Whatever Happened to Those Houses for Sale?

Homebuyers are back. But they're not finding many for-sale houses to choose from.

This dearth of for-sale homes isn't imaginary. In fact, the pool of properties actually has shrunk in housing markets across the nation.

Only 2.32 million existing homes were available for sale in the U.S. at the end of September 2012, according to the National Association of Realtors. That figure represented a 5.9-month supply of for-sale homes at the September pace of sales. A year earlier, the supply of for-sale homes would have lasted 8.1 months at the then-current pace of sales.

So, what happened to all the houses?

Leslie Appleton-Young, chief economist for the California Association of Realtors in Los Angeles, and Rick Sharga, executive vice president of Carrington Mortgage Holdings, a mortgage company in Aliso Viejo, Calif., offer some answers.

Sellers are on the sidelines. Some homeowners have no reason to move. Others aren't motivated because they would take a loss at current prices or they still owe more than their homes are worth.

"They're not sure what they want to do," Appleton-Young says.

Rising prices might help those who aren't deeply underwater reach a break-even point. Meantime, negative equity has an unexpectedly positive effect on house prices in markets hardest hit by the housing downturn, according to a recent report from CoreLogic, a real estate data and analytics company in Irvine, Calif. That's because negative equity restricts the number of homes available for sale, and the reduced supply of homes keeps prices from falling further.

Investors are buying houses as rental properties instead of fix-and-flip opportunities. "Typically investors buy, rehab and flip, and that's not happening much because prices are low and demand for rental units is high," Appleton-Young explains.

Well-priced homes are selling fast, reducing the for-sale supply. "If properties aren't priced right, they do sit, so (sellers) have to be realistic. But if it's in the ballpark, it goes quickly," Appleton-Young says.

Even notoriously slow short sales are moving faster due to new rules that are intended to streamline and standardize short sales for homeowners who have mortgages backed by Fannie Mae or Freddie Mac.

Home builders have been idle. "Home development is at an almost all-time low," Sharga says.

Prior to 2009, builders completed at least 1 million new homes per year, according to the U.S. Census Bureau. But in that year, they finished only 794,000 homes. In 2010, completions numbered 651,000, and in 2011, the total dropped to just 585,000. The most recent figure for 2012 was an annualized pace of 677,000 new homes. That was an increase, but still far fewer homes than typical.

The supply of so-called distressed homes has declined due in part to legal snafus in the foreclosure process. Distressed homes include short sales, preforeclosures and bank-owned real estate.

"The robosigning issues and the national mortgage settlement essentially stopped foreclosure procedures in a number of states," Sharga explains.

Banks still own hundreds of thousands of homes, and millions of homeowners are still late or delinquent with their mortgage payments, but those homes aren't on the market and Sharga says that backlog will take time to work through.

Lenders and government agencies are selling distressed loans to servicing companies that are offering homeowners workouts and loan modifications. "A certain number of those loans will never go into foreclosure," Sharga explains. "They'll be modified or short-sold, so that backlog won't all hit the market really ever."

REO properties also are being sold in bulk to investors. The Federal Housing Finance Agency recently announced sales of 970 properties in California, Arizona and Nevada; 699 properties in Florida; and 94 properties in Chicago.

So, what does the tight supply mean for buyers and sellers?

Appleton-Young says sellers need to be wary of overconfidence and recognize that overpriced properties won't sell soon, if at all. Buyers, meanwhile, need to recognize that markets are competitive and that all-cash offers, preferred by sellers, aren't uncommon.

Sharga says patience is a must for buyers.