From our friend Nick at the

Falling home prices should give aspiring homeowners the upper hand this spring, but in a growing number of locations, it doesn’t feel like a buyer’s market.

Blame the nearly five-year slide of home prices. Those declines, which accelerated over the past two quarters, have left many sellers unable or unwilling to lower their prices. Meanwhile, buyers remain gun shy about agreeing to any purchase without getting a deep discount.

That dynamic has fueled buyers’ appetites for bank-owned foreclosures. Those homes often hit the market at bargain prices, but they are being snapped up by investors who are paying in cash.

At a focus group earlier this month, the mood among buyers was “nasty,” says Glenn Kelman, chief executive of Redfin Corp., a Seattle-based brokerage that operates in nine states. “There’s a shortage of attractive inventory,” he says. “Customers just keep getting outbid on the houses that they want.”

It took Susan Hunter just one month to unload her home in Redondo Beach, Calif., last fall. But she has been outbid on four homes at a lower price point in Eagle Rock, an emerging neighborhood in northeast Los Angeles. Some sold to investors who paid cash. Other listings, she says, are being resold by investors at prices that she says are too high.

“It’s the Wild West out here. It’s a daily, tireless search,” says Ms. Hunter, who works in television production and marketing. Demand is up because “we haven’t been able to find homes here below $500,000 since the 1990s.”

Last year, software engineer Young Hammack gave up looking to buy after being outbid on three properties. This year, he has his eye on a four-bedroom foreclosed house with a pool in Citrus Heights, Calif., that hasn’t yet hit the market. He hopes to pay about half the $492,000 it fetched six years ago.

But the 32-year-old, who is relying on a 3.5% down-payment mortgage backed by the government, is at a disadvantage against buyers who can pay cash. “It’s a false buyer’s market,” he says. “If you think prices are cheap, wait until you start putting offers in.”

Many buyers are looking for discounts because they lack confidence that prices have reached a bottom, and sellers won’t have much pricing power as long as buyers such as Mr. Hammack and Ms. Hunter are in no hurry. “It may take some time, but I’m willing to wait,” Ms. Hunter says.

The Wall Street Journal’s quarterly survey of housing-market conditions in 28 major metro areas shows inventories of unsold homes remain high but fell during the first quarter. Listings were down by nearly 25% from one year ago in Miami and Orlando, and by 12% in Phoenix and Portland, Ore., according to figures compiled by John Burns Real Estate Consulting.

Other markets, including New York’s Long Island and Charlotte, N.C., still face imbalances. At the current sales pace, it would take more than 16 months to sell all homes listed for sale in each market. A balanced market typically has a six-month supply.

Meanwhile, home values fell in every metro area for the second straight quarter, according to data from Zillow Inc. Prices were down by more than 5% in Chicago and Detroit, the largest quarterly drops, to levels not seen in more than a decade.

Values have fallen so far that many sellers with equity aren’t willing to drop their prices. Those without equity can’t cut the prices unless the bank agrees to take a loss in what is known as a short sale. Such sales can take months to complete and fall through at the last minute, deterring some buyers. Still, short sales hit a new high, accounting for 9% of all transactions in January, according to CoreLogic Inc.

“Frankly, until we start building some equity, the market is just going to sit here and do pretty much nothing for the next few years,” says Christopher Thornberg, a housing economist at Beacon Economics in Los Angeles.

Homes that don’t need much repair work and that are located in choice neighborhoods near transit hubs or with good schools are in demand. “What’s selling is the cream of the crop, and they sell fast,” says Steve Capen, a real-estate agent with Keller Williams Realty in St. Petersburg, Fla. “If it’s not cream of the crop, it’s getting hammered.”

Mike Morea and his family have outgrown the 800-square-foot, two-bedroom home he bought eight years ago in Seminole, Fla. He hopes the bank will approve a short sale for about $85,000 for a $50,000 loss. In December, Mr. Morea saw first-hand why buyers are more attracted to foreclosures: he bought one for himself, a $200,000 three-bedroom home in a nicer neighborhood 10 minutes away.

“That’s what every seller is running into,” says the 31-year-old police officer. “Nobody is going to buy your home at retail price if there are 30 foreclosures available.”

While foreclosures are in demand, mortgage companies’ processing problems have sharply curtailed the flow of bank-owned properties onto the market in states such as Florida, New Jersey and New York, where courts must process foreclosures.

To be sure, some of the challenges facing the housing market are easing as the economy adds jobs, boosting demand and easing mortgage delinquencies.Depressed prices coupled with low interest rates have made housing more affordable than at any time since 1975, according to Zillow.

But the legacy of the housing market’s collapse has left two big structural problems. First, the huge erosion in homeowners’ equity has deprived housing markets of the all-important “trade up” buyer. Even those with equity often aren’t willing to sell at current market prices, exacerbating what housing analyst Ivy Zelman calls the “stuck factor.”

Second, foreclosures are still weighing on housing markets. While mortgage delinquencies are down from their 2009 peak, an all-time high of 2.2 million loans were in foreclosure at the end of March, according to LPS Applied Analytics.

Economists say the “shadow inventory” of another 4 million potential foreclosures will keep a lid on prices for years. Even in markets with rising demand and falling inventory, prices won’t go up because “there’s too much on the horizon, so nobody’s in a hurry,” says Ron Leis, a broker in Sacramento, Calif.

Tighter credit standards have also left markets with fewer buyers at a time when more would help. When he needed to move into a bigger home four years ago, Todd Loewenstein sold his Redondo Beach home and began renting. “Now, we want to get back in, but it hasn’t happened,” says the 44-year-old technology entrepreneur.

He fell out of escrow one week before closing on an $850,000, three-bedroom home in October after the lender turned down his loan. Mr. Loewenstein, who was prepared to make a 20% down payment, says he has never missed a payment in his life and has enough savings to last several years.

But he wasn’t able to meet the bank’s tight income-documentation requirements. The home, which sold for $1.25 million in 2005, is still on the market. Mr. Loewenstein says he scans listings every day and is still looking to buy.

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Jim the Realtor
Jim is a long-time local realtor who comments daily here on his blog, which began in September, 2005. Stick around!

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