What happened to the MLS inventory?

Since the housing bust began, the banks have largely controlled the inventory of homes on the MLS. At first, they flooded the MLS with subprime foreclosures, but with mark-to-fantasy accounting, they were able to slow their foreclosure rates and store delinquent borrowers in shadow inventory. Since early 2009, the number of properties available for sales has been completely controlled by the banks. They determine when to list their standing inventory of REO, and they control the approval on every short sale. Between those two sources, the banks control the market.

Banks decided early this year to slow the rate they took back properties at foreclose auctions thus reducing MLS inventory of REO significantly. More recently banks increased foreclosures 30% as their REO pipeline stabilizes, but this supply is still several months away. Plus, they also slowed their rate of new filings which suggests they don’t plan to increase inventory significantly. Hopefully, the upsurge in banks taking on REO will translate into more available MLS inventory soon. It’s too early to tell if this is a new trend signalling a change in policy.

The banks benefit from the lack of inventory. Buyers bid up the prices on what’s available, and the banks recover more capital from their bad loans. The only caveat is that banks aren’t able to sell that many or prices would crumble again, so by restricting supply and raising prices, they slow the rate of their liquidations. It’s their hope that rising prices will trigger a self-fueling price rally as sidelined buyers enter the market for fear of being priced out. It likely won’t work out that way.

Many sidelined buyers are smart. They are waiting because they know lenders have an enormous shadow inventory they must liquidate, and in many markets, lenders have lost control of their liquidations and drove prices much lower. When buyers know the product is there, they also know they have the upper hand. If they wait, they can generally get a better deal. Most sidelined buyers today are frustrated by the lack of currently available inventory, but they are also being patient and waiting for lenders to pick up the pace of their liquidations. In the meantime, inventory levels are dropping to very low levels, particularly in the western US.

For-Sale Listings Drop Again, Led by California Cities

By Nick Timiraos — September 18, 2012, 6:00 AM

The number of homes listed for sale fell in August, led by a clutch of California cities that posted outsized declines.

Active Inventory in Irvine hit the lowest level of at least the last six years. (chart courtesy of Irvine Housing Blog)

Inventories fell in August by 1.2% from July, bucking a seasonal pattern of a slight uptick before the summer season ends. Listings were down by 18.7% from one year ago and 34.1% from two years ago, according to a report from

Falling inventories are a leading driver behind the recent rally in home prices, and the declines point to continued price-strength in many parts of the Western U.S., which are also benefiting from strong investor demand.

Investor demand is confined to only a small subset of the property market. The real story behind the rising prices is the lack of supply.

Among the 15 cities with the largest year-over-year declines, some 13 were in California, led by Oakland, which posted a 58.4% decline. Other big declines came in Stockton (down 45%), Fresno (down 43.1%), Sacramento (down 42.4%), Riverside-San Bernardino (down 41.8%), Bakersfield (down 41.4%), and San Jose (down 41.1%).

The decline in active listings across Orange County is remarkable.

Inventory declines have typically preceded stronger prices if demand stays the same, because more buyers are chasing fewer homes. But low inventory could also curb transaction volumes if buyers, frustrated by the lack of choice, sit on the sidelines. …

Many frustrated buyers are sitting on the sidelines. As a result, we may not see a decline in price this winter, and if inventory returns, sales volumes may remain relatively high as unsatisfied buyers from the prime selling season remain active this fall and winter.