Why Housing Inventories Are Falling

Home sales have now posted year-over-year gains in each of the last nine months. But in almost all of those months, the number of homes for sale has declined. On Thursday, the National Association of Realtors reported that inventories fell by 1.3% in March, leaving inventories 21.8% below their year-earlier levels.

“Buyers have come out early, but sellers haven’t,” said Mark Vitner, senior economist at Wells Fargo & Co.

What’s going on here? March typically marks the start of the peak spring sales season.

Here are three reasons to explain why inventories have fallen:

With prices down by one-third from their peak (and by much more in the hardest hit housing markets), who wants to sell a house right now if they don’t have to? That’s especially true for the roughly 15% of homeowners who are underwater on their mortgage.

Banks have decelerated the foreclosure process after they were caught routinely passing off bogus documents to demonstrate ownership. That has slowed the pace at which they’re putting homes back up for sale.

While investors initially were buying up foreclosures that could be fixed and flipped, or resold, for a quick profit, over the past two years, more investors have been buying inexpensive homes that can be rented out. Those homes are out of the for-sale pool for the near-term.

The first two reasons would imply that the downturn in listings is somewhat artificial and possibly temporary, and that inventories will pick up when prices begin to rise and when banks sort out their back-office operations. But the role of investors in today’s market could make the drop more lasting.

The Realtors’ report also showed that the West was the only part of the country to see a year-over-year drop in sales during March. That drop was concentrated almost wholly in properties priced below $100,000, where sales were down by 19%.

There are a few reasons this could be happening right now: there may just not be as many of these homes to buy any more, as the worst of the foreclosures have been sold or as prices have been bid up above $100,000.

Readers, why else do you think inventories might be unusually low right now?

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