Blame sellers, not buyers, for the lousy real estate market. Deeply negative sentiment is causing sellers to lose sales or keep their homes off the market altogether. Buyer sentiment is not expected to improve in the near term and market activity will remain sluggish for months to come.
That's the bottom line from a new study of housing markets from the Research Institute for Housing America (RIHA) and the Mortgage Bankers Association by Professor Gary V. Engelhardt of Syracuse University.
Engelhardt's thesis may explain the dramatic decline in inventories across housing markets this summer and fall as sellers have kept their homes off the market. According to the latest data from Realtor.com, listings on the nation's largest homes for sale site were down 21.3 percent in November from a year ago.
Over the next five quarters, positive home-buying sentiment is forecast to remain around current and long-run average levels. But buyers aren't the problem, according to Engelhardt, it's sellers. Home-selling sentiment is forecast to remain around current and historic-low levels.
Sellers want to price their homes based on key past market values, such as the purchase price of the property, the market value at the time or the most recent refinance or second mortgage or what a comparable property sold for in the recent past.
Underwater homeowners cannot adjust their reservation prices downward much below that of the outstanding mortgage amount. Currently, about 23 percent of all homeowners with mortgages nationally are underwater. In some particularly hard-hit markets, as many as half of all homeowners with mortgages are underwater. Those are the same places with the highest incidence of past due
mortgages and foreclosures.
With large declines in market values, sellers see increased value in waiting, either to initially list, or to keep, the property on the market. This may help to hold reservation prices high enough to drive a substantial wedge between buyer and seller sentiment. A poor job market with limited job mobility — a key driver of housing-market transactions — may exacerbate this.
Over time, buyer and seller sentiment will come more in line and there
will be more transactions but prices will not rise as fast as volume for two reasons. First, time on the market for existing listings will fall. Second, any upward price pressure will bring forth new listings, as observed prices will begin to cross the reservation prices of sellers who have kept homes off the market. Overall, there is little reason to believe there will be substantive increases in home prices in the near term, at least until reservation and observed prices become better aligned, Englehardt said.
Things won't get better until the negative equity picture improves. "Over the past two decades, purchase originations have tracked more selling sentiment more strongly than home-buying sentiment. This is especially the case in the current downturn. This suggests that favorable sentiment and real activity
in the market will be weighed down significantly until the overhang of troubled mortgages is cleared out. Although there has been some recent progress on this, there is still a long way to go," concluded the Syracuse economist.