Lack of Inventory: The Affordability Killer

Low inventory and high home prices resulted in pending home sales falling 1.8% in August to a score of 104.2 on the the National Association of Realtors’ (NAR) Pending Home Sales Index.

That’s down from a score of 106.1 in July.

Contract singