Yesterday Ocrenter (who I appreciate for continued contributions!), left this question:

So what is the theory behind the dried up inventory?

–the foreclosure pipeline finally drying up
–short sales tying up most of the distressed properties
–homeowners are avoiding listings due to the low median price
–ability to refi to historic low interest rates allowing homeowners to stay put
–inability to obtain profit at sales is preventing move ups

All of the above?

I think it is all of the above, with some qualifiers.

1. The foreclosure/short-sale pipeline.

The selling of distressed properties has slowed down, and could grind to a halt. Banks seem to have converted to using short sales as their primary disposal device, but they haven’t figured out how to get borrowers to give up the free-rent program.

The servicers are telling borrowers to short sell, but are they? It doesn’t look like it – both REO and short-sale listings for the county are down:

Qtr. REO New Listings SS New Listings

We are in this funky purgatory – where defaulters are being coddled further. Servicers are taking their foot off the foreclosure gas, which is counter-productive – it removes the pressure on defaulters to either short-sell their house, or be foreclosed. Without the threat of foreclosure, they will enjoy the free-rent program indefinitely.

2. Sellers are waiting for something.

Elective sellers are certainly committed to stay on the sidelines, but here is the reality:

Their motivation to sell isn’t strong enough.

Their reluctance to sell can’t be based solely on selling for a higher price. If that was all they wanted, they could have sold anytime during the last 5-7 years and gotten more money – but they didn’t.

They just don’t feel like selling, for whatever reason. They don’t need the money bad enough yet, they don’t have anywhere else to go that’s better, or the grandkids are here, so phooey on you.

Without strong motivation, all sellers will list too high and not sell – every year, every market.

3. The move-ups aren’t moving up.

I think we are in the midst of a substantial societal shift in culture, where we are getting used to having less, and liking it.

My rule-of-thumb is that you have to spend 50% more than you are getting for your old house, to make it worth it to move up. You can’t sell for $700,000 and buy for $800,000 in the same area – you don’t get enough extra.

It turns out that staying put isn’t so bad – whether the cause is the unwillingness to pay more, can’t qualify for more, or just being stuck with the over-encumbered housing handcuffs.

You would think that the lack of move-up buyers would inhibit the upper-end market. But there are three other categories of high-end buyers – those that sold at the peak and have waited, the out-of-towners (out-of-country in particular), and first-timers – who have been picking up the slack, apparently. We just had first-timers pay $1.75 million for their first, and probably last, house.

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