The National Association of Realtors released pending home sales data today, reporting that December numbers posted a 4.3% drop from November. The pending sales index was still up 6.9 percent from a year ago. NAR economist Lawrence Yun said supply limitations were to blame for the drop:
“The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis.”
Well, not exactly. We have the same problem here in Katy Texas that Mr. Yun is talking about in terms of low inventory. Mr. Yun, however, is off the mark in terms of the cause of the drop in pending sales. There are really several factors behind the decrease in pending sales, yet Mr. Yun doesn’t seem to want to address the actual causes of the limited housing stock for sale. Sure, the past twelve months have seen a rebound in confidence in the real estate market, but those gains are largely smoke and mirrors courtesy of record low interest rates. The key test for a real recovery will be what happens when rates start to rise again on a sustained track.
Another, more critical factor behind the lack of homes for sale is the still large supply of underwater borrowers or those with little or no equity. As appraiser Jonathan Miller points out, a huge percentage of borrowers still have little or no equity. He suggests that roughly 40% of mortgage holders don’t have enough equity to qualify for a trade up. What happens to those borrowers when they find out they can’t qualify under the terms they planned on? They do NOTHING. These potential home buyers are stuck in the mud hoping that the market improves enough for them to sell at a profit. If they can’t pay commissions and fees to sell, they probably don’t have the means or will to buy another, more expensive property. The math simply doesn’t work for them, and so another potential listing vanishes. I think Miller makes a great analogy when he says that housing is local, but credit is national. That phrase provides a wonderful explanation of our current situation, tight credit and ultra-low interest rates are catch-22. The tight credit is choking off supply, but demand is holding fairly constant.
The dynamics Mr. Miller is referring to are most certainly in play here in the Katy Texas real estate market. While prices have been rising recently, they certainly aren’t jumping the way you might expect given tight inventory levels and a better-than-average employment situation. Home prices in the area have also lagged the improvement in purchasing power due to those ridiculously low interest rates. The real estate outlook has certainly improved during the last 12 months, but it’s probably a bit premature to say we are in a full-blown recovery. We still have several years to go before we work off the existing supply of shadow inventory, and that’s assuming we maintain our momentum with local job growth.