CoreLogic came out with its quarterly MarketPulse today, and the report went deep on the impact of negative equity on the real estate recovery. According to CoreLogic, the months’ supply of unsold homes was down to 6.5 in April, the lowest mark in more than five years.
Traditionally, analysts have regarded the housing market as “balanced” when there’s about 6 months’ worth of homes unsold — when less inventory is available, sellers have the advantage, when there’s more, buyers do. So hitting the 6.5 mark ought to be unmitigated good news, but CoreLogic suggests that this time around the market isn’t balanced — there’s plenty of demand out there but too few sellers can afford to list their homes because prices are still far below what they were when they bought, leaving them underwater.
“Analysis of the 50 largest markets reveals the metropolitan areas with the lowest levels of months’ supply also have the highest shares of negative equity. Markets with negative equity share of 50 percent of more have an average months’ supply of 4.7 months, compared to 8.3 months’ supply for markets with less than a 10 percent negative equity share…Paradoxically, as the flow of REOs has slowed over the last 18 months, negative equity as become a positive force in real estate markets by restricting supply in the face of increasing demand.”
Respected housing blogger Calculated Risk quibbles with that take, though, laying the finger on sellers’ expectations as the true cause of the supply choke. After all, CR points out, in a falling market it’s to the sellers’ advantage to list and sell their home as quickly as possible, before prices drop even more. But in a rising marker the opposite is true — if homeowners are watching bidding wars spark higher sales prices in their neighborhood, they’ll be more likely relax and list their own home when it suits them, confident that when they do prices will have risen even further.
It may seem like a subtle distinction, but that difference could be all important to the housing market’s recovery. If CoreLogic’s right and most people are hanging on until they’re back in the black before selling, the recovery could take years — prices in many places around the country are still 10 or 20 percent below where they were a the peak.
But if CR’s right, then all that’s needed to flip the switch back to normal is buyers’ and sellers’ belief that prices are rising right now — though they may take a loss on their current home, they’ll also be able to buy at today’s cheaper prices, confident that the market’s back on the mend. So does fear still rule sellers’ hearts? The full recovery of the real estate market could rest on the answer. —Colleen Sullivan
