Planning to buy a home this spring? Why not wait?
Several months ago, I had a meeting with a representative of the OC Register who wanted to sell me ad space. During the conversation, he said the realtor community in conjunction with the OC Register needed to create a “buying frenzy” to help liquidate the abundance of distressed inventory. Obviously, he was not a reader of the blog.
Perhaps in the era before blogs, a coordinated mis-information program conducted by realtors and the local media would succeed in persuading buyers to act when it is not in their best interest to do so. We have certainly seen consistent examples of ludicrous statements from the NAr that vacillate between spin and utter bullshit. However, in today’s world of citizen journalists who have access to facts and who aren’t willing to spin them to suit the conspiracy, it’s much more difficult for the NAr to dupe buyers into action.
The OC Register’s salesman’s comment is very revealing of the mindset of realtors everywhere. The salesman from the OC Register wouldn’t have made such a suggestion unless he believed it was something I thought would be a good idea. Therefore, it’s safe to assume realtors think it’s a good practice to create a false sense of scarcity to induce buyers to overpay for real estate when the realtors know full well the distressed supply is much larger than what’s currently on the market. These are the same realtors telling potential buyers in Orange County today that they need to buy now because prices are bottoming and the distressed inventory is evaporating before our eyes. Don’t believe them.
While it’s true that the distressed inventory is low right now, this is not because lenders are running out of it. Current foreclosure rates are an astonishing eight-times their historic norms. While it’s also true that delinquency rates are declining, they are still very high at nearly double their historical standards. Therefore, lenders are not running out of future inventory of delinquent borrowers to foreclose on. Whatever lenders may do to manipulate currently available properties on the MLS does little to impact the enormous stockpile of bad loans yet to be processed which ultimately will become future MLS inventory either as REO or short sales.
Today in real estate markets across the Southwest, inventory is way down, particularly distressed inventory. This reduction in inventory is a completely voluntary decline created by lenders. Lenders have no shortage of REO they currently own, nor have they put a significant dent in the shadow inventory of upcoming REO and short sales. Anyone who buys today because they believe there will be no further distressed inventory to weigh down prices is making a serious mistake. The lack of inventory on the market will not cause a sudden spike in house prices. The lack of inventory will cause a sudden decline in sales volumes and a premature end to the spring selling season.
Think about it this way; if you went to the Toyota dealer to buy a car you could afford, and they were out of cars, would you buy a more expensive Lexus instead? Probably not because you couldn’t afford the Lexus. Instead of buying the more expensive Lexus, would you go shop for an older Toyota or a lesser quality car? Probably not because you know Toyota would simply build more if you waited for the one you wanted. The same analogy holds true for houses today. Buyers cannot raise their bids and buy more expensive properties because they can’t get the bigger loan, and most buyers today are not substituting to inferior housing because they know the better house will be on the market eventually.
During the housing bubble, there was no reasonable expectation of better housing coming to market later because at the time, there was no shadow inventory needing liquidation. Today, most buyers know about shadow inventory because there are media outlets like this one who are willing to tell them. Armed with this information, most buyers are responding to today’s diminished inventory with a wait-and-see attitude. There is no reason for any prospective buyer to believe they will be priced out any time in the next three to five years and probably much longer. Given the inevitability of shadow inventory liquidations, why not wait?
Plus, if you try to buy in a market characterized by depleted supply, you will not get a good deal. Any reasonably priced property is going to have multiple competing bids. In that environment, there are no good deals to be had. Last fall and winter, there were often competing sellers and few buyers. In those circumstances, the buyer is likely the only bidder on the property, and the seller knows if they hold out for top dollar, the buyer will go to the competing seller. Really good deals can only be had when there are no competing offers, and sellers are motivated.
The median price of an existing home that sold in April of this year was $177,400, an increase of just over ten percent from a year ago. That is the biggest price jump since January of 2006. The difference between now and then, though, is the 2006 price jump was real, this latest spike is not.
“This is a mix of home issue,” warned National Association of Realtors chief economist Lawrence Yun, who usually tries to see the positives in all housing numbers. “There is an acute inventory shortage in Phoenix, Las Vegas, Ft. Myers,” Yun explains.
I always find it surprising when Lawrence Yun tells the truth, particularly when it doesn’t fit the typical buy-now-or-be-priced-out-forever realtor narrative.
This same problem with the changing mix of homes is also responsible for the dramatic change in listing prices on the local MLS. With the reasonably prices REOs and short sales selling and not being replaced, and with the WTF priced discretionary sales remaining on the market, the aggregate listing numbers are skyrocketing.
Since what’s currently listed at WTF asking prices is not selling, the actual sales prices have only rebounded slightly, and sales volumes are starting to fall.
The unexpected drop in signed contracts to buy existing homes in April should have come as no surprise. It is all about price point, supply, and where the action is/has been.
Depending on which survey you follow, sales of distressed properties (foreclosures and short sales), make up anywhere from a quarter to 40 percent of all home sales nationwide.
The bulk of these sales are out west in cities like Phoenix, Las Vegas and much of Southern California. Real estate agents out west will tell you that supplies of these distressed properties are dropping fast, thanks to huge investor demand.
The drop in inventory is not being caused by huge investor demand. This is a fallacy being promoted by realtors because increasing demand implies market strength — a strength that simply isn’t there. The drop in inventory is almost entirely due to dramatically decreased liquidation efforts by lenders. That is a temporary condition that masks true market weakness.
That, in turn, led to a huge drop in sales of lower priced properties, as we reported last week, down 26% in the $0-100,000 price range, according to the National Association of Realtors.
Now we see contracts to buy existing homes in April dropping 12 percent out west, …
“Aside from the inescapable month-to-month variability, the increasing problem is on the shortage of inventory,” admits Lawrence Yun, chief economist for the NAR. “Areas like Phoenix and Vegas, Orange Country, California are all reporting sharp reductions in inventory, and this is a problem because this is reducing the business transaction potential. ….”
The declining supply is a catastrophe for realtors because fewer homes for sale means fewer sales commissions.
The spring sales season, while not exactly robust, was busy, especially for investors in distressed properties.
As for the summer, the numbers do not look as strong. After two months of gains, asking prices on for-sale homes, a two-month leading indicator, were unchanged in May month-to-month, according to a new report from sale site Trulia.com.
It is starting to look as if the declining inventory has caused a premature end to the spring rally. Perhaps the activity will carry over longer as buyers sit out the summer and wait for inventory to return in the fall. Since there is essentially no move-up market, the active buyers today are all renters or homeowners capable of buying a home without selling their current one. Those buyers are less sensitive to the time of year to complete a transaction. And since the fall and winter are generally the best time to buy anyway because prices are weaker, it is probably wise for those looking right now to be patient and wait for lenders to cajole more short sellers or release more REO in the fall and winter.
Some people don’t believe banks withhold inventory from the market. They don’t realize or accept that lenders have thousands of properties they currently own that they must eventually liquidate. When they do, they are certain to harm the neighborhood comps, and since most people don’t know where or when these comp bombs will be dropped on the market, many choose to ignore them as if the problem doesn’t exist. Well, it does exist as properties like today’s featured property attest to. As long as banks are withholding inventory, the housing market will face lingering uncertainty about future pricing, not as some unfocused fear, but as a legitimate recognition of the power of distressed inventory to push prices lower.