Apr242013

No escape velocity as depleted inventory pummeled home sales in 2013

Typically, January is the slowest month of the year for real estate sales. Sales volume rises each month through July or August when it peaks as buyers rush to get into homes before their children start a new school year. When sales volumes decline on a monthly basis during the first half of the year, it’s often a troubling sign for the real estate market.

Sales volumes declined in March, and it is a sign of a problem in the housing market: a lack of inventory.

Why Home Sales Stalled in March

By Nick Timiraos — April 22, 2013, 11:46 AM

Sales of previously owned homes fell by 0.6% in March from February, causing some analysts to second guess the housing rebound.

In the post The bearish case for another leg down in housing, Mark Hanson flatly stated, “Market forecasts and sector stock multiples are forecasting sales, price and home improvement gains similar to what we saw in 2012 YoY. This will not occur.” Will Mark’s bearish prognostications proof correct?

What’s going on? Here are four takeaways from the National Association of Realtors’ report on Monday.

Why would anyone turn to the NAr for information on what’s happening in the real estate market? All they will provide is spin and bullshit.

1) The problem for the housing market right now is a lack of supply—not a lack of demand. This isn’t a surprise to anyone who’s tried to buy a house in many parts of the country over the last year. The number of homes listed for sale rose by just 1.6% in March, meaning just 30,000 net new units hit the market. The 1.93 million homes for sale in March was down by 16.8% from one year ago and is the lowest inventory level for the month of March in 13 years. “Inventory is definitely gating demand,” says Glenn Kelman, chief executive of real estate brokerage Redfin. Monday’s report showed that sales were still 10.3% above last year’s levels on a seasonally adjusted basis, continuing a streak of 21 consecutive months in which home sales have increased from their year-ago level.

Since we were coming off some of the lowest sales volumes in history, year-over-year increases are hardly surprising. Orange County home resale volume is very weak by historic norms.

2) Rising demand and falling supply continue to push prices higher. The median home price in March rose 11.8% from one year ago to $184,300. (Changes in the median price often reflect a shift in the “mix” of homes being sold, meaning they can rise when more expensive homes transact in a given period.) In the West, median prices were up by 26.1% from one year ago, a clear sign that more homes are selling at higher price points. Median prices have risen from their year-ago levels in 13 straight months.

The current median sales prices are very distorted, but there is no question market prices are rising. I was looking through the OC Housing Market Report for this month, and I was floored by the price increases in areas dominated by condos. The speculators who bought condos in 2011 are sitting on a mountain of equity. Prices on a per-square-foot basis are up nearly 40% in Irvine’s Orangetree over the last six months. Based on the relative degree of undervaluation, these prices won’t move much higher as the window of opportunity in these units is closing fast. Note the rapidly increasing cost of ownership.

3) Buyers are getting frustrated, and some sellers are getting greedy. Some sellers are hearing that it’s a sellers’ market and are becoming more determined to ask for more. Inventory is low, of course, because many sellers aren’t willing or able to sell at prices that are down sharply from seven years ago.

The problem isn’t a lack of willingness, it’s a lack of ability. Low housing inventory is an indicator of residual mortgage distress. People aren’t listing their homes because they can’t sell it for enough money to pay off their loan. The more extreme the lack of inventory, the more problem the market has with underwater loanowners. This inventory will stay off the market until prices reach near-peak levels when loanowners can finally get out of their properties without trashing their credit scores.

Some have a “reservation price”—a price at which they’ll sell. Ultimately, rising prices should lead more sellers to put their homes on the market.

(See: Must-sell shadow inventory has morphed into can’t-sell cloud inventory)

But until then, buyers may give up. “There are not enough homes to buy,” says Mr. Kelman. “We see so many people dropping out of the process because they’re tired of getting outbid.”

This is a real issue. Buyer fatigue is prompting many to give up the search. Perhaps this is latent demand that may return when inventory is more abundant, or perhaps these buyers will give up on owning because the asking price of cloud inventory is too high. 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.

Another problem: many sellers aren’t going to be willing to list until they’re more confident they can buy another home to move into.

We have a current client who won’t list their property for this very reason. It’s hard to measure how big an issue this is, but anecdotes are becoming more common.

4) The current market isn’t fun for real-estate agents, who make their living selling homes. But it is good for the home builders.

Yes, it is (See: Low MLS inventory a boon to homebuilders)

If would-be buyers are motivated to buy now to take advantage of low prices and low mortgage rates but can’t find a home on the resale market, they’re likely to turn to the new-home market. Already, new home sales have rebounded from their depressed levels of a year ago, and Tuesday’s report for March sales will provide the latest indication of just how quickly builders are regaining market share that they surrendered as the foreclosure crisis worsened five years ago.

What is escape velocity?

In rocketry, escape velocity is the speed required to propel an object into a stable orbit. In a housing market, escape velocity is a sustained increase in demand required to push prices higher for the long term. For a housing market to embark on a long bull rally, it needs rising prices predicated on rising incomes and increasing household formation. That’s not what we have. The only increase in housing demand is coming from investors, and the reason prices are rising is because inventories are so restricted by bank policy that the few active buyers in the market are being forced to pay more.