The Housing Inventory Conundrum

It's prime selling season for real estate, but one thing is missing: homes that are for sale. The bad news is that this problem won't be fully solved until more homeowners have equity in their homes. The good news is that we're definitely moving in the right direction.

The housing inventory conundrum
Data from multiple industry sources show that the available-for-sale inventories of both new and existing homes are at or near their all-time lows. The number of new homes for sale equates to only 4.1 months' worth of demand at the current sales rate. And the supply of existing homes is enough to satisfy only 5.1 months' worth of demand. Both figures are roughly 30% below their long-run averages.

This is particularly perplexing in light of the recent surge in home prices. The National Association of Realtors estimates that home prices rose by 15.8% in May on a year-over-year basis. CoreLogic (NYSE: CLGX  ) pegs the number at 12.2%.

If home prices are going up so fast, why aren't more people listing their homes for sale? According to Svenja Gudell, senior economist at Zillow (NASDAQ: Z  ) , the problem has to do with negative equity.

"These homeowners owe more on their mortgage than what their house is currently worth, which means in order to sell it, they would have to come up with additional money at the time of closing to pay off their loan," Gudell explained. "Since many homeowners are not in a position to do that, they cannot list their homes, greatly restricting the supply on the market."

Zillow estimates that 25.4% of homeowners with a mortgage were underwater as of the first quarter. Corelogic puts the figure at 19.8%. Either way, to Gudell's point, a significant portion of potential supply is likely being held off the market.

Light at the end of the tunnel
Fortunately, things appear to be looking up -- both literally and figuratively. Two separate estimates are predicting that inventory has recently picked up steam. Nick Timiraos of The Wall Street Journal reported yesterday that, based upon data supplied by Realtor.com, "the number of homes listed for sale increased by 4.3% in June to 1.9 million homes, the highest level in the last year."

Separately, weekly inventory data from the Department of Number's Housing Tracker shows that inventory is up by 18.1% thus far in 2013, putting it on the best course since 2010. Based on this, Calculated Risk's Bill McBride speculated that, "It now seems likely that inventory bottomed early this year."

It's worth noting that we're starting to see this on the new-home front as well. In its most recent quarterly earnings release, the nation's largest homebuilder, D.R. Horton (NYSE: DHI  ) , reported a 33% year-over-year increase in the number of homes it closed on. PulteGroup's (NYSE: PHM  ) total closings grew by 23%. And deliveries at Lennar (NYSE: LEN  ) were up by 39%.

The net result of these developments is twofold. On the one hand, home sales should continue to pick up. This is great for the housing market and the economy. And on the other hand, prices should begin to stabilize, adding more certainty to the market and thereby encouraging more people, both on the demand and supply sides, to enter it.

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