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Home sales: Is a 'seller's market' pending? (+video)

Pending home sales and existing home sales are rising, which is shrinking the inventories of available homes. Some experts are now saying the unthinkable: A seller's market is pending. 

By Schuyler VelascoStaff writer / February 27, 2013

A US flag decorates a 'for sale' sign at a home in the Capitol Hill neighborhood of Washington. Existing home sales and pending home sales are rising, according to the National Association of Realtors. Inventory is tightening to levels not seen in more than a decade.

Jonathan Ernst/Reuters/File

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After a six-year free fall in home prices and a modest rebound, real estate agents are beginning to mouth a phrase that until now was taboo during the housing slump:

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"Seller’s market.”

Existing home sales are up. Pending home sales – sales that have not been finalized – are the strongest they've been in nearly three years. The idea of a seller's market may sound ludicrous in an economic sector that has lost a third of its value and regained only 7 percent in the past year, as measured by the S&P/Case-Shiller 20-city home price index. And it's hard to tell whether it's a temporary blip, because much depends on the moves homeowners make in the coming months. Nevertheless, growing evidence suggests that in many real estate markets across the United States, a shortage of homes for sale is giving sellers the negotiating advantage after six years where buyers ruled.

"Buyer traffic is 40 percent above a year ago, so there is plenty of demand but insufficient inventory," says Lawrence Yun, chief economist at the National Association of Realtors (NAR), in an e-mail press release Tuesday. "We’ve transitioned into a seller’s market in much of the country.”

What's changing the market dynamics is the imbalance between buyers and sellers. Nationally, housing inventory has contracted to its lowest level since 1999, according to an analysis from J.P. Morgan. The Washington-based NAR puts the US supply of homes for sale at 4.2 months. On Wednesday, the NAR reported that pending home sales rose a seasonally adjusted 4.5 percent in January to its highest level since April 2010, which was boosted by a home buyer's tax credit. It isn't just homes for sale: Rental vacancies are at the lowest level in a decade, according to the US Census Bureau.

Typically, home builders pick up the slack of a housing shortage by building new ones. New home construction is recovering, but not quickly enough to keep pace with demand and projected population growth. Housing starts actually fell 8.5 percent in January, although that may be weather-related. December's pace of construction was unusually strong. NAR is projecting 1.1. million total housing starts for 2013 – a vast improvement over 781,000 in 2012.

 Still, “the underlying demand based on growing population is 1.5 million housing starts per year,” says NAR spokesman Walter Molony. “If we don’t see enough construction, we will see pressure on home prices that we don’t want.”

The trend is most recognizable in reports from metro areas. In Minneapolis-St. Paul, for instance, there were 11,977 homes available for sale in January, down 34 percent from 17,655 a year ago, according to an analysis by researchers at the University of St. Thomas in St. Paul, Minn. In Washington, D.C., available homes decreased 36 percent from 2012 to 2013. Lubbock, Texas, saw its inventory of available homes shrink by 31 percent in 2012, according to the Lubbock Realtors Association.

"For the first time in several years, the Lubbock real estate market’s existing months of inventory for December dropped below 1,300 homes or 4-1/2 months and officially transitioned from a buyer’s to a seller’s market, carrying last year’s strong recovery trend into 2013," the Lubbock Avalanche Journal reported. 

In Seattle, the number of available homes dropped 37 percent, with the average time on the market shortening from 6.7 to 3.4 months, according to the Northwest Multiple Listing Service. Areas hard-hit by the housing bust are seeing inventories shrink as well: As of November 2012, Palm Beach County, Fla., had seen its number of available homes plunge 54 percent from 2011, according to data from the Multiple Listing Service.

But big questions remain about how permanent these shortages will be. Hanging over the market looms a potentially huge "shadow inventory" – homes that owners have put off selling because of low prices and foreclosed homes not yet released to the market. An October 2012 report from CoreLogic put the number of homes accounted for by shadow inventory at 2.3 million. That has some analysts skeptical that a seller's market is forming. 

"While recent results have been considerably better than those seen earlier in the cycle, we continue to believe that the large supply overhang of existing homes (factoring in all those in foreclosure or soon to be) promises to keep pressure on prices for some time," writes Joshua Shapiro, an economist from New York-based forecasting firm MFR, in an analysis. "Also, with foreclosures now starting to ramp back up, increased sales of distressed properties are likely to have a downward influence on price data, just as a reduced number of such sales in recent months likely had a beneficial effect. This, combined with seasonal weakness during the slow selling season, promises to keep home price data considerably less buoyant for a while."

Another question mark is the identity of the buyers themselves. While mortgage rates are near record lows, the number of mortgage applications remains low. That suggests that the recent perkiness in the housing market has more to do with business entities seeking a deal than the normal buying and selling of individuals moving to a new city or moving up in to a bigger house or better neighborhood.

“It is apparent that much of the increased activity in the housing market has been from investors/speculators rather than from owner-occupiers,” Mr. Shapiro writes. “While this could be a first step in a longer recovery process, it could also just be a reaction to artificially low interest rates and a rush by institutional investors into anything with the prospect of a positive return.”

One reason individual home buyers are staying out of the market is stringent credit standards. After a period of wildly unscrupulous lending, banks have swung the other way, only granting loans to borrowers with impeccable credit. “Keeping things, safe, but going back to common-sense lending standards would make home sales 10 to 25 percent higher,” says Mr. Molony of the NAR.

The good news is that more mortgage lenders are now loosening standards than tightening them, according to the Federal Reserve.

And there are other causes for optimism. Home improvement and construction retailer Home Depot saw its fourth quarter earnings beat expectations, with sales rising 13.9 percent to 18.2 billion. The retailer’s sales to professional contractors kept pace with those to private consumers, which is a strong positive indicator for new construction. 

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