Where Have All the Sellers Gone?

There is an interesting anomaly in the real estate market. In spite of record sales last year, currently there are not many homes for sale in many areas of the country.   Most of my direct experience is from California , of course, but I am getting similar reports from all over the country. Bottom line, buyers don’t have much to choose from.

Looking back historically, the health of the real estate market has usually been dependent upon buyers. If there were a lot of buyers, the real estate market was good, and if there weren’t enough, it was a bad market. The number of buyers is largely dependent upon the state of the economy, enough good jobs being created, and people having enough income to qualify for loans. Another factor is interest rates and how they translate into a monthly payment that people can afford.  

The ability of buyers to buy is also dependent upon the willingness of the mortgage industry to approve their loans.   Picky underwriting standards mean fewer approvals, whereas when lenders are liberal more people have the ability to buy a home.   Lenders certainly are quite willing to lend now but the catch is, is there a home for the borrowers to buy?

Let me digress a minute to talk about the large picture.   In America we have an infrastructure problem.   We just plain haven’t been building enough roads, schools, hospitals, and the like, and lots of what we have is in need of maintenance. On the housing side, for well over a generation we have been creating jobs and families far faster than we have been creating housing for them.   You can live on slack for a while, but at some point in time, you run out of slack.  

Obviously if we are to have another record year in 2004, a record number of homes have to be available for sale.   The homebuilders are creating new product about as fast as they can, so I think that the health of market is thus dependent upon the number of “used” homes available.   So what affects that?

There usually is a pent-up demand for housing, and the cycle starts when homes at the entry level become affordable.   Then the sellers of the homes bought by entry-level buyers would move up a notch, and the owners of the homes they bought would move up notch, and so forth.  

During the first part of a housing cycle, growth is stimulated because of a pent-up demand created when times were poor.   In the middle of the cycle normal demand is satisfied. No one ever seems to talk about   the latter part of the cycle, where we may be now.   In that phase, we start borrowing from the future.   It may be that many of the homes that contributed to the 2003 record were ones that normally would not have come on the market until 2004.   Attracted by lower interest rates, those sellers move up their schedule by a year.

If I am right, the prospects for a banner 2004 are not as bright as some people have been predicting.   It’s not the buyers or the index of affordability or whatever else pundits use to make predictions, because they are talking about the demand side of the equation. They never consider the supply side, and that’s where the problem is. We also know that as long as this situation lasts, there will continue to be upward pressure on prices.  

All in all, it’s going to be a tough year for buyers.   I currently have over $4,000,000 million in loans pre-approved for buyers who are vainly looking for homes.   They eventually find them, but not until they have worked very hard.   If you are in the market, you’ll have to do a lot of work too, but it will be worth it.   If you are a potential seller, think seriously about finding your next home first, then list your current home for sale.

Hang in there!