Home Prices Climb as Supply Dwindles

The Wall Street Journal

8 August 2012

Home prices rose by their largest percentage in at least seven years during the second quarter, propelled by low inventories of properties for sale and high demand for bargain-priced foreclosures, according to two reports Tuesday.

Prices rose by 2.5% in June from a year ago, and by 6% from the previous quarter, said CoreLogic Inc., a Santa Ana, Calif., data firm. The quarterly jump was the largest since 2005.

Separately, Freddie Mac, which uses a different methodology, said home prices during the second quarter jumped by 4.8% from the previous quarter. That was the largest jump since 2004.

Rising home values helped lift Freddie to a $3 billion profit, its best showing since the mortgage-finance company was taken over by the U.S. government four years ago. Freddie’s larger sibling, Fannie Mae, which hasn’t yet reported second-quarter earnings, posted a $2.7 billion gain for the first quarter.

The main force behind the home-price gains appears to be a shortage of homes for sale. The number of properties on the market is down sharply from a year ago. Meanwhile, demand is up, as mortgage rates have dropped to their lowest levels in at least 60 years.

Prices are rising because “there’s not enough supply, given higher levels of demand,” said Ivy Zelman, chief executive of Zelman & Associates, a research firm. Last week, Ms. Zelman revised her 2012 price forecast to a 5% gain. At the beginning of the year, she predicted a 1% decline. “With every passing month, distressed homes are being absorbed at better and better prices,” she wrote recently.

Inventories are low for a handful of reasons. Investors who are scooping up homes have been converting them into rentals rather than flipping them, keeping the properties off the market. Banks have slowed their foreclosure processes in the past two years after they were found to be rushing through incomplete paperwork to repossess homes.

New-home construction has been at depressed levels for years, as builders have had to fend off competition from bank-owned foreclosures. That lack of new construction “has set the foundation for a snapback in pricing,” said Michael Sklarz, president of Collateral Analytics, a Honolulu-based research firm.

Many traditional sellers are sitting on the sidelines because they are unable or unwilling to sell.

More than 11 million homeowners owe more on their mortgages than their properties are worth, meaning they are likely to sell only if they have to move. Others who have equity could be holding out for higher prices down the road.

In hard-hit markets, “only a little bit of the market is tradable because you have so much negative equity,” said Stan Humphries, chief economist at real-estate firm Zillow Inc. “You have very few people willing to sell homes, and a big uptick in demand can create some real price appreciation.”

Meanwhile, as inventories have shrunk, demand has picked up. “Everything is going to multiple offers,” said Anthony Lamacchia, who owns a real-estate firm in Waltham, Mass. One of his agents has written 15 offers for four different buyers this summer, failing to land a property each time.

Lou Barnes, a mortgage banker in Boulder, Colo., said demand for mortgages to buy homes is even outpacing the levels seen during 2009 and 2010, when federal home-buyer tax credits spurred a burst of sales. “Main Street morale has brightened a great deal here,” he said. “Sellers have lost their fear of giving away a house. Buyers have lost their fear of doing something dumb.”

The Federal Reserve said Monday demand for mortgages to purchase homes jumped during the second quarter by the largest amount in at least three years, according to a survey of bank lending officers.

Investor buying in many markets also could help change the psychology for traditional buyers, creating momentum that becomes self-reinforcing. “People say, ‘If there are good deals here, why are we letting investors take advantage?’ ” Mr. Sklarz said. “Investors are forcing everyone else to think about this logically.”

For now, price increases appear to be broad-based. CoreLogic said 71 of the nation’s top 100 metropolitan areas saw prices rise on a year-over-year basis in May, compared with just 19 markets in December. That was the largest number of rising metro areas since November 2006, when home prices began to tumble.

The jump in home prices is particularly notable at the low end of the market, fueled by investors making all-cash offers for foreclosures that can be rented out. Such rising prices allowed Freddie Mac to set aside less cash in reserve for loan losses. The company lost 38 cents for every $1 of debt that went through foreclosure during the second quarter, an improvement from 40 cents at the end of March and 42 cents a year ago.

That dynamic was evident in hard-hit markets such as Phoenix that this year have notched price gains. In Arizona, Freddie lost 40 cents for every $1 that it foreclosed on, compared with 51 cents a year ago.

Housing markets still face challenges. Many aspiring homeowners can’t qualify for a mortgage because lending standards have tightened, with banks scrutinizing borrowers’ income and assets or potential snags that might later require them to buy the loan back from Fannie or Freddie, were the borrower to default. Others simply have too much debt to take on a home purchase.

Another serious concern is the “shadow supply” of more than three million properties with mortgages in some stage of foreclosure or serious delinquency that haven’t been taken back by lenders.

Freddie Mac, for example, said it still had $118 billion in delinquent mortgages, just below its peak of six months ago. “All the metrics are getting better, but the nonperforming inventory is still very large,” said Jim Vogel, an analyst at FTN Financial. As a result, he added, “we wouldn’t tell anybody that the corner has been turned yet.”

Meanwhile, home sales are falling in some hard-hit markets where stocks of foreclosed properties are nearly empty. In Nevada, for example, a state law revamping the foreclosure process and imposing penalties for noncompliance brought bank repossessions to a halt. Sales of foreclosed homes in Las Vegas hit a 4½ year low in June, according to DataQuick, prompting home sales to fall by 16% from one year ago, the first decline in one year.

At the same time, some buyers “aren’t happy with what’s on the market, and they’re staying on the sidelines,” said Jon Mirmelli, a real-estate broker and investor in Phoenix. “It’s a frustrating market right now.”

Price gains also are likely to ease later in the year, when home sales traditionally slow. June prices rose by 1.3% from May, compared with monthly gains of 2.3% in May and in April, CoreLogic said in its report Tuesday. Freddie said its forecast calls for several more months of weak home prices.

But the biggest worry is still whether the economy can add enough jobs to keep sales strong. “At some point the global economy has to creep into people’s thinking. I worry about that all the time,” said Glenn Kelman, chief executive of Redfin Corp., a real-estate brokerage with offices in 14 states.