Inventory up, demand down, the standoff over cloud inventory begins
In my opinion, the housing market has reached an important inflection point. Through May of this year, thanks to restricted MLS inventory and super low interest rates, sellers were firmly in control of the market. Anything put up for sale sold quickly, often well over asking prices with a plethora of competing bids.
As prices pushed higher, many distressed loanowners found comparable sales value reaching the outstanding balance of their loan. This is an opportunity to get out from under the debt on the house they really can’t afford, so many of them listed in hopes the rising bids would take them out at the ask. The influx of inventory has been significant.
As distressed sellers finally saw the light at the end of the tunnel, an event we all knew was coming — rising interest rates — came upon us sooner than anyone expected. The stampede for the exits in the bond market has sent mortgage interest rates up nearly 30% (from 3.5% to 4.5%), and recent activity in the bond market foretells even higher mortgage interest rates in the future. Rising rates cut the legs out from under the market. Buyers can’t stand tall and bid to peak prices on their flatlining incomes.
So where does this leave us?
We now have a large number of cloud inventory listings. These sellers can’t reduce their price because they need to pay off a big loan. So no matter how much of this inventory comes to market, it won’t put downward pressure on prices. It isn’t must-sell inventory, it’s can’t sell inventory. Potential buyers can’t finance the asking prices these sellers need to complete a sale. What we have is an old-fashioned Mexican standoff where neither party can pull the trigger. The market may stall and go nowhere.
What are the potential outcomes?
The reason I believe this is an important inflection point is because something in the market is going to change.
It’s possible that mortgage rates will fall again, and the rally will continue. With the imminent fed taper, this doesn’t seem a likely scenario.
It’s possible that the weight of this inventory will snuff the rally out. With the nature of cloud inventory, this doesn’t seem a likely scenario either.
It’s possible that buyers and sellers will be frozen in their unarmed Mexican standoff and sales volumes will fall. This scenario does seem likely. To some degree, this will come to pass over the next six to nine months.
Prices will be volatile. We may see pockets where prices rise significantly, and we may see areas where prices completely stagnate. This will probably play out in a random fashion depending on what neighborhoods and communities attract the remaining buying interest and what ones don’t. I expect the buying interest to be strongest in the most undervalued markets because the marginal buyers who find themselves priced out of the neighborhoods they really want substitute down to bargain neighborhoods. As the market pauses to catch its breath, the uneven relief rally may even itself out.
By Nick Timiraos — August 13, 2013, 11:58 AM
The number of homes being offered for sale is rising heading into the softer part of the summer, a sign that higher home prices could be encouraging more sellers to test the market, according to a report released Tuesday.
Nationally, the number of homes for sale stood 5.2% below the levels of a year earlier. But inventories rose by 1.4% from June, an indication that the inventory crunch could finally be easing, data from Realtor.com showed. Compared with June, listings rose in 17 of the 30 cities.
The 1.96 million homes listed for sale was the highest since last September, according to the report.
Four cities posted increases in the number of homes for sale from one year earlier, led by Atlanta, where inventories were up almost 17.9%. Listings increased by 16.7% in Sacramento, Calif., by 6.8% in Los Angeles, and 2.8% in Orlando. Prices have risen strongly in all of those cities over the past year.
The number of listings is up in OC about 25% off the bottom, but it’s still down more than 30% from last year.
Despite the talk about resurgent demand, sales volumes are down 7.9% from last year’s levels.
Inventories stood below year-earlier levels in the remaining 26 cities, falling most sharply in Detroit (-30.2%), Boston (-28.9%), Denver (-25.1%), San Francisco (-19.4%), and Las Vegas (-19.1%).
Interesting that San Francisco, a market where prices were never allowed to deflate, has surging demand and declining inventory, and Las Vegas, the worst of the bubble crash markets also has surging demand and declining inventory. The demand for both markets comes from different places. In San Francisco, the economy is better, and the many highly-paid tech workers are bidding up prices. In Las Vegas, the economy is still in the doldrums, but the hedge funds are buying everything they can.
Another wild card: how homeowners respond to mortgage rates that have jumped by at least a percentage point over the last two months.
I think we have some idea how this wild card is playing out.
Market competition balances out after peaking in March
Competition for homes across the U.S. dropped in July, online real estate firm Redfin reported Thursday.
