Growing Home Inventory Means Real Estate Prices Should Drop

More inventory and less competition from institutional investors should make shopping for a new home less stressful this spring and summer than it was in 2013.

With tight inventory in real estate markets all over the country last spring, homebuyers had to be battle-ready if they wanted to win the best properties. In cities like Washington, D.C., Realtors reported multiple offers within days of listing a property and sales prices bid tens of thousands of dollars over asking prices.

Institutional investors not competing anymore

The inventory shortage was exacerbated by institutional investors like Blackstone Group LP (NYSE: BX  ) , American Homes 4 Rent, which has an IPO on file, and Silver Bay Realty Trust (NYSE: SBY  ) buying up as many distressed properties as they could to add to their portfolios of rental properties.

Blackstone spent more than $20 billion buying up 200,000 rental homes over the past two years, according to a recent Bloomberg article, making it the biggest private home landlord in the country.

But Bloomberg reported last week that most of those big-money investors were backing out of the private home investment game – or at least slowing down their acquisitions.

Jonathan Gray, global head of real estate for Blackstone, told Bloomberg the private equity firm was going to slow its investment dramatically from the $100 million a week peak.

"The institutional wave has passed," he told Bloomberg. "It's at a much lower level than it was 12 or 24 months ago."

American Homes 4 Rent and Colony American Homes also reported slowing acquisition activity. Nationally, Bloomberg reported that institutional home purchases dropped to a 22-month low in January.

Without competition from institutional investors, traditional small investors will be able to return to foreclosure sales for their deals and avoid competing with regular buyers on the open market.

Small investors generally buy and renovate properties to put back on the market, while institutional investors were buying properties to hold them as rentals. With institutional buyers backing down, the inventory of available homes for sale could rise.

Equity equals inventory

The National Association of Realtors reported last week that the national median home sales price was up 10.7% year over year. That means homeowners are more likely to have equity than they have been since the start of the recession.

That positive equity will allow homeowners to sell their properties and reinvest the profits in their next homes.

Equity means inventory.

Zillow reported in February that home prices increased just 0.2% from December to January – the smallest price increase since May. That slowdown in appreciation is attributed to increasing home inventory.

Zillow reported that home listings on its site were up 11.1% annually and that the inventory of available homes climbed again in January for the fifth straight month.

Of course, there are still headlines in major metropolitan areas like Boston, exclaiming that home inventories are lower than ever and the market is expected to be particularly tight for buyers.

However, Zillow said inventory is up in 82% of the markets it covers.

Sellers often tend to wait to put their homes on the market until the spring, in part because they want to move in the summer themselves and in part because they believe the market is stronger in the spring and summer.

Zillow predicts that inventory will continue to climb as more people decide to make a move.

Greater inventory is good news for buyers

More inventory on the market means buyers will have more choices and competition won't be as stiff. Where four families might have looked at one house and bid on it against each other last year, they could be able to spread their interest around to two or three houses this year.

That will make for a much less stressful buying experience. Homebuyers will have more time, more choices, and more bargaining power.

Of course, those buyers who are also sellers might be disappointed by the lack of enthusiasm. Where they might have expected to sell their house in a week or two last year, they'll likely have to wait a little longer this summer.

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