Editor’s note: This is the second in a two-part series on the impact of shrinking inventories on buyers and sellers. In Part 1, "Low inventories thwarting buyers," Inman News reporter Andrea V. Brambila looked at how the scarcity of listings in many markets is affecting buyers. In Part 2, Brambila looks at the reluctance of many sellers to put their homes on the market.
Home prices are seeing some strength nationwide, but further price increases will be necessary to spur some homeowners to sell, according to real estate professionals contacted by Inman News.
As would-be sellers sit on the sidelines hoping for prices to go up, many markets are facing inventory shortages. Nearly every major U.S. metro saw the inventory of for-sale listings drop by double digits in August compared to last year, according to data from Realtor.com.
By and large, real estate agents and brokers say that despite some modest price increases, many homeowners still cannot afford to sell.
Though rising home values helped 1.3 million homeowners get out from "underwater" in the first half of the year, 10.8 million homeowners still owed more than their homes were worth at the end of June, according to real estate data firm CoreLogic.
The firm has said that negative equity prevents potential sellers from placing their homes on the market because of the need for a down payment to purchase a move-up home. Underwater sellers would also have to either negotiate a short sale with their lender or pay the difference if the home were sold.
Tom Avent, broker-owner at Tom Avent Real Estate in Fresno, says buyers now believe home prices have hit bottom and their confidence has boosted demand. But sellers are reluctant to list their homes because they have lost so much equity, he said.
The Fresno metro area has experienced the third-biggest drop in listings in the past year, down 43.1 percent in August. Active inventory currently stands at a 1.5 months’ supply.
"Many of them are waiting for prices to increase more before they can sell, and some sellers are keeping their current homes as a rental investment and buying without selling," Avent said.
The Oakland, Calif., metro area saw the largest drop in for-sale inventory in the nation in August, according to Realtor.com — down 58.4 percent year over year. At the same time, the median list price of a home in the Oakland market rose 13.6 percent on an annual basis, to $385,000 — the sixth-highest price jump of the 146 markets tracked by the site.
Nonetheless, prices are at 2002 levels, according to Deidre Joyner, a real estate agent at Red Oak Realty in Oakland.
"I have several clients who may sell if they can earn about $50,000-$75,000 more (on a sale) than they can right now," she said.
An aerial shot of Oakland, Calif., showing Lake Merritt and the Adams Point neighborhood. Image via Shutterstock.
‘No sense of urgency’
An August consumer survey of U.S. adults from Fannie Mae found that 35 percent of respondents believed home prices would rise in the next year, while 48 percent thought they would stay the same. Only 11 percent thought they would decline.
Seattle-based online brokerage Redfin also recently surveyed 816 homeowners in 20 metro areas nationwide who intended to sell their home. The survey found that 8 out of 10 believed they would get a higher price for their home by waiting one to two years to sell. Only 13 percent believed now was a good time to sell, while 61 percent believed now was a good time to buy.
In a blog post, Redfin said sellers had "no sense of urgency."
"Taken together, the responses paint a picture of a market composed of reluctant sellers with low opinions of the market today, yet high expectations for the future," Redfin reported. "Most of today’s sellers believe that it’s a much better time to buy a home than it is to sell a home, and that the market will get better for sellers in the next year or two."
And while sellers are generally happy with the price increases that the inventory shortage has spurred in some markets, many also worry about finding a replacement property, real estate pros said.
"The sellers want to sell high and buy the home for prices that were available six months ago. When they realize the entire market trends up, they rethink their plans to sell since it may not be as economical," said Andrea Harrington, an agent at EWM Realty International in Fort Lauderdale, Fla.
Still a buyer’s market
In other markets, listings may have dropped, but that doesn’t mean inventory is low enough to make it a seller’s market. In Tallahassee, Fla., for example, for-sale listings fell 15 percent in August, but there is still a supply of roughly 11 months on the market.
"The declining real estate inventory has not brought about market equilibrium yet, so buyers still have plenty of choices," said Joe Manausa, broker-owner of Century 21 First Realty in Tallahassee.
He has been cautioning sellers that prices in the area may not reach what they were in 2008 until several years from now.
"We have altered our listing presentation significantly, now offering home sellers the kind of information they really need to make an informed decision," Manausa said. "We have found that many home sellers, once educated, make the decision to stay out of the market — thus reducing inventory and making it easier for those that do need to sell immediately."
Manausa said his firm is "only dealing with home sellers who are motivated to sell a home right now. Those that want to ‘test the market’ end up unhappy with their real estate company, and we do not wish to be that company."
The Williams House, an historic home in Tallahassee, Fla. Photo credit: Ebyabe/Wikimedia.
He also noted that even a market with a less than a six month supply is not necessarily a seller’s market at every price point.
"In many markets, the supply of homes under $100,000 has been cleared by investors, while those over $400,000 have significant glut," Manausa said. "When you segment a market by price point, you get relative supply levels that accurately show (a buyer’s) market above the median, and (a seller’s) market below the median. Thus, the overall supply is dangerously misleading in most markets."
Fewer distressed properties
A diminishing pipeline of distressed properties has played a role in the overall inventory shortage. Nationally, 15 percent fewer homes received foreclosure-related filings in August compared to a year ago, according to foreclosure data aggregator RealtyTrac.
Though short sales have been on the rise this year, they have not made up for the sharp decrease in sales of bank-owned homes, also known as real estate owned homes, or REOs.
At least partially due to efforts at the state and federal level to regulate the foreclosure process and help struggling homeowners, more borrowers have avoided foreclosure through loan modifications. Short sales also appear to be closing faster, meaning they spend less time on the market.
"Banks are working harder to get short sales closed in 90 days or less, thus reducing inventory," said Alexis Eldorrado, managing broker at Eldorrado Chicago Real Estate in Chicago, where listings are down nearly 20 percent from a year ago.
