1816 is known as the year without a summer. Due to an unusual combination of events, temperatures didn’t rise that summer causing widespread crop failures and starvation.
2012 is known as the year without a seller. Due to a dramatic change in foreclosure policy, festering delinquencies at the major banks, more than a quarter of all mortgage holders underwater, and hedge funds intercepting MLS inventory at the auction sites and renting them out instead, sellers did not bring properties to the market in 2012. This wasn’t a small phenomenon. Across most of the US, there were a third as many houses for sale this year as there were two years ago. In California, the reduction in for-sale inventory was even more extreme. Orange County ended the year with 63.6% fewer listings than the year before.
As one might imagine, a 63.6% decline in inventory coupled with continued stimulus from the federal reserve pushing mortgage rates to record low levels caused the housing market to bottom. In fact, the rebound has been very robust as buyers take advantage of a monthly cost of ownership that is the lowest relative to rents since the 1980s.
The big question for 2013 is whether or not inventory will return to the market. So far, it looks like it won’t.
First, the banks have no real incentive to process more foreclosures. They have a near zero cost of capital thanks to the federal reserve, and with prices going up, the longer they wait, the more they recover when they do finally foreclose on their legions of delinquent borrowers — and the major banks have a lot of delinquent borrowers. At last report, more than 10% of all mortgages at the major banks are delinquent. The modest decline from the peak came from a combination of foreclosures and aggressive loan modification programs. It has remained stubbornly high because loan modifications continue to fail and borrowers re-default.
With the banks content to kick the can into 2013, the only source of listings is short sales and organic sellers. The big concern for 2013 will be short sales. If Congress does not extend the short sale tax forgiveness, short sale listings will dry up. What incentive would a loanowner have to complete a short sale? If they just stop paying, they will be allowed to squat for quite a while, perhaps years. If the tax forgiveness is not extended, the short sale listings that do come to market won’t be real. Many will list their home just to fend off a foreclosure and squat for a little longer.
We have begun to see the organic sellers return. They are the ones with the WTF asking prices trying to make a profit from their peak purchases back in 2006. Some of those actually sell which shows how much reducing interest rates from 6.5% to 3.5% over the last six years has helped. An increase in organic listings is not a blessing for the market. They will all be unrealistically priced. Back in 2007, we had huge inventories, but since most of it was organic sellers prices well above market comps, the inventory was there but useless. If organic sellers make a comeback in 2013, we will have the same phenomenon. An MLS clogged with WTF asking prices serves no one.
For the past two years, inventories of homes for sale have plunged. Low inventories have been a mixed blessing for real-estate agents. They have undoubtedly helped stabilize home prices, but they have probably also limited the volume of homes sold.
So far, the lack of inventory has not hurt sales volumes. There have been enough listings to satisfy demand, but at the super low inventory levels we have now, sales volumes will almost certainly be less in 2013 if more inventory does not come to market.
Supply-demand dynamics “have moved much more in favor of a sellers’ market,” says Ivy Zelman, chief executive of Zelman & Associates. Inventories are down because many homeowners are unwilling or unable to sell, particularly if they owe more than their homes are worth. Strong investor demand and fewer bank foreclosures have also contributed to inventory drops.
That’s exactly what’s going on, and those dynamics look to continue throughout 2013.
Inventory declines have been the most important development this year. It began when builders sharply cut back construction in 2007 and 2008. By 2010, mortgage delinquencies peaked, setting the stage for a decline in foreclosures. By 2011, rental demand rallied and housing demand began picking up among investors in neighborhoods where homes could be easily rented out. In March, the Journal traced the cycle of this recovery in Phoenix, which has had the strongest home-price rebound.
As prices pick up in more markets, more sellers could come out of the woodwork. In Phoenix, where prices are up 17% from a year ago, inventories of homes for sale have increased in each of the last four months. Inventories are up 10% from their July trough, though they are still down by 20% from one year ago, according to Realtor.com.
Large drops in inventories have whittled away the discount at which foreclosures sell in many markets, which has further contributed to big price gains. In some markets, especially throughout California and Arizona, an uptick in inventory would lead to more sales without putting too much pressure on prices.
We could see a doubling of inventory and prices would keep going up. If inventories tripled, and we got back to 2011 inventory levels, then prices might flatten out, but it doesn’t seem very likely that many houses will come to market.
But that’s not the case for soft markets such as St. Louis, New York’s Long Island, and Chicago, where inventory jumps could further depress prices.
The judicial foreclosure states of the East Coast are still going to get crushed.
If inventories continue to decline, it will be hard to see big gains in home sales, and home builders will benefit in a big way. Builders are already ramping up construction but they face their own challenges, including labor shortages and rising land and building costs.
The builders are already loving the lack of inventory. If MLS inventory does not come back to the market, 2013 will exceed expectations for builder sales.
So will we see more MLS inventory in 2013?
Last year was very unusual in that there was no seasonal uptick in listings. Usually, inventory increases from January through July. I expect we will see a return to the normal seasonal pattern this year, but even at the peak, we will likely have low inventory. As a result, prices will probably continue to move higher, perhaps much higher.
Get us out at breakeven, please
The owners of today’s featured short sale just want out. They are hoping the lack of inventory will give them an opportunity to get out at breakeven. It just might.
They paid $645,000 back in 2003. Today their asking $700,000 which will get them out at breakeven after commissions and closing costs. They don’t have much room to negotiate.
Have prices appreciated in Newport Beach since 2003? We will find out soon.
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Proprietary OC Housing News home purchase analysis
$700,000 …….. Asking Price
$645,000 ………. Purchase Price
6/24/2003 ………. Purchase Date
$55,000 ………. Gross Gain (Loss)
($56,000) ………… Commissions and Costs at 8%
($1,000) ………. Net Gain (Loss)
8.5% ………. Gross Percent Change
-0.2% ………. Net Percent Change
0.8% ………… Annual Appreciation
Cost of Home Ownership
$700,000 …….. Asking Price
$140,000 ………… 20% Down Conventional
3.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$560,000 …….. Mortgage
$145,210 ………. Income Requirement
$2,487 ………… Monthly Mortgage Payment
$607 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$175 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$483 ………… Homeowners Association Fees
$3,751 ………. Monthly Cash Outlays
($550) ………. Tax Savings
($895) ………. Equity Hidden in Payment
$149 ………….. Lost Income to Down Payment
$108 ………….. Maintenance and Replacement Reserves
$2,563 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$8,500 ………… Furnishing and Move In at 1% + $1,500
$8,500 ………… Closing Costs at 1% + $1,500
$5,600 ………… Interest Points
$140,000 ………… Down Payment
$162,600 ………. Total Cash Costs
$39,200 ………. Emergency Cash Reserves
$201,800 ………. Total Savings Needed