The newest topic in real estate seems to be the idea that somehow there's an “inventory shortage.” The headlines tell us there is a “lack of inventory” and raises the question of “where are the houses?”
Lawrence Yun, the chief economist with the National Association of Realtors, says “buyer traffic is 40 percent above a year ago, so there is plenty of demand but insufficient inventory to improve sales more strongly. We've transitioned into a seller's market in much of the country.”
Well, actually, I don't think that's the case. Instead, I would argue is that we have a marketplace which is in transition, where home prices are generally rising and where foreclosures and short sales remain available at discount prices, something which would hardly be possible in a marketplace with limited inventory and massive demand.
It should be said that home prices are a relative measure. Existing home prices in January, according to NAR, were 12.3 percent higher than a year earlier. That's surely good news for property owners, however the housing sector has a huge pricing deficit to overcome. The Federal Housing Finance Agency says that in November home prices were still 15.2 percent below April 2007, when peak prices were hit.
Not only are home prices not where they have been, there's no shortage of marketplace discounts.
"Distressed homes — foreclosures and short sales — accounted for 23 percent of January sales, down from 24 percent in December and 35 percent in January 2012,” according to NAR. “Fourteen percent of January sales were foreclosures and 9 percent were short sales. Foreclosures sold for an average discount of 20 percent below market value in January, while short sales were discounted 12 percent.”
It's still a buyer’s market, at least for foreclosures and short sales. If there were really a shortage of homes for sale then why is it that properties remain available with significant discounts? The problem certainly isn't financing, mortgage rates today are hovering around 3.5 percent, not far from all-time lows. Despite claims that loans are tough to get the reality is that millions of people financed and refinanced homes last year. I know, I was one of them.
Home values today would be far higher if the marketplace were not so crowded with short sales and foreclosures. They make up nearly a quarter of all the properties being sold and they are being marketed with substantial discounts.
Rather than moan about the alleged shortage of inventory, perhaps the real issue is that property owners — including lenders with large REO inventories — are hanging tough, waiting for prices to still go higher. They want the missing 15 percent in value that they used to have. It's both psychologically and financially important for many owners not to have a loss on a house, and who can blame them?
As long as the marketplace is weighted down with foreclosures and short sales many homeowners will not want to sell. Alternatively, the fact that there are so many distressed properties available — and the fact that enormous discounts continue to exist — should be seen as evidence that a buyer's market continues.