Why So Many Low Inventories?

Just about every market in the US has seen home prices gain in recent months, while available housing stocks have taken a tumble. But why is it that just as buyer demand starts to pick up, inventories have fallen so low?

According to the NAR, total inventory in the US fell to just 1.82 million homes at the close of 2012, 21.6% lower than December 2011. In a recent investigation, the Wall Street Journal highlighted some of the causes of falling inventories:

Sellers hesitant:

One of the most fundamental problems remains the number of homeowners that are still underwater – some 22% of those with mortgages, according to CoreLogic. Homeowners in this situation are reluctant to sell as doing so would mean taking a big financial hit. Consequently, those areas with the highest percentage of underwater borrowers have some of the lowest inventories around.

Investors change strategy:

A second problem is that investors make up a huge portion of active buyers at present. But whereas before the idea was to snap up a property, do it up and move it along, many are now changing tack, doing up the homes they buy and renting them out to feed the growing demand in this market. As a result, fewer doer-uppers are coming onto the market.

Lack of equity:

While not everyone is underwater, a great deal of homeowners lack equity in their current homes, hence they are unable to ‘trade up’ for a better home. General practice is for buyers to use the proceeds from the sale of their current home to finance a down payment on one that’s more expensive, but this is becoming less common simply because most people don’t see enough equity in their properties.

Fewer foreclosures:

Faced with more scrutiny over the way they handle foreclosures, banks are moving at a far slower pace than before when it comes to repossessing homes. As such, we’re seeing far fewer foreclosed properties come onto the market than before.

Less new homes:

It’s only recently that the new home market has shown signs of a rebound, but while the number of housing permit applications has increased recently, builders still need time to build these new developments. Between 2009 and 2011, the number of housing starts fell to record lows, hence we’ve seen little by way of ‘new’ inventory come onto the market.