Declining Home Sales & The Future Of The Housing Market

All the talk about the rebounding housing market has a lot of people wondering why home sales continue to decline into 2013 with inventory dropping 8.5% at the end of the year since November—a 21.6% decline from one year earlier.  However, the news isn’t all bad. For the whole of 2012, sales were up 9% to 4.65 million units, which is the highest annual total since 2007. The National Association of Realtors reported that although there was a 1% drop in home sales from November to December, levels are still 13% higher than they were a year ago. That means there has been 18 straight months of rising home sales. Nick Timiraos of the Wall Street Journal gave great insight into the reasons why inventory has continued to drop into twenty thirteen.

Housing Inventory Declining, But Why?

First off, many homeowners are still underwater. CoreLogic, Inc. reports that more than 10 million homeowners owe more on their mortgage than their home is actually worth. Unless they are getting married, divorced or face more financial crisis, these homeowners won’t be selling anytime soon. Housing markets with the largest amount of underwater borrowers have been most affected by the decline in home inventory.

Some homeowners are underwater, while others just don’t have enough equity to “trade up.” An additional 10 million homeowners have less than 20% equity in their current residence, which means they can’t feasibly make a down payment on a more expensive home and pay their realtor to sell their current home. “Under-equitied” homeowners have definitely added to the decline in inventory.

Builders, Banks & Borrowers

Then there are people who have plenty of home equity, but they want to buy at the bottom and are reluctant to sell if they think prices will be higher tomorrow. These homeowners look down the road a year from now and wonder if their home might be worth more and refuse to sell today. Markets like Denver and Dallas have seen this trend because there was hardly a housing bubble to begin with. This meant that there was a smaller number of underwater borrows and have thus seen double-digit declines in inventory.

Since the “robo-signing” scandal in late 2010, banks have been slower at foreclosing.  Banks and other companies that process delinquent mortgages have been having difficulty proving that they are following current state laws in addition to the numerous state and federal rules that govern loan modification and foreclosures post robo-scandal.

Finally, builders have been putting up fewer homes. From 2009 through 2011, housing starts were severely affected by the housing crisis. Twenty twelve saw a rebound of these low levels, but there has still been less inventory being added to the market, which is problematic because demand is picking up fast. In retrospect, the housing market hasn’t really been “normal” in about a decade, but the declining inventory shows that supply-and-demand dynamics are normalizing, which will help give the housing market the boost it needs to be successful again.