Homeseller Reluctance Worsens U.S. Inventory Shortage
Jaimie Adler said it’s getting cramped in the Lexington, Massachusetts, house she shares with her husband, two daughters and an au pair who occupies the former office. They’d sell, Adler said, if more homes were on the market in the Boston suburb.
Adler is staying put -- and she’s not alone. The dearth of residential listings nationwide is now feeding on itself, with homeowners such as Adler reluctant to sell because of the difficulty in finding a place to buy. For others who refinanced into historically low interest rates, the prospect of rising borrowing costs makes selling less appealing.
“This time next year, it will still be tight,” said Lawrence Yun, chief economist at the National Association of Realtors. “We could be entering this cycle of no inventory coming on because of a fear people have that they cannot buy.”
Adler and her husband, Jeffrey Palter, are planning to expand or rebuild their 1,250-square-foot (116-square-meter) home after talking to an agent about listing it last year. Selling would be too risky, Adler said, because they might get stuck renting an apartment like a friend whose house hunt in the area lasted a year.
“We’ve decided to stay and work with what we have,” said Adler, 42, who runs a public-relations company from her guest bedroom. “We found some bigger homes in the neighborhoods we liked, but they’re more money and they’re still 25 years old, so they need the same amount of work.”
The 30-year rate probably will reach 5 percent by the end of the year as the Federal Reserve scales back bond-buying that has held borrowing costs close to record lows, according to the Mortgage Bankers Association. A rate increase would only exacerbate the supply constraints, Yun said.
Fewer homes are trading and prices are soaring in part because buyers have limited choices, especially in the strongest markets. While completed sales of previously owned dwellings rose in April from the previous month, the first gain this year, they were down 6.8 percent from a year earlier, according to NAR. The listings shortage has fueled price gains for two years, with the median existing-home value rising to $201,700 last month, up 5.2 percent from April 2013.
Sellers had owned their homes for a median of nine years in 2013 compared with six years at the housing market’s peak in 2006, data from the National Association of Realtors show. Buyers last year planned to stay in their homes for 15 years, compared with eight years in 2006, according to the group.
The number of listings on Zillow Inc. (Z)’s website, adjusted for seasonal variations, fell each month this year through April, when they reached a nine-month low, according to the Seattle-based property-data provider. The number of properties on the site had climbed through most of the latter half of 2013.
“It’s like a game of musical chairs for sellers,” said Stan Humphries, chief economist of Seattle-based Zillow. “They don’t want to get out of the chair they’re sitting in because they’re not reasonably confident they’ll find another chair to sit down in. That sets into play a negative feedback loop that feeds on itself.”
NAR’s inventory numbers, which are based on a sampling of multiple listings service data, jumped in April. The increase might have resulted from sellers who delayed listing their homes in previous months because of unusually harsh winter weather, Yun said.
Inventory at the end of April rose almost 17 percent from March to 2.29 million existing homes available for sale, NAR said. That represented a 5.9-month supply at the current sales pace, up from 5.1 months. The market remains tight, and a 6-to-7-month supply would be normal, according to the group.
Price gains may prove irresistible to some potential homeowners, encouraging them to list their properties, helping inventory grow, said Paul Diggle, U.S. property economist for Capital Economics Ltd. in London.
The S&P/Case-Shiller index of property values increased 12.4 percent in the year ended in March, the smallest 12-month gain since July, after rising 12.9 percent in the year ended in February, a report from the group showed yesterday.
Mark Fleming, chief economist of property-data firm CoreLogic Inc., said the inventory is even tighter than it seems. Some properties are not desirable because they’re in unpopular locations or lack the amenities that buyers want, he said in a report last week.
The “inventory of homes for sale that buyers actually want to purchase is even less than what’s on the market now, and many people who are looking (and qualified) to buy a home are holding off because they can’t find the right one,” Fleming wrote. These “buyers waiting in the wings are the new ‘shadow demand.’”
About half of mortgaged homes have below-market loan rates, Fleming said. Some 3.57 million likely sellers may be discouraged from listing their properties because the cost of financing their next home will be higher, he said.
Construction starts of single-family homes were at about 60 percent of the 20-year average in March, according to Commerce Department data. Homebuilders are increasingly catering to buyers who can afford larger, more expensive properties near employment hubs and are cautious about creating housing on more-plentiful land on the outskirts of cities.
Labor shortages are contributing to the slowdown. Subcontractors have struggled to find skilled construction workers, many of whom moved out of the country or left the business during the housing crash.
“The builders that are left standing today are there because they were conservative,” Zillow’s Humphries said. “They are naturally going to approach this up market more conservatively because, for anyone looking at new construction over the last decade, one thing you don’t want is to get out over your skis.”
Adler, the homeowner, said a local builder approached her a few months ago and said his client wanted to buy her house, built in the 1940s, and renovate it.
She and her husband instead decided to improve the house themselves because they like the quiet neighborhood and the area’s schools, she said. Adler said she’d prefer to have at least 2,000 square feet of living space, an open floor plan, a finished basement and a “fantastic kitchen.”
“There are gorgeous homes in this town, but they start at a million dollars,” she said. “It makes more sense to stay and renovate so you get exactly what you want.”
Remodeling and replacement activity last year reached the highest level since 2008, according to construction-data firm Hanley Wood’s Residential Remodeling Index. In the first quarter, the gauge gained 6.6 percent from a year earlier, the seventh consecutive year-over-year increase.
Homeowners have felt more confident investing in improvements because of price gains, which gives them more equity to tap to fund projects, said Jonathan Smoke, chief economist at Washington-based Hanley Wood.
“This will provide a source of consistent projects,” he said. “We feel positive we’re looking at multiple years of stable growth because you’ve got this scenario of the very people who feel financially secure having been locked in by low mortgage rates, and wanting to invest in their homes.”
The “lock in” effect will significantly slow turnover, and counter sales resulting from underwater homeowners -- those who owe more than their properties are worth -- regaining equity, said Geoff Smith, executive director of the Institute for Housing Studies at DePaul University in Chicago.
A 3 percentage point increase in rates over three years would increase the share of locked-in homes in strong housing markets by 35 percentage points, according to an Institute for Housing Studies simulation from February that analyzed data from 33 Cook County, Illinois, markets.
Rising rates slowed sales most in relatively stable, affluent markets because that’s where refinancing has been most popular, according to the report.
The federal government’s policies to drive up homeownership in the past 20 years resulted in an average of 5 million sales a year. Turnover during the next five years will be flat, said John Burns, an Irvine, California-based real estate consultant.
Adler said the chances of her putting her house on the market are minuscule. An agent suggested last year that she list the property for $725,000, she said.
“The only way I would list this house is if I could buy something first,” Adler said. “It would take me inheriting a million dollars to buy something first -- or winning the lottery. And I don’t play the lottery.”
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