Are Home Prices Overheating Due To Lack of Inventory?

We’re only just beginning to see signs of recovery in housing markets, but already some analysts are warning that home prices could be overheating. The problem is that lack of inventory seems to be the chief factor in driving prices up – something that could have negative consequences further on down the line if more homeowners aren’t tempted to sell in the coming months.

The problem becomes evident with a quick look at the stats – last December saw the number of properties listed for sale nationwide decrease by 8.5% from the month before to just 1.82 million in total, which is the lowest we have seen for several years, reports Investor’s Business Daily. As of today, existing inventories are 22% lower than they were just one year ago, with homes in the ‘low-priced’ category thought to be even scarcer than that.

Walter Molony, spokesperson for the National Association of Realtors, warns that the market is now entering an uncertain phase:

"We're not sure what's going to happen this spring, but it's going to be very interesting to see what happens in the next couple of months.”

The big worry is that sustained price increases without any new inventory will ultimately hurt the real estate recovery. Homes could quickly become unaffordable as more properties are subject to multiple bidders, reversing the impact of current low interest rates we’re seeing now.

According to Molony, one of the biggest reasons for a lack of inventory is down to the restrictive lending standards of banks, which limits both buyers and new home construction. Loosening these standards would result in inventories going back up, but the problem is that banks refuse to entertain the idea.

Brian Moynihan, CEO of the Bank of America, said at a recent forum that the tight standards were necessary to avoid a housing bubble from reappearing:

"Credit has been restricted for a while, but ... it had to be restricted because this is what helped open the problem up.”

Another reason why inventories are falling is because there are still legions of homeowners that remain underwater on their homes. For anyone in this situation, it simply isn’t worth selling as they would walk away from the sale with debt.

The Investor’s Business Daily says that things will pick up eventually when people who purchased their homes at the peak of the last cycle deem it profitable to sell up, although this won’t happen until 2014 at the earliest.