory comes to market, it won’t put downward pressure on prices. It isn’t must-sell inventory, it’s can’t sell inventory. Potential buyers can’t finance the asking prices these sellers need to complete a sale. What we have is an old-fashioned Mexican standoff where neither party can pull the trigger. The market may stall and go nowhere.
Buyers and sellers will be frozen in their unarmed Mexican standoff and sales volumes will fall. This scenario does seem likely. To some degree, this will come to pass over the next six to nine months.
And since August of 2013, the market has endured declining sales, just as I predicted. Although sales picked up in 2015, and everyone is celebrating the ongoing recovery, sales volumes are still below 8 of the last 10 years and 15% below the average of the last 27 years — not exactly a robust rally.
In April 2013, just prior to the “taper tantrum” in mid 2013 when mortgage rates rose from 3.5% to 4.5% in less than 60 days, I wrote a post No escape velocity as depleted inventory pummeled home sales in 2013. In that post, I noted the following:
Banks are counting on pent-up demand from frustrated buyers to liquidate their cloud inventory. They may be rudely greeted with an MLS loaded with inventory that either nobody can afford or it’s at prices they’re unwilling to pay.
Two years later, that’s exactly what analysts observe today.
The biggest barrier to a more robust spring housing market is simply a lack of listings, and there may be even fewer than we think, at least fewer homes people want to buy.
There are always WTF listing prices in any market. Each seller believes their property is special and worth significantly more than the market will bear. Most agents take these listings with hope they can talk the seller down to reality after 30 days when nobody looks at it.
Nearly three-quarters of the homes on the market are “stale,” which is to say that they have sat on the market for more than a month with little to no interest from buyers, according to a new report from Redfin.
The number of homes for sale rose 2 percent in March from a year ago, according to a report from the National Association of Realtors released Wednesday. That, however, includes both new listings and homes that have languished on the market for months. With demand and sales increasing, there is just a 4.6-month supply of listings; a six-month supply is considered to be a healthy market balance between buyers and sellers.
The “six-month balance” meme is a distortion of fact (lie) promoted by realtors so often it’s become accepted as truth. What’s worse is that even a cursory look at the facts reveals the truth, but nobody bothers to look at the data.
With few exceptions over the last 15 years, whenever the moths of supply has been below 5, prices appreciated. When it’s between 5 and 6, prices were flat, and when it’s above 6 prices fell sharply.
Of course, all real estate is local, but even in the most sought-after neighborhoods, some houses sit. …
“Everyone loves it; it’s the price,” said Ghada Barakat….
“People cannot come up with the down payment to qualify. Jumbo loans are very tough,” added Barakat.
This is the nature of cloud inventory. Buyers may like the house, but they can’t afford the price, and the seller can’t afford to lower it, so the property just sits there.
There is something else at play as well: information. With so many websites and apps pushing moment-to-moment market movement, today’s buyers are increasingly data driven. Especially after the epic housing crash that gave birth to all this data, buyer psychology and suspicion are in full swing.
“The trust is broken among buyers. …” noted Nela Richardson, Redfin’s chief economist. …
Years of realtors lying to buyers will do that.
In Charlotte, North Carolina, the scenario is much the same. The supply of properties for sale is at a three-year low, and fresh listings, less than 30 days old, accounted for just over 5 percent of Charlotte’s inventory as of March 31, also a low, according to Redfin. In other words, 95 percent of Charlotte listings are stale.
For those who truly understand how cloud inventory works, it should not be surprising that the MLS gets polluted with stale listings. When houses get priced based on outstanding loan balances rather than the market, it’s a recipe for stale listings. Thus we have a market where the few reasonably priced listings go quickly with multiple offers and the cloud inventory listings just sit there.
It may not be the new normal, but it’s a phenomenon we will see until fundamentals applied to mortgage rates elevate market prices above peak housing bubble levels all across the country, and in some markets that is another decade or more away.