Shrinking inventory misleads future sellers… for now

The current shrinking homes-for-sale inventory is a present disturbance which supply side thinkers – that is, most real estate licensees (but not all by any stretch) – profess has reset the market.

It hasn’t and it won’t, no more than the notion of build it and they will come has ever proven true.

Rather, in order to bottom in sales volume and pricing there must be sufficient fuel to keep the market in the air, not grounded for failure to lift off. A run at the effort is practice, but does not count. Real estate Olympics, if you will.

What is better understood to move markets, be they labor or real estate, is demand from someone for the use of the stuff. For jobs it is motivated employers, private and public. For real estate, whether housing of any type or commercial properties, demand takes the form of end user-occupants, not flighty flipping speculators.

The level of inventory, or supply, merely affects pricing. Pricing (and mortgage rates) presently does not attract many buyer-occupants. Buyer demand is always the prerequisite, needed before the housing market can transition into a solid, upward-bound recovery in volume, then prices. Builders get it; real estate brokers and agents need to.

The housing market is ultimately driven by end user demand – of which there is presently very little, probably less than half the sales volume experienced in the recently passed Q2 2012. The current low-level mini-bubble in home prices is due to speculators ferociously outbidding one another to snatch up properties, prompting real estate owned (REO) and short sale sellers and lenders to sense increased action then demands higher prices as a result.

Speculators are so eager to acquire as much property they can they have begun trading amongst themselves for lack of an understanding of those consequences. Trading cards comes to mind. Hard-money lenders are funding many of them, but only at a mere 50% to 60% LTV.

Cash buyers are getting a cash-out loan at 70% of their purchase price from some community banks, avoiding all the troublesome questions about the source of down payment funds.

As a result, speculators and lenders have artificially driven volume and prices up a bit, though only temporarily. In the process, they have created the illusion of increased demand where very little actually exists. The truth is in the numbers: there were roughly half as many buyer-occupants as sellers in the second quarter of 2012, the speculators merely taking the seller’s risk position of locating that buyer-occupant (or interim tenant for lack of an immediate flip).

However, speculators will soon realize their investments aren’t paying off as expected. At some point in the second half of 2012, this mini-bubble will deflate and we’ll be back to square one, a point which may have already passed. Stay tuned for Q4 2012.

Agents will then begin talking more frequently with actual homebuyers – seeking them out from the growing stock of tenants, an activity which will build, and reset, the market.

This current nostalgic, and hopefully temporary, foray back into that supply-side world of the seller’s market will prove short-lived indeed.

So, what will signal rising demand from end users?

Employment and consumer confidence will need to rise before potential buyer-occupants feel financially secure enough to borrow and buy a home.

What’s a buyer-occupant and buy-to-hold income property investor to do in this environment where supply is sparse due to speculator interference and competition driven prices?

Wait it out, as they are.

This mini-bubble will soon pop if it hasn’t already. Actual homebuyers will once again be able to move freely about the inventory, exercising their position as the primary source of demand.

Further, the shadow inventory still waits to get on the market, as lenders are replete with delinquent loans. The properties underlying these delinquencies will eventually be released back into California’s now temporarily depleted inventory. Much like the rising of the tides, the parched California sand will soon be saturated yet again, and buyers will have a lot to choose from.

Property sellers would be wise to get the most out of this mini-bubble while they can, because it, like the last stimulus of 2009-2010, is the bridge to nowhere.

Credit given to the first tuesday Journal Online — P.O. Box 5707, Riverside, CA 92517

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