The Pending Supply of Homes
Perhaps you’ve heard of the pending demand for real estate — prospective buyers who have postponed taking action until they perceive conditions have optimized. There’s also a pending supply of real estate and it’s large enough to have a serious impact on the housing markets if a recent study is correct.
Since the real estate markets went south in 2006, owners who can afford to wait to sell have been doing just that. Unlike job relocators or foreclosure victims, these are people who have a choice, and many have chosen to delay lifestyle changes because of the market. They see no reason to list their properties when values have dropped a third and the months’ supply is in double digits. No doubt a significant percentage of prospective sellers are underwater on their mortgages and are waiting for the promise of positive equity before they sell.
Intuitively, we have known this pending supply of properties was out there, but no one has known how large it might be — until now. Its size is determined in part by how high prices might rise. Having waited many months, it makes sense that most owners would not sell at the first blush of price stabilization but would wait until they stand a chance of getting what they think their home is worth.
A recent national survey looked at this issue and produced what may be the first data that measures the size of the pending supply. It found that 10.7 percent of the nation’s 75 million homeowners have chosen not to sell at current market prices. That’s a huge number, 8 million homes, or about a two year-supply.
However, these properties won’t come on the market all at once. There is a dynamic relationship between the listing of these properties and prices. They will list in waves as prices rise to levels sellers find attractive. In the current market, they will have to wait many more months to see those kinds of increases. Many will lose patience and sell at a loss. Other owners will wish they could make a chance and will quietly enter the ranks of the pending supply
If and when home prices eventually rise by 5 percent, the survey found that 31.3 percent or 2.5 million owners will put their homes on the market. Should prices rise 10 percent, an additional 9.6 percent would sell, adding 760,000 more homes to the inventory. At 15 percent, 20.7 percent more would sell, representing 1.6 million homes. That’s a total of about 5 million homes that would to on the market at 1increases of 5 percent or less. It would take a rise in prices of 20 percent or more to get most of the remaining sellers—28.4 percent or 2.27 million homes—to sell. Ten percent of owners said that either wouldn’t sell at any price or didn’t respond to the question.
Perception is as important as reality when it comes to understanding how owners will react to changing market conditions. Zillow has sponsored some interesting research along those lines and recently found that mosthomeowners - 74 percent - believe their home will not decline in value in the coming six months, effectively calling a bottom to their own home's housing slide. One in four homeowners (27 percent),in fact, think their home's value will increase in the next six months, while nearly half (47 percent) believe their home's value will remain the same. Homeowners were optimistic when it came to predicting home values in their local markets. About two-thirds of homeowners believe home values in their local markets will increase (26 percent) or stay the same (37 percent) over the next six months. Thirty-seven percent believe home values will decrease.
The reason most owners sell is space related; either they want more or less. The second greatest reason is a change of lifestyle—retirement, divorce, starting a family. What sacrifices are American families making because they can sell their homes? Are young families renting longer than they would like? Are retired couples holding on the family home? Are children making do with bunk beds and are divorced couples drawing lines on the living floor so that they can continue to live in the same space until they can afford to sell? Is the real estate crisis warping the way we live?
The good news is that the owners of the pending supply are prospective buyers themselves and their entry into the market will create demand for many of the houses other pent up supply owners are selling. Their income exceeds $50,000 and most are over 35. These are “move-up” buyers, most of whom will use proceeds from their sales to buy new homes.
The pending supply hangs over the market like a shadow. In light of size found in this survey and its potential impact on the market place, we know very little about the pending supply. We need to understand its composition nationally and locally, and track it on an ongoing basis. We need to understand better how owners perceive their markets and what will motivate them to sell—and to buy.
As we look forward to price stabilization and improved prices, should we fear the pending supply as a damper on the market or welcome it as the first step in the process to free millions of move-up buyers to buy mid to higher-end properties?
Steve Cook is a nationally recognized speaker and author. He has worked with various companies and organizations as a consultant. He has an extensive background in public relations, journalism and politics. Check out his Real Estate Economics News blog on RealTown.
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