Why There Are No Homes on the Market
Last year the U.S. housing market seemed to be making a real comeback. Home prices skyrocketed, sales jumped and buyers were often forced into bidding wars for their desired properties. Things were finally looking up.
But since last summer there has been a serious disparity between the number of homes for sales and the demand for homes. In 2013 there was only a 4.9-months’ supply of existing-home inventory on average, well below the 6-month supply that characterizes a balanced market between buyers and sellers. Since then the supply has gradually increased to a 5.6-month supply as of May, according to the National Association of Realtors, but in many parts of the country buyers are still feeling the pinch of limited inventory.
So why are there so many U.S. markets with too few sellers? It appears that a pair of historically unique circumstances are making it unattractive to sell right now. The problems are 1)there are too many homeowners with not enough equity and 2) many homeowners currently have lower interest rates than they would get on a new home purchase.
Experts estimate that as many 40 percent of homeowners are either “underwater” - owing more than their homes are worth – or have so little equity in their homes that they can’t afford to cover the costs of selling and have enough for a down payment on their next purchase. Home prices have jumped 8.8 percent in the last 12 months according to CoreLogic, which helps boost equity for borrowers, and prices are expected to continue rising through 2014 albeit at a slower pace. So theoretically, more homeowners should be able to sell this year.
But at the same time, mortgage interest rates are expected to rise, possibly reaching 5 percent in the first quarter of next year. The current rates on a 30-year conventional, fixed rate mortgage stands around 4.2 percent. The problem with rising rates is that they are coming off of all-time record lows, having bottomed out around 3.3 percent in November 2012.
Those insanely low rates fed a refinancing frenzy, with almost everyone who could qualify jumping into those lower rates on their mortgages. It is extremely unlikely that rates will ever fall that low again, which makes selling a very unappealing option for many homeowners right now. It’s hard to consider selling your old home and buying a new one when your interest rate would be roughly a whole point higher and your payments would be higher.
For those in that predicament that still really want or need to get into another home, often their best option is to rent out their current home instead of selling in order to hold on to the low rate and make a profit on the monthly income. This compounds the problem of inventory shortage though as they both take more homes off the market without adding any more to the supply.
So what is the solution? When will market conditions be enough to entice sellers out of their low interest rates? Certainly prices will have to rise more, but new home building will probably have to pick up dramatically to increase the supply of homes available. It will also take more new household creation among Millennials and more first-time buyers to make the rental business a less profitable venture for would-be sellers. Even then, it’s hard to say how strong the pull of their ultra-low mortgage rates will be on those who cashed in during the Great Recession.