Something's Wrong With the Market

Despite a strong year, the number of home sales is trending historically low.

December 24, 2014

This year was great for real estate for home-price increases, the ability for sellers to sell, and practitioners to get homes sold. But the big problem that seems to have evaded a lot of chatter is the number of homes sold.

Home sales declined 3.8 percent between January and October of this year, according to the National Association of REALTORS®. Other real estate data show a startling long-term downward trend: According to DataQuick, home sales each month this year have averaged about 14 percent below monthly levels in 1988, when DataQuick began tracking such data. If you think about how many more homes are built every year — and how much larger the population is — it defies logic that there would be fewer sales than 25 years ago.

This has nothing to do with buyer demand or their ability to qualify for a mortgage. That's evident in the fact that almost three-quarters of home sales garner multiple offers. Look to the selling side: A six- to seven-month supply of homes for sale is considered a normal market; we were at a 5.1-month supply in November, according to NAR. We were trending up in August, but that trend has reversed dramatically in the last 90 days.

The real question is: Why aren't more sellers putting their homes up for sale?

One explanation could be that people are staying put longer. The median tenure of a home owner has increased from six years to nine years between 2001 and 2013. But that doesn't explain everything. We do know that first-time landlords are at an all-time high. This began when prices were low and people were buying a new home while renting out their current home, waiting for prices to rebound. Now prices have rebounded, and they are still keeping them rented.

Low interest rates have also contributed. Many people are able to pull money out of their current home and rent it rather than sell. A $1 million mortgage today can carry a $2,600 monthly payment on a three- or five-year fixed rate. That enables people to borrow more.

Another issue is the loss of stated-income loans. Many home owners who would sell and buy another home are self-employed. They write off too much to qualify for a mortgage and need to stay in their old home that they bought and financed before 2007. Although a few lenders do have these loans, they are hard to get and much more expensive. Mortgage reform pretty much put an end to these loans, as verifying income was required on owner-occupied loans.

Lastly, many people aren't applying for mortgages because they think they won't qualify for a loan. In a recent DataQuick study, two-thirds of people who thought they would not qualify really would have. Perhaps many home owners who would move up are not doing so because they feel they can't qualify for a new home if they sold their current home.

This trend may reverse a little in 2015, as people who rented their homes decide to sell because they think the market may be topping out. We could see some more stated-loan options as lenders push for more ways to loan out money — this trend of fewer sales has hurt them as well. A build-up in home equity, combined with lower down payment options from lenders, will also help. An increase in sales in 2015 over 2014 is expected, but unfortunately, they will likely remain below average levels. This will also place more upward pressure on prices: NAR is forecasting a 4 percent rise in prices over 2014. Anytime you have more buyers than sellers, you are going to see prices go up.

Syd Leibovitch is president and owner of Rodeo Realty, Inc., in Beverly Hills, Calif. He also managed affiliate companies including L.A. Mortgages, Encore Escrow, and Progressive Title.