Analysis: Supply crunch to take steam out of home sales

A shortage of properties could take some edge off home sales during the spring selling season, but the housing market recovery should remain intact.

The stock of houses for sale has declined rapidly in recent months as both investors and ordinary Americans rush to take advantage of near record low mortgage rates.

The surge in demand for houses, thanks to an improving labor market and the Federal Reserve's very accommodative monetary policy, is putting a firmer foundation under the economy as it deals with the headwinds from belt tightening in Washington.

In February, there were 1.94 million previously owned homes on the market, representing 4.7 months of supply. The inventory of new single-family homes available for sale during the same period was about 150,000, or 4.4 months' worth.

A six months' supply is normally considered as a healthy balance between supply and demand. With the busy spring selling season around the corner, realtors and economists are worried about the supply squeeze.

"If we don't see more people listing their properties, I don't think we will see the home sales volume increase that we are accustomed to seeing," said Glenn Kelman, chief executive officer of online real estate group Redfin, based in Seattle.

"There are far more buyers than there are sellers on the market. We would have a huge boom spurred by low interest rates if there were more inventory on the market."

The National Association of realtors expects existing home sales to rise between 7-8 percent this spring from a year ago. For the full year it forecasts sales advancing 7 percent to an annual pace of about 5 million units. Sales are currently running at a 4.98 million-unit pace.

The flow of foreclosed homes coming on to the market, which had been both a source of supply and a key obstacle to the sector's recovery, has dropped significantly in recent months.

According to Kelman, supply was now mostly coming from homeowners and that was not much, as most of the homes were still worth less than what their owners owed banks.

Data from CoreLogic last week showed so-called shadow inventory - homes either in foreclosure or being held from the market by banks - dropped 15.4 percent to 2.2 million in January from a year ago. That was well below the cycle peak of 3 million units in January 2010.

Economists said while homes were still falling into foreclosure, delays with the paper work meant those homes were not coming onto the market. Even where they had been repossessed by the banks, they were also not hitting the market.

"Banks tend to remember the experience of 2008 when they rushed to sell off properties all at once and that caused a downward spiral in house prices," said Andres Carbacho-Burgos, an associate director at Moody's Analytics in West Chester, Pennsylvania.

"They are trying to be cautious about selling off too many properties all at once."


The inventory crunch is most acute in areas like Washington D.C., New York, and the coastal California cities where, according to Kelman, "homes are selling in hours."

The months of supply in coastal California has dropped to 30 days from between six and eight months last year. Even in places like Atlanta and Philadelphia, where the housing market has been slow to recover, inventory is also tightening.

"The demand for properties is insane. The bidding wars that are going on, there is not enough inventory and it has become truly a seller's market again," said Neil Garfinkel, real estate attorney at Abrams Garfinkel Margolis Bergson in New York.

But in cities like Detroit, where the population is declining and vacant houses are everywhere, the housing recovery will probably not happen this year or even next year.

Despite expectations of a relatively quiet spring season, the housing recovery is not expected to step back, largely thanks to investors, who make up roughly a fifth of home sales and account for most of the cash sales.

Cash sales account for about a third of transactions. Wall Street investors, who were very active in the housing market over the past 1-1/2 years, are now competing with ordinary people looking to make money from real estate.

"They are buying whatever they can get their hands on. Before they were more selective," said Kelman.

The properties are repaired and rented out. While some of the big money has started to leave areas like Phoenix, Arizona as the foreclosure inventory gets depleted, Atlanta is seeing a jump in sales and prices because of the Wall Street investors.

"Investors will start to exit only after either foreclosure inventories are significantly depleted or sale discounts have fallen off so much that it's like buying a regularly priced home," said Moody's Analytics' Carbacho-Burgos.

Analysts and realtors saw little chance of a repeat of the housing market collapse.

"Back in 2007 we had very leveraged investors. They were buying a home that they would sell for a higher price in six months," said Redfin's Kelman. "That's not happening now, the investors we see now are coming in with cash."

(Reporting By Lucia Mutikani; Editing by Chris Reese)