A gilded age of low housing inventory

Sellers are not listing and selling their homes because the debt on their property creates incentives for them to stay where they are.

gilded_age_bankersMark Twain coined the term “gilded age” in response to a superficially prosperous era that covered over many deep structural problems in society. The US housing market enjoys its gilded age as the only housing recovery with record low sales, record low purchase originations, and record low home ownership rates.

Since the housing bust began, banks controlled the inventory of homes on the MLS. At first, they flooded the MLS with subprime foreclosures, but with mark-to-fantasy accounting, they were able to slow their foreclosure rates and store delinquent borrowers in shadow inventory. Since early 2009, the number of properties available for sales has been completely controlled by the banks; they determine when to list their standing inventory of REO, and they control the approval on every short sale — between those two sources, the banks control the market.

With the serious problems facing the housing market including a weak economy, slow job growth, tepid demand from owner-occupants, excessive consumer debt, excessive student loan debt, a depleted buyer pool due to credit impairment, and artificially low interest rates, it’s a wonder housing prices aren’t still heading straight down. The 20012-2013 price rally was engineered by the lending cartel through restricting for-sale inventory on the MLS. Without this inventory restriction, prices would almost certainly head lower.

Why don’t homeowners list and sell their homes?

The banks don’t directly control millions of properties through ownership as their REO inventories are largely gone; however, they control the debt on millions of homes, so they greatly limit homeowners options with regard to selling. I wrote back in March of 2013 that low housing inventory is an indicator of residual mortgage distress:

the banks have engineered much of this shortage by endless can-kicking through loan modifications and refusing to foreclose on delinquent mortgage squatters. Lenders benefit from rising prices because they recover more capital when they do foreclose, and loanowners benefit because rising prices also makes it possible for them to sell without the lingering debt issues of a short sale. It’s only future buyers that get screwed, and obviously, nobody cares about them.

n a normal market, there is not an overhang of distressed loans that need to be processed. The flow of properties on and off the market is not constrained by lender policy. In a market where down payments are more substantial and prices are slowly rising, nobody is underwater and thereby reluctant to sell for a loss. The fact that inventory is so low right now is directly related to the choices of these two groups.

Although lenders deserve much of the blame for the lack of inventory, loanowners are the oft ignored group who isn’t listing their homes. And why should they? If they wait, and if prices keep going up, they can avoid a short sale. As long as prices are rising, they have a huge disincentive to sell.

In May of 2013, I looked at this issue in greater depth in the post Loanowners are in no hurry to list and sell their houses:dont_come_crying

I postulated that loanowners would begin listing their homes as soon as prices reached near-peak levels when they could get out without completing a short sale. Upon further reflection, I’ve concluded that we may not see many more MLS listings once loanowners are above water. We will certainly see some, and we are seeing some of these WTF listing prices now, but the cloud inventory may remain in the clouds until rising housing costs force these over-extended borrowers to leave. …

One of the reasons many loanowners don’t want to sell is because they will endure the unceremonious fall from entitlement. People who can’t afford their homes are living beyond their means. If they sell and find a rental, they will be forced to live within their means in a property they can afford. For most loanowners, that means taking a step down the property ladder, and nobody wants to do that. So unless they are forced to, people won’t voluntarily sell a nice house to move into one they consider substandard. When combined with the emotional attachments of home ownership, most people will chose to struggle and fight rather than capitulate and sell.

Another reason this loanowner doesn’t currently plan to sell his house is because he couldn’t buy another one. His credit is trashed because in order to get his loan modification, he had to stop making regular payments. The missed payments ruined his credit score. If you extrapolate that circumstance to the millions of borrowers who applied for a loan modification, and you begin to understand why owner-occupant loan applications have been so low for so long. …

Second, this loanowner wasn’t being compelled to sell due to the cost. With his loan modification, his monthly cost of ownership is lower than a comparable rental. With his 2% temporary teaser rate, his payment is very low. As long as his monthly costs are lower than a comparable rental, it doesn’t make sense for him to sell and rent.

This loanowner also thought he could get a low-rate mortgage. Given his bad credit, it’s unlikely he will be given any mortgage much less a low-rate one.

So why aren’t homeowners who otherwise would like to move trying to sell?American-Gothic-House-Underwater

  • They are underwater and can’t get a bank-approved short sale or come up with the cash to pay off the note.
  • They have equity, but not enough to buy a comparable property or a move-up if they sold. They don’t want to step down the property ladder.
  • They have a loan modification making it much less expensive to stay where they are than to sell and move.
  • They don’t want to rent, particularly if the rental they can afford is not as nice as their current home.
  • They don’t have the credit qualifications to get a new mortgage, most often due to defaults to get their loan modification.

Keep in mind that the conditions outlined above did not exist prior to the housing bust. In a normal market where people can afford their homes and prices appreciate moderately with the growth of wages and jobs, very few people fall into the categories listed above. In today’s market, they account for the entirety of the missing MLS inventory, anywhere from 20% to 50% of the housing stock.