Last month, 63.3% of all offers obtained by Redfin agents landed in the middle of a bidding war, down from 68.6% in June and the peak of 75.7% in March.
Some of the more competitive markets — including Orange County and San Diego, Calif. — experienced steep drops in competition from June to July.
Redfin agents claim rising home prices, interest rates, inventory levels and buyer fatigue played a role in easing market competition during the summer months.
Russ Wetherill says:
August 15, 2013 at 11:28 am
Here is what I am seeing in my area right now. On June 3rd, there were 9 active, 12 pending, and 14 sales in the last 3 months. As of this morning, there are 19 active, 2 pending, with 26 sales over the last 3 months. Seems like buyer activity was more or less absorbed during the last 3 months, and/or the rates have driven many buyers off the fence and back into their rental. …
The inventory has risen here from 82 to 114 (6/3 to 8/15). Prices are all about 10% too high. This is a very different market if prices are 10% lower. I keep looking for the pot of gold at the open houses I attend, but somehow it eludes me… The values just aren’t there for the amount down and monthly payment. Not all the sellers have to sell at these prices, however. About a third bought at the peak and are looking to breakeven. Twenty percent bought in 2009-12 and are looking for a windfall. The rest are long-term equity sellers. Apparently, they are all getting the same bad listing advice from their realtors based on what the prices were 1-2 months ago. There hasn’t been a single house go pending here in the last three weeks (July 27), and that was a cash sale that closed in 4 days. Two wheels are off the cart, and the other two are perilously close to the end of the axle.
August 15, 2013 at 1:59 pm
Sales have slowed to a crawl in our neighborhood. When we listed in late June there were two other listings. Today there are 13 (including ours). A nearly identical comp to ours listed two weeks ago. That homeowner bought in 2010 and is looking to earn a nominal profit. We bought in 2007 and are looking at a 10% loss, if we sell at a reasonable price.
Nobody makes an announcement when the market shifts, but based on these inventory anecdotes, we may be seeing it happen now.
The blog’s astute observations
I have been thrilled by the quantity and quality of the comments on this blog of late. At the time of this writing, there were 76 comments on yesterday’s post, and 40 to 50 is becoming the norm. Although the number of blog commenters is usually only about 1% to 2% of the total readership, they provide a great resource for discussing these issues and exploring different points of view. I’ve always considered these comments one of the best features of the blog. It gives this forum life.
I know I recently thanked all of you for your participation, but I want to do it again. Your contributions are immeasurable. Thank you.
Typical OC Ponzis
Ponzi living was a very common lifestyle during the housing bubble. With houses appreciating at rapid rates, and with banks eager to give free money to anyone who wanted it, many people became dependent upon their yearly infusions of cash. Appreciation was treated like wage income.
The former owners of today’s featured property paid $216,000 back on 8/27/2001. The rode the wave of appreciation and extracted $165,400 in mortgage equity withdrawal. The couldn’t afford the new payments, so they defaulted and gave up the house in a foreclosure auction last year.
[idx-listing mlsnumber=”PW13160389″ showpricehistory=”true”]
235 North BERNIECE Dr Anaheim, CA 92801
$358,900 …….. Asking Price
$216,000 ………. Purchase Price
8/27/2001 ………. Purchase Date
$142,900 ………. Gross Gain (Loss)
($28,712) ………… Commissions and Costs at 8%
$114,188 ………. Net Gain (Loss)
66.2% ………. Gross Percent Change
52.9% ………. Net Percent Change
4.3% ………… Annual Appreciation
Cost of Home Ownership
$358,900 …….. Asking Price
$12,562 ………… 3.5% Down FHA Financing
4.32% …………. Mortgage Interest Rate
30 ……………… Number of Years
$346,339 …….. Mortgage
$96,521 ………. Income Requirement
$1,718 ………… Monthly Mortgage Payment
$311 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$75 ………… Homeowners Insurance at 0.25%
$390 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,493 ………. Monthly Cash Outlays
($354) ………. Tax Savings
($471) ………. Principal Amortization
$20 ………….. Opportunity Cost of Down Payment
$110 ………….. Maintenance and Replacement Reserves
$1,797 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,089 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,089 ………… Closing Costs at 1% + $1,500
$3,463 ………… Interest Points at 1%
$12,562 ………… Down Payment
$26,203 ………. Total Cash Costs
$27,500 ………. Emergency Cash Reserves
$53,703 ………. Total Savings Needed