When MLS inventory is tight, good deals are hard to find

Banks are slowing their acquisition of foreclosures to reduce their standing inventory of REO. They are also slowing the rate at which they are selling on the MLS and putting fewer and fewer homes for sale. Delinquent mortgage squatters are not taking up the slack and listing their homes as short sales, primarily because they get a free ride if they simply wait and do nothing until the bank finally forecloses. With both banks and loan owners choosing not to list their homes, the inventory available for sale on the MLS has fallen substantially. Until the incentives change, neither banks or loan owners are going to replenish the MLS inventory.

Tight supply is forcing potential buyers to compete for the few properties available, and prices have reached a temporary bottom. This benefits the banks who were recovering less and less of their original capital with each MLS sale as prices fell. Further, if prices were to rise on a sustained basis, new buyers would obtain equity and in a few years, the move-up market will begin to recover. The advantages of rising prices prompted the various homebuyer tax credits of 2009 and 2010, the last artificial boost to the housing market. It’s also what’s motivating lenders to restrict inventory today. The tax credit failed because artificial props generally do. Will this latest round of market manipulations fail as well? Only time will tell, but history suggests this spring’s bottom will not be a durable one.

The games bankers play impact buyers in today’s market. Any reasonably priced property is going to have multiple bids, and although they may look like a deal based on asking prices, the competing bid pressure often drives those prices up to unreasonable levels. Many of these deals fall apart because the properties do not appraise at the contract price, and the buyer cannot or will not make up the difference. Cancellation rates in Orange County are running nearly 50% because appraisers are doing their jobs well.

Shortage of homes for sale creates fierce competition

With housing inventory at a low, would-be buyers are scrambling to bid on homes before they’re even listed, and real estate agents are vying to represent the few sellers that do exist.

By Alejandro Lazo, Los Angeles Times — June 10, 2012

The newest problem for the slowly improving housing market isn’t a shortage of serious buyers, it’s a shortage of good homes.

Would-be buyers are packing open houses and scrambling to make offers on properties before they are even listed. Bidding wars are erupting. …

Housing inventory has sunk to levels not seen since the bubble years. The number of American homes with a “for sale” sign hit 2.5 million in April, the lowest number for an April since 2006, according to the National Assn. of Realtors.

Anything the NAr says should be treated with skepticism, but in this case, they are reporting the truth. Inventory is declining, particularly in the West.

David Dennick, who lives in Echo Park and works as a television editor, has been searching for a home with his wife, Denise, for about two months. The couple have already bid on three properties. They are hoping to find a home for less than $525,000, which is $25,000 more than they originally had hoped to spend.

“It is much more competitive than we thought,” said Dennick, standing in the entrance of an Eagle Rock open house on a recent Sunday. “It is just frustrating because we thought we would really be able to buy a house; we are a middle-class family.”

Active buyers are shocked at how quickly the dynamic of the market changed from a buyer’s market to a seller’s market. A 50% inventory reduction will do that.

The sharp drop in inventory along with rock-bottom interest rates have helped stabilize even some of the hardest-hit markets, including the Southland, Las Vegas, Phoenix and Miami. Some real estate professionals are concerned that the lack of inventory might turn off potential buyers, stifling the recent recovery in home sales.

The much-predicted foreclosure wave that was expected to dump more homes onto the market has not materialized.

Lenders are opting for squatting over liquidation. Just because lenders haven’t released the floodgates doesn’t mean the reservoir is empty.

Fewer borrowers are entering default,

Recent vintage loans have better underwriting, but with so many recent buyers underwater, many still are defaulting. Plus, lenders are not making substantial progress on the backlog in shadow inventory.

and banks are better managing the properties they do have on their books.

What does that mean? We know that Banks cut standing REO inventories by reducing new acquisitions by 50%. But is that a sign of better management?

In addition, professional investors bankrolled by private equity firms and hedge funds are pouncing on bank-owned homes, often turning them into rentals.

Pouncing? Really? Did Alejandro have a realtor help write this piece? Hedge funds are buying homes, but they are a drop in the ocean. Hedge funds don’t have enough money to make a difference in the housing market.

A dearth of new construction also is constraining supply. In April — the most recent month for which figures are available — the number of completed new single-family homes available for sale stood at 46,000, the lowest level since the Census Bureau began keeping track in 1973. Some 70,000 were under construction, also near historic lows.

As I noted before, As lenders withhold product, the homebuilders will flourish. They have. The Irvine Co. sells out 4 new-home projects. Despite improving numbers, new home construction is still very low by historic norms.

The inventory problem has been exacerbated by the plunge in home prices since the go-go years. Many people who bought at the top of the cycle are so deeply underwater, they can’t get the price they need to sell and are therefore not bothering to put their homes on the market.

Is isn’t that people are not “bothering” to list their homes out of a sense of indifference. Loan owners have a strong incentive not to list their homes. If they do nothing, they don’t have to make any payments, and they don’t have to pay rent. If they go through the hassle of a short sale, once it’s complete, they will need to move into a rental and start incurring housing costs again. Why would anyone be in a hurry to do that?

“We know negative equity holds back home sales, but it also holds back the listing of sales,” said Sam Khater, an economist with CoreLogic, a company that tracks the mortgage market. “Today it is holding the market back.”

The lack of available homes is maddening for those consumers who thought 2012 would be the year to buy.

In Southern California, inventories have plunged over the last year. The number of homes listed for sale in April fell 35% in Los Angeles County and was down 42% in Orange, 39% in San Bernardino, 42% in Riverside, 53% in Ventura and 43% in San Diego counties, according to online brokerage Redfin.

The inventory decline is remarkable. Ordinarily, the first business day of the year in January is the lowest point of inventory for the year. That was not true this year.

… “It is a precarious situation, but the real issue is that nobody wants to sell a house right now,” Kelman said. “So now we have classes for our real estate agents on how to win a bidding war.”

As I’ve noted on many occasions, why would they be motivated?

… Also important is having enough cash to make up the difference between the negotiated price and whatever the appraised value of the home turns out to be, he said. (Lenders won’t provide a mortgage for more than a home’s appraised value.) Many deals these days are falling apart because appraisals are coming in low, given how many recent comparable sales have been foreclosures or other distressed properties.

“The appraisal is blowing up the deal half the time,” he said.

And I hope they continue to do so. That is their job. As independent third-parties, they are supposed to be impartial arbiters of value. With the new system of randomly picked appraisers, they are under no pressure to “hit the number” to please a realtor to get future work. That one change in the system is doing much to prevent another housing bubble.

So how do you get a good deal?

Finding a good deal always requires three things: (1) a bit of luck, (2) no buying competition, and (3) a motivated seller. There is no way to tell if a seller is truly motivated based on their asking price. realtors play far to many games. The only way to find out if a seller is motivated is to make an offer on the property and see what happens. One of Shevy’s favorite techniques is to offer on overpriced properties to see if the seller can be engaged in a negotiation. Most of the time, the sellers are not motivated, and their WTF asking prices stroke their egos and pollute the MLS. Those offers go nowhere. However, Shevy doesn’t advocate waiting for a price reduction because that will bring in competing offers. Many times the seller will start with a WTF asking price — often prompted by a realtor promising the world to get the listing — but then after getting no interest in the property, the sellers get anxious and want to sell. A reasonable offer may get traction, and if the seller is more motivated than the original asking price would suggest, the one-on-one negotiation yields a good result for the buyer. Believe it or not, this technique really works.