A short-sale specialist, Eldorrado sees short sales closing "at a much higher rate than a year ago."
She anticipates even speedier short sales under new guidelines issued by Fannie Mae’s and Freddie Mac’s regulator, the Federal Housing Finance Agency, that are scheduled to go into effect Nov. 1.
Some real estate professionals also believe banks are holding back from releasing their REO inventory at once.
In the Atlanta metro area, where listings were down 37 percent from a year ago in August, the drop in inventory has had the effect of creating a "somewhat artificial seller’s market," said Christy Brannon, an agent who is part of a team at Keller Williams Atlanta Metro East in Conyers, Ga.
"Whether they are holding on to inventories for that purpose or just really making sure, this time, that they are actually able to legally foreclose on the homes is anyone’s guess," Brannon said.
Jason Lopez, a broker at Atlantic & Pacific Real Estate in the San Diego area, said that "shadow inventory," which he defines as all properties at some stage of the foreclosure process, will have to come to market in order for the supply of homes for sale to increase.
Lopez thinks those properties should be offered to buyers who will live in them or resell them, not sold in bulk to investors who will turn them into rentals — a view shared by real estate industry trade groups.
The FHFA is moving forward with a pilot initiative to conduct bulk sales of homes in Fannie Mae’s REO inventory in metropolitan areas "hardest-hit" by the foreclosure crisis, including Los Angeles, Chicago, Las Vegas, Atlanta, Phoenix and parts of Florida.
"Selling distressed assets in bulk to investors that have no short-term plans to bring that inventory to market will cause this issue to linger," Lopez said. "We don’t need more tenants — we need homes for first-time buyers, and those capable and willing to get back into the market that want to take advantage of these low rates and do it the right way."
Investors buy, hold and rent
According to an analysis by real estate search portal Trulia, buying now beats renting in the 100 largest metro areas in the U.S. But persistently rising rents mean investors are still going strong — they made up 18 percent of homebuyers in August — and investor demand is contributing to the inventory shortage.
Listings were down nearly 35 percent year over year in the San Diego area in August.
"On the REO side, trustee auctions have gotten much more competitive, and more homes are selling at that stage and never make it to the market as an REO," Lopez said. "Factor in that investors are moving toward a buy-and-hold strategy versus flipping, and even less inventory becomes available."
Charles Roberts, co-owner of Your Castle Real Estate who serves as a director on the Denver Board of Realtors, said he’s having his "best year ever" as a real estate agent. Roberts said he’s tallied more than 50 closings so far this year, largely due to investor clients. High affordability and low interest rates have made the Denver metro area "an amazingly hot landlord market," he said.
"Vacancies are at all-time lows; rents are up at their highest rate in 10 years; many people are still afraid to buy so they rent — all of which means that you can’t swing a dead cat without finding a qualified tenant," Roberts said. "My buyers have a long-term outlook and are buying, (sometimes fixing), renting, and holding for at least seven to 10 years."
Coaxing sellers off the fence
Some real estate pros say many sellers have the impression that home prices are still declining and there is an overabundance of homes on the market.
"Many sellers are still not aware of how strong our market is," Roberts said. "They still think it’s a bad market to sell. Our job is to inform them about the market and explain to them that with a rising market it has become a strong seller’s market and to walk through their options."
Denver skyline image via Shutterstock.
Some real estate professionals are dealing with the inventory shortage by reaching out to potential sellers.
"Once they get the insights, it’s like a light goes off," Lopez said. "This is a seller’s market, and that is surprising to them. Now it doesn’t mean prices are skyrocketing like past cycles, but with the chance of multiple offers it makes the process more appealing."
Stacie Perrault Staub, broker associate at Live Urban Real Estate in the Denver metro area, has had some success coaxing sellers off the fence by letting them know their home will have less competition on the market.
"Some of my current sellers have been on that fence for years," she said. "And some of my favorite transactions this year have involved sellers who never thought they could sell their home for what it was worth and ended up making a profit. I’ve had some great — and surprising — results pushing the boundaries this year, adjusting up to account for low inventory. Turns out, thirsty people will buy the water."
One wrinkle is that sometimes, no matter how much a buyer is willing to pay, homes aren’t appraising at the agreed-upon price. For that reason, it’s important for real estate professionals to be "super-prepared" for the appraisal, Staub said.
"I prepare a nice packet of info for the appraiser, including comparables, information about the community and neighborhood, and even down to new restaurants and coffee shops, school improvements, and local recreation amenities and events," she said. "I also include a nice list outlining every improvement that has been made to the property itself. I haven’t had a deal fall through due to appraisal on the listing side yet!"
Lack of new homes
In some areas, the inventory problem is not due so much to a lack of sellers, but a lack of homes. Sheri Moritz, a real estate broker with Keller Williams’ Wake Home Team in Raleigh, N.C., said the inventory shortage in her area would ease only with a jump in new homes built.
Moritz said the area’s population is expected to nearly double in the next eight years, making it "harder and harder to keep up with the demand."
"Many new-home builders either went out of business or drastically slowed their building through the difficult times our market experienced," Moritz said. "Although building has begun to ramp up again, we are not building as fast again as the recent growth in demand."
The sellers who are selling "are not typically leaving our area, so when they sell they are still needing a home in our market," she said. "So even if more resale sellers put their homes on the market, we need to find homes for them to move to."
Nonetheless, Chicago’s Eldorrado said she didn’t want "too much" inventory coming on the market.
"If the supply is more than the demand, the prices will tumble further rather than leveling out," Eldorrado said. "The market is correcting itself right now from the wild run-away-train appreciation of easy money when all you needed was a pulse to get a mortgage and everyone bought. Well, almost everyone."