Home values are increasing and that should be a huge incentive for people (including homebuilders) to put houses on the market. But that’s not happening. Instead, homebuyers continue to compete for hard-to-find homes for sale.
U.S. home prices rose 5.4 percent in December, the largest year-over-year gain since July 2014. The median sales price of a previously owned home also jumped 8.2 percent from last January, the largest year-over-year gain since April 2015 and the 47th straight month of increases.
While the number of existing homes on the market at the end of January increased from December, the level was still 2.2 percent lower than a year ago.
"The spring buying season is right around the corner and current supply levels aren't even close to what's needed to accommodate the subsequent growth in housing demand," said Lawrence Yun, NAR chief economist, in a press statement.
So why are there fewer homes for sale?
1. Not as many new homes.
While the pace of new household formation has recovered from lows during the recession, homebuilding has not kept up, says James Gaines, chief economist at the real estate center at Texas A&M University. He noted that in the last two years, the U.S. has added more than a million households. This year, Gaines forecasts 1.25 million new households, which is a historically average rate.
By contrast, homebuilders last year started 715,000 single-family houses, well below the 1.025 million average since 1959. The last time builders reached the average was 2007 and it won’t be until 2018 that starts will hit that point again, according to a forecast from Chris Christopher, director of U.S. macro and global economics at IHS Global Insight.
2. Fewer distressed properties.
After the housing bubble burst, there was a glut of distressed properties on the market, either in foreclosure or up for sale by desperate homeowners willing to sell them for less than they owed on their mortgage. The number of distressed properties has fallen drastically since.
In December, the number of homes somewhere in the foreclosure process was 433,000, down from 568,000 the previous year and the lowest level since November 2007. The NAR found that the number of sales of homes in foreclosure or short sales in January was down 11 percent from a year ago.
And because home prices are rising, there is no incentive for a bank or lender to approve a short sale to a homeowner who wants to get out a property, Gaines says.
3. Fewer job relocations.
Job relocation was the second-highest reason that home sellers sold their previous home last year, according to the NAR, and the second-most-common reason that new buyers would consider selling their home. But the reality is that fewer people are actually relocating to new cities for jobs. Only 11 percent of people who got a new job last year moved for the position, down from the previous two years and well off pre-recession levels. The decline is also part of a longer-term trend since the 1980s of decreasing relocations.
4. Staying put in the golden years.
While plenty of seniors plan to downsize, a good portion of baby boomers don’t intend to move. Almost two-thirds of boomers plan to age in place in their current home, according to a survey last year from the Demand Institute. To do that, some are planning age-friendly renovations to meet their needs as they grow older. More than a third of remodelers said in December that homeowners wanted such projects as kitchen, bath and universal design remodeling; the latter is often for aging homeowners.
5. Stuck homeowners.
More than half of home buyers last year used proceeds from the sale of their previous home to purchase a new house. The median equity sellers got out of their old home was 23 percent. But for many current homeowners, that is not an option. Just over one in six of the approximately 50 million homes with a mortgage have less than 20 percent equity in them, according to CoreLogic. About 4.1 million homes, or 8.1 percent, are worth less than their mortgage and would require a seller to bring money to the closing table to settle the home loan. That’s enough reason to keep many people from selling their homes, even if they want to.
For those homeowners who do want to sell and see rising prices as an opportunity to get a good return on their property, the very reason they may not be selling is because of the lack of inventory, says Gaines. “Part of it is a catch-22,” he says. “A lot of people aren’t selling their homes, even if they want to, because they can’t find one to buy.”