Is Inventory or Home Prices Holding Back Home Buyers?

Although housing market activity appears to be improving, there are many signs of doubt concerning sustainability of such progress. With the decline of inventory, as well as distressed properties, home prices are rising rapidly. As recent reports show that home sales are down, the question remains whether it is inventory or home prices that are holding back home buyers.

According to the National Association of Realtors, the Pending Home Sales Index fell 0.4% to 104.8 for the month of February and is the result of the shortage of homes for sale. February new home sales fell 4.6% (up 12.3% from sames time 2012), but construction spending was up 1.2% in for the same month, according to the Commerce Department. The supply of new homes is at 4 1/2 months and is one factor sending home prices higher. The S&P/Case-Shiller Home Price Indices showed an increase in average home prices for the 12 month period ending in January for all 20 cities tracked. The 10 City Composite rose by 7.3% and the 20 City Composite rose by 8.1%; both having the highest year over year increase since the summer of 2006. In the most recent report from CoreLogic, a leading residential property information, analytics and services provider, the Home Price Index jumped 10.2% on a year over year basis in February 2013 when compared to the same time last year and is the biggest increase since March 2006. This was also the 12th straight month of home price increases on a national level.

While inventory for home purchases remains low, there are 2.2 million homes sitting in the shadows, according to CoreLogic. This amount is down 28% from January of 2010 when there were an estimated 3 million in shadow inventory. However, these 2.2 million homes represent a supply of nine months. Shadow inventory represents properties that are delinquent, in foreclosure or bank owned and are not yet listed for sale. In the meantime, the four hard hit states, Arizona, California, Florida and Nevada, had double digit price growth over the last year, according to DataQuick, a data and analytics company. Other markets saw an average growth of 2.5%. So why is there so much growth? Institutional investors, corporations, billionaires and smaller investors are scooping up homes to be used as rentals. Many of today's home buyers are being pushed out of the ring by cash deals. According to CoreLogic's March Market Pulse, "In January CoreLogic wrote that a drop in REO sales signaled an improving market. While true for most markets, a surge in bulk investor activity can destabilize other markets." and "While some of these markets may be recovering, in others, the REO decline is driven by investors, and homeowners may be pulled out of the water into a rocky boat."

So where does this leave consumers? While there are some consumers who are purchasing homes, things are getting tougher as prices increase. According to the recent Mortgage Bankers Association's Market Composite Index, purchase applications rose for the week ending March 29th by 1% on a seasonally adjusted basis. However, more consumers are still refinancing existing mortgages and taking advantage of low mortgage rates. Refinance applications were down 6%, but still made up 74% of total volume of mortgage applications. At this point, many homeowners who may have considered moving up to a bigger or better home may be sitting on the sidelines as prices increase, while choosing to refinance instead. Further, although prices are rising, there are still many homeowners who remain underwater and are using HARP loans to refinance. HARP refinances represented 28% of refinance activity in this latest report.

Adding to the difficulty of purchasing a home, first time home buyers who often use FHA mortgages for financing, are finding that FHA guidelines have changed. Annual mortgage insurance premiums have once again increased and borrowers must now have a minimum credit score of 620 in order to pass through automated underwriting. In addition, debt to income ratios must be no more than 43%. In many cases, these guidelines were already required by lenders for qualifying. FHA still offers a low down payment, as well as, other benefits to homeowners. Instead of selling, many are taking advantage of the FHA streamline refinance program that does not need an appraisal or any other documentation for approval. Some homeowners, those who have loans that were FHA endorsed prior to June 1, 2009, can receive reduced upfront and annual fees when refinancing through the streamline program. As has happened in the past, FHA home buyer mortgage business will probably slow down until consumers get used to the changes that have taken place.

Although the housing market may be in recovery, there are several things that should be considered. The supply of homes for sale reached a 13 year low in January and then rose in February for the first time in 10 months. The supply of new homes is at 4 1/2 months. With a 9 month supply of shadow inventory out there, home buyers may be holding off on purchasing. Rising home prices may attract some homeowners to sell, but there are many who refinanced to record low mortgage rates who will chose to stay put and enjoy having more money in their pockets. There will always be first time home buyers, but as guidelines get stricter, these numbers may get smaller. Then there are the investors, both small and big corporate investors buying up the bargains. This may be causing low inventory and higher home prices, but whether it is sustainable for the long term and for a real housing recovery remains to be answered.

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