Not Enough Houses

A shared lament among real estate agents is that there is a glut of inventory and a shortage of buyers. Add the issue of sellers stubbornly holding to high asking prices, and it's a recipe for a molasses slow market.

But I'm sure sure it's quite so simple. My two colleagues and I at CBA are actually having more of a problem with an inventory shortage of houses that our clients want to buy. Some may have even seen the house they like, but want to do more shopping and see more houses before making a decision. Often, we don't have a lot of other choices to fill out the dance card. Without a larger menu to pick from, they're hesitant to make a decision.

Between the 3 of us, we have a half dozen clients who fall into this category. They've seen a house they reasonably like. When asked the question, "What is it about the house that would keep you from buying it?", the surprising response is "Nothing major, really. We'd just like to see more." We're not hearing the major common objections from these folks — price, location, setting, condition, etc.

The common element among these buyers? They're all looking in categories where we may only have a couple of houses — or at least houses that we feel are good examples of what they're looking for — to show. Property categories currently with a dearth of choices include farmhouses or charmers on quiet country roads under $300,000, contemporaries with views under $450,000, moderately priced 3+ bedroom lakefront homes,  "cabins in the woods" in the mid to upper $100's, and the once plentiful "vacation chalet" with cathedral ceilings and a loft set in the woods.

Consider the situation with those under $300,000 charmers. Last spring and summer, we had a reasonably good selection. There were 5 or 6 good choices that I could string together for a showing day that presented a well rounded selection. Most of those are gone, and haven't been replaced by comparable houses coming to market. Even just above the $300,000 cutoff, there haven't been charmers coming to market that will just need some time to "age" and the sellers to get religion about price. The next price jump for charmers is to the upper $300's to low $400's, for a handful of larger, grander houses.

It's a very strange situation to say to a potential buyer, "Here are the one or two (farmhouses or houses on motorboat lakes or view houses whatever) on the market in your price range that fit your criteria." Folks don't want to schlep up from the city to see just one or two houses, so we end up padding out trips with houses that, frankly, don't fit their criteria.

Recently, the most common "end of trip" conversation with prospective buyers goes something like this. Buyers - "We liked the third house you showed us a lot. So we'd like to come back in two weeks to see some more houses like it. If you can put together 5 or 6, that would be great." Me - "I don't have 5 or 6 more houses like this to show you. In fact, today you've seen everything that comes even reasonably close to what you're looking for." Buyers - "Well, then can you keep us in mind and send along anything like this that does come on the market. And when there are few to take a look at, we'll come back up."

So that third house they liked? They would probably buy it, if I showed it alongside 5 or 6 reasonably "close but no cigar" options, so they felt they were making the best choice among a selection of good options. But that psychology doesn't hold when it's one good choice among 5 lousy options.

I've blogged a couple of times about the factors that make a house "deal capable", where the seller is ready to be realistic. For example, a house being on the market for more than one year. Likewise, there are some factors that contribute to buyers being "decision capable." On the buyer side, it is probably less related to "time spent looking" and more related to "selection of reasonably good choices seen." It's not specifically the total number of houses seen, but rather that they've seen enough houses to have a short list of 3 or 4 that they'd seriously consider buying. Without a shortlist of 3 or 4 choices, they may just not make a decision. With shortages in some categories, it may be impossible to come up with a 3 or 4 house shortlist.

Comments

[Ferenc Milo]

C'mon.

"Not enough houses" on the market!

You've got to be kidding us.

There are plenty of houses in Sullivan but the prices are still too high versus current market conditions. Buyers are kicking tires and they are NO rush.

I'd love to get your take on the Dec 2009 and January 2010 data.

Ferenc Milo

[David Knudsen]

I beg to disagree. In certain categories, there just isn't inventory. How many 1,400 to 1,800 sq. ft. farmhouses on quiet roads in west county are on the market at the moment? It just isn't a matter of price. On Wanaksink Lake, there is ONE non-fixer, 768 sq. ft. on the market. And how many contemporaries with views? I agree that price is still an issue, but so is inventory in some categories. If I have a client looking for, say, a view contemporary up to $400,000, I have almost nothing to show them — even if I expand my search to sweep in houses at $500,000 or $600,000 that might be overpriced. Folks just aren't putting their houses on the market unless they have to.

And you sort of missed my point entirely. When a buyer finds a house they like that IS well priced, they're hesitant to push the button unless they've had a much wider selection of houses to choose from. It's worth noting that single family inventory in the Sullivan MLS is down about 20% since October!

[Michael]

We're having the opposite problem here in Manhattan.
There are currently 8500 unsold condos on the market.
That's a 6 year inventory to be absorbed!

http://thehousinghelix.com (NYC Leading Appraiser)

[Brad]

I am curious, is the fall in inventory since October partly seasonal - people taking their homes off the market for winter, or did alot of homes sell last fall? Also if sales picked up, how much was due to the first time buyer tax credit do you think? Thanks

[Mr Hamilton]

History tells us:

Inventory is high during housing bubbles as sellers are motivated to sell (maximize profits)

Inventory is high during/after housing bouncing bottoms as many sales are a must sell (lost job, move, etc)

Inventory is Low during price discovery as sellers are in shock and waiting for things to improve.

You will know your geographic location is nearing bottom when inventory begins to climb. Sellers will hold off but eventually the sponge will no longer hold more water.

[David Knudsen]

Very interesting point, Mr Hamilton. That's really what it feels like.

[henry]

Michael,

I think your numbers are wrong. How do you calculate a six year inventory? The current inventory is ~8500 (including condos and coops but before shadow inventory) as per urbandigs.com. No way to get to a six year inventory using current or historical sales data.

[Michael]

henry, we focus on the absorbtion rate.
As of current, it tells us Manhattan has a 6-7 year inventory of condos/coops.

[Michael]

henry, this is a very good research summary put together by a NYC private capital firm.
The data is dismal at best.

http://www.westwoodcapital.com/opinion/images/stories/in-print-docs/foreclosuresfishfoodandthefinalfallinhomeprices.pdf

[Bix]

There was a similar situation when I was house hunting a zillion years ago, in the spring of 2008. There were very few houses that met our criteria, and the few that were any good were snapped up pronto. It became obvious after a while that it was just a very thin market.

Ferenc: Sure, there are plenty of houses, in theory. But too many are in undesirable areas, are on major roads, or otherwise have issues.

[Susan Tettemer]

I think another factor, is how long, how many houses and how educated about house shopping is the buyer. I looked at 100 houses, spread over 3 counties for over a year. In the process, I lost one house with a slow offer, made a half hearted offer on another house, and came to understand what I wanted, and was willing to give up in a property. When the right house came along, we were ready to pull the trigger on the first showing. Perhaps many buyers are only ready to buy if a perfect house falls into their laps, and otherwise house hunting is really just a hobby for them.

[Ferenc Schlapper]

Bix writes:

"Ferenc: Sure, there are plenty of houses, in theory. But too many are in undesirable areas, are on major roads, or otherwise have issues."

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Well, Bix, I guess that accounts for about 80% to 90% of the houses currently listed on the Sullivan MLS.

What happens to those houses Dave? Do they reside in some sort of twilight zone for eternity?

Scary.

F.

[henry]

Michael,

Interesting article (especially quotes at end from Miller Samuel). Those numbers are similar to the numbers that I have heard (though have heard slightly higher numbers for the shadow inventory in NYC).

His "absorption" calc is different than I have seen before. Using his numbers (if I read correctly), I would calculate as follows: (8500 on market + 8500 shadow) / 9000 sales = ~ 2 years of inventory... which is a lot (not arguing otherwise).