Falling Housing Market Inventory Brings Only Limited Benefits

Prices decline even as the supply does

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If it's not one thing, it's another. Long blamed for much of the housing market's woes, massive for-sale home inventories are now dwindling across the nation, The Wall Street Journal reports. Unfortunately, that doesn't necessarily mean relief for the housing market, and instead calls attention to a host of other problems likely to keep a lid on any improvement.

Americans listed 2.19 million homes nationwide at the end of the September, a 20 percent drop compared to last year, the Journal reported, and the lowest level on record since the survey's creator, REALTOR.com, began tracking housing inventory data in 2007. All 146 markets in the survey posted declines in inventory year-over-year, except Denver and El Paso, Texas. Listings were down 49 percent in Miami, 48 percent in Phoenix, and 46 percent in Orlando, Fla.

Normally, shrinking for-sale home inventories indicate consumer demand for housing as buyers snatch up homes on the market. That can benefit housing markets, the Journal's Nick Timiraos reports, by reducing competition and thereby driving up prices.

[See why mortgages rates are rising.]

But this isn't a normal housing market. While trending downward, supply in many metro areas is still sky high, and even large draw downs in inventory haven't had the desired impact on prices. Actually, they've done the reverse. As prices have plummeted, so have inventories.

Take Orlando for example. Between June 2010 and June 2011, the number of for-sale homes dropped 29 percent according to HousingTracker. During that same period prices sunk almost 11 percent, according to the Federal Finance Housing Agency's House Price Index. Compare those numbers to Washington, D.C., one of the strongest housing markets in the nation and you'll find a smaller drop in inventory, and a smaller drop in home prices.

"Many of the places with the biggest inventory reductions have also had some of the biggest price declines in the past year," says Jed Kolko, chief economist at real estate information website Trulia.

Fewer houses on the markets lead to lower home prices? That logic doesn't add up. But are the buyers (or lack thereof) to blame? The sellers?

The answer is both, and it all goes back to weak consumer demand. Weak consumer demand has been an ugly and persistent symptom of the Great Recession, impacting every corner of the economy from manufacturing to retail.

Real estate hasn't been spared--despite rock-bottom mortgage rates and record affordability, Americans just aren't buying homes at the rate necessary to sop up excess supply, which experts expect will be further inflated with another round of foreclosures in the near future.

[See how the government could help the housing market.]

As a result, those who can have taken their homes off the market or held off on listing, according to the Journal and Kolko. "When prices go down and inventory goes down as a response, it's because people are taking their homes off the market or deciding not to list," Kolko says.

The scary part is that sellers sitting on the sidelines could flood the market quickly if prices pick up in the market. "It's something that can change pretty quickly," Kolko says. "People can just decide to list their homes again and there are so many homes that are owned by banks or in the foreclosure process that if prices started to rise, lots of additional inventory could come to market."

A fresh deluge of properties on the market could complete the vicious cycle, putting a damper on housing prices, spurring foreclosure activity, and depressing the housing market further.

Skittish buyers have held off on making a move, too, fearing that the downward march in home prices could actually dip lower, and for the most part they've been right. Although prices have inched up the past few months according to the latest Case-Shiller Index, home prices are still about 30 percent off of their July 2006 peak.

Considering the strong rental markets in some regions, one possibility we've explored before is encouraging real estate investors to buy up foreclosed, vacant, or distressed properties and rent them. That would clear some of the excess housing supply and allow investors to capitalize on demand for rental properties.