Expect low for-sale house inventory for many more years

For the missing MLS inventory to return to the market, borrowers need debt forgiveness, and house prices need to move even higher.

I advise buyers to be sure they plan to live in the same place for at least two or three years for prices to rise high enough for them to sell and cover the sales costs. In a normally appreciating market like we have today, it still takes seven to ten years for prices to rise high enough to pay the costs and leave a first-time homebuyer with the 20% equity needed for the down payment on a move up.

The breakeven barrier of two or three years keeps most properties off the market unless the buyer is under extreme duress. Once that threshold is met, the move-up down payment barrier is a practical choice made by those intending to climb the property ladder. Both of these key price thresholds serve to keep properties off the market.

Since real estate markets generally enjoy gentle home price appreciation, there is generally a steady supply of homeowners with sufficient equity to sell, cover their expenses, and provide at least a 20% down payment for the next house. It’s only when the market is disrupted, like the bubble and bust of the 00s, that the system fails to work properly.

With house prices at or near the peak on most markets, the number of people who can’t sell because they can’t at least breakeven is greatly reduced from 2012 levels. However, since very few owner-occupant buyers participated during the down years, the ranks of those with sufficient equity to execute a move-up is seriously depleted. People are no longer trapped by the need to break even, but they are trapped by choice because they can’t make a move up trade.

Is this really a problem?

hid_the_housesThe financial media inundates us with stories about the “problem” of low MLS inventory that supposedly holds back first-time homebuyers, who are buying in near record low numbers. Whether or not this is a real problem or a fiction of the financial media depends on your point of view.

Bankers don’t consider low MLS inventory a problem; after all, bankers engineered the MLS shortage in order to drive up house prices to restore collateral value to the bad loans they made during the housing bubble. Homeowners are happy to go along for the ride. Neither bankers nor homeowners consider low MLS inventory a problem.

realtors, lenders, and current entry-level home shoppers consider the lack of MLS listings a huge problem. realtors and lenders consider it a problem because fewer transactions make for fewer commissions and less income. Entry-level home shoppers are frustrated by a lack of choice and high prices for what they might want.

With no consensus on whether or not this is a real problem, there is little political motivation to solve it, particularly if the solutions presented by advocates have a high cost — and workable solutions would be very costly.

Why the supply of homes for sale is the lowest since 1999

Diana Olick, January 25, 2017

House hunters out this spring will have to pound more and more pavement to find their home sweet home.

The number of for-sale listings fell again in December to the lowest level since 1999, according to the National Association of Realtors. There were just 1.65 million homes for sale at the end of December, which at the current sales pace would take only about 3 ½ months to exhaust. A normal, balanced market has about a six-month supply.

This, as the busy spring market is already on the verge of starting. “To say early buyer demand is strong in early 2017 is an understatement — it is titanic. Redfin data shows that buyers are out touring in droves, ready to pounce on new listings that fit the bill,” said Nela Richardson, chief economist at Redfin.

Did they legalize pot in Seattle too? I want some of what she’s smoking.

“The only thing missing is homes for sale to satisfy demand, because there just aren’t a lot of homes available to buy right now. We are in a real estate black hole until those listings show up again.”

Notice it’s the realtors crying about this so-called “problem.”

The shortage is being driven by surging demand and weak home construction. Single-family housing starts continue to rise, but very slowly each month. Builders are still operating at well below normal construction levels, and that doesn’t even account for pent-up demand from the housing crisis and growing household formation.

(See: Is pent-up housing demand real or a realtor fantasy?)

“The homeownership rate is at a near 50-year low, and it could remain at this level,” said Lawrence Yun, chief economist at the NAR. “I’m not sure if this is the trend that America wants.”

It’s certainly not a trend American realtors want.

Tight supply is pushing home prices past their peaks in some markets and well past income growth nationally. Mortgage rates were historically low in 2016, helping to offset the higher prices, but that is not the case this year. Rates are already up significantly since the election and are expected to continue higher.

Which is why I predicted that Home sales are likely to fall in 2017.

Only a few of the big volume home builders are putting resources into the starter home market.

“I continuously say that the industry and the first-time buyer need more homes priced below $250,000, but the high costs of lots, labor and regulations puts tight margins on this price point. In coming months we’ll watch to see what influence the rise in rates had,” said Peter Boockvar, chief market analyst at The Lindsey Group.

It is extremely difficult to provide homes for less than the conforming loan limit anywhere in California. Even if land residuals were zero, due to the costs of improvements and fees, it’s very difficult to build at price points first-time homebuyers can afford. This will drive a trend toward higher density during the next building cycle.

First-time buyers continue to make up less than a third of the sales market; historically they are usually at about 40 percent. Affordability is weakening, but mortgage credit availability also continues to be difficult.

As rates rise, fewer potential borrowers qualify for the strict debt-to-income levels lenders now require. Some are looking to the Trump administration to loosen regulations on lenders,

That worked out poorly last time… just sayin’.

but that could take time and is unlikely to happen before the spring season. The administration already froze a last-minute cut in the FHA insurance premium by the outgoing Obama administration, which might have opened the market to more homebuyers.

“Constrained inventory in many areas and climbing rents, home prices and mortgage rates means it’s not getting any easier to be a first-time buyer,” said Yun. “It’ll take more entry-level supply, continued job gains and even stronger wage growth for first-timers to make up a greater share of the market.

None of which will happen quickly.

With low inventory, high prices, rising mortgage rates, and tight lending standards, 2017 is not going to set any positive records for sales.