Why Aren’t There More Homes For Sale?

by Tommy Unger | April 22, 2014

Over Half of Homeowners are Not Currently In a Financial Position to Sell


… The dearth of homes for sale is the result of two phenomena: people buying homes at the peak of the housing boom, paying more for them than they are now worth; and, after the bust, people buying and refinancing homes at unsustainably low interest rates.In this study, Redfin has uncovered four categories of homes that are unlikely to reach the market anytime soon (percentage of homes affected indicated in parentheses):

  1. Low equity (19%) — A home with low equity is one for which the homeowner owes more than 80% of the value of the home. Most of these low equity homes were purchased or refinanced during the home price bubble between 2004 and 2009.
  2. Low mortgage rate (16%) — Homes purchased or refinanced when national mortgage interest rates were lower than 4.25 percent are considered to have low mortgage interest rates. These purchases and refinances occurred between 2011 and 2013.
  3. Company or investor owned (3%) — These are homes currently owned by a company or investor who purchased five or more homes in a metro area during the past 10 years.
  4. Purchased or refinanced in the past seven years (14%) — The home has been owned by the current owner for less than seven years. Redfin has found that buyers typically sell after more than seven years.

Combining these factors, more than half of all existing homes are unlikely to be put up for sale without significant changes in the housing market.

Their groups are different than mine, but the essence of the problem is the same: for various reasons related to their mortgage debt, people can’t or won’t sell their homes.HELOC_abuse_3

Buyers and Refinancers With Low Equity

Many who bought between 2004 and 2009 paid more for their home than the home is now worth. Others purchased homes with little or no down payment. Additionally, many people refinanced during the bubble to cash out on the housing market gains while expecting prices to continue rising. If these homeowners sold their homes today, they may not pocket much profit to put toward their next home.

Buyers and Refinancers With Low Mortgage Rates

Between 2011 and 2013, mortgage interest rates hit historic lows. Many buyers and refinancers locked in rates well below 4 percent. These homeowners are unlikely to sell and buy something else because home prices and mortgage rates are now significantly higher than they were at the time that they purchased or refinanced their current home. Their mortgage payment would be 29 percent higher on the same home because of those rising rates and prices. Recently, the Institute for Housing Studies corroborated Redfin findings with evidence that “rapidly increasing interest rates, along with negative equity, ‘lock in’ households to their existing mortgages and residences, which reduces housing turnover.”

This explanation misses the real problem: affordability. Being locked into a low rate means you can’t refinance, but it says nothing about your ability to sell and repurchase another home. If interest rates go up, all houses become less affordable, and house prices must come down or wages must go up, or nothing is going to sell. Rising rates will paralyze the housing market because houses will be less affordable, not because homeowners are trapped.

Miscellaneous: Recent Buyers, Companies and Investors

Fourteen percent of homeowners bought in the past seven years and have at least 20 percent equity in their home. The rule of thumb is that homes sell roughly seven years after their purchase. While they are financially ready to sell, their relatively recent home purchase means these owners are likely to stay put.

Finally, 3 percent of homes are currently owned by a company or investor. These investors are likely holding on to their investment for the capital appreciation and rental income.

This has big implications for the future move-up market. Early last year, I said The move-up market will suffer for another decade because so few owner-occupants bought homes at the bottom. Much of the equity needed to fuel the future move-up market is going to hedge funds instead.


A look at Inventory Across Metros

While the tight inventory situation is almost universal across the country, there is some variation across markets. Low equity and low mortgage rates have helped suppress inventory across much of the West, including Seattle, Sacramento, Denver and Los Angeles. The South and East are better positioned as far as home equity, and are subsequently seeing more homes for sale. Atlanta, Charlotte, Raleigh and Long Island all have a larger percentage of homes for sale than the rest of the country.

The state of homeowners and for sale inventory in select U.S. housing markets.

Inventory Will Remain A Challenge in 2014

Although some markets are bouncing back from their 2013 inventory lows, buyers in 2014 will continue to face limited options and competitive situations in most markets. Rising home values and new construction may help alleviate the low inventory problem in some places. Redfin calculates that all virtually all low equity homeowners could be in the black with five years of 5 percent price gains. Additionally, Redfin agents have already seen inventory rise in markets with significant home value appreciation, such as Southern California, Phoenix and Washington, D.C.

Inventory will be a challenge well beyond 2014. Below-median home inventories may not recover for years.

Bankers implemented a policy where no house sells for less than the onerous debt put on it because they won’t foreclose, and they won’t approve short sales. They wrote their private loan modifications with interest-only terms thus preventing money-renters from paying down their debts ensuring the market is saturated with underwater and near-equity loanowners for many years. Most of the conditions outlined above that are preventing people from listing and selling their homes are chronic.

Low inventory is the new normal.

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