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New Fed Paper Addresses Why Housing Inventories are Low

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Just about anywhere you look in the United States the residential real estate market is plagued by a lack of homes for sale.

The Federal Reserve Bank of San Francisco recently published a paper — titled Why Are Housing Inventories Low? — suggesting that many homeowners can’t sell because they are still underwater, meaning they owe more on their home mortgage than the house is worth.

Written by William Hedberg, a research associate, and John Krainer, a senior economist, both with Federal Reserve Bank of San Francisco, the paper argues the following:

“Inventories of homes for sale have been slow to bounce back since the 2007–09 recession, despite steady house price appreciation since January 2012. One probable reason why many homeowners are not putting their homes on the market is that their properties may still be worth less than the value of their mortgages, which would leave them owing additional money after a sale.”

“In other cases, homeowners may simply be hoping that house prices will continue to rise, allowing them to recover lost equity,” write Hedberg and Krainer.

They also suggest credit is tight and getting a home loan is more difficult today. They acknowledge that there are few homeowners today, but believe home loans are harder to come by.

“Thus, either preference for homeownership has shifted or, more likely, credit constraints have affected household home purchase decisions,” they write.

Hedberg and Krainer do acknowledge that home ownership rates have fallen while for-rent  inventories have risen.

“Changes  in for-sale and for-rent inventories are seen most dramatically in markets where foreclosure rates were high and where investors are now reportedly playing an important role in home sales. Indeed, in markets such as Las Vegas, Miami, and Phoenix, the total inventory of homes for rent is approaching that of homes for sale. This is a remarkable shift that has continued throughout the recovery, not just most recently when prices have been rising and inventories have failed to respond. Still, the impact of investors in these markets should not be overstated. The decline in homes for sale is very closely linked with the large downward shift in the homeownership rate in these markets,” write Hedberg and  Krainer.

“Current inventories of homes for sale are low given more than a year of house price appreciation. County-level data suggest that many homeowners are waiting for prices to rise further in their markets. Markets that have seen the strongest house price appreciation and job growth are the ones where for-sale inventories  have declined the most.”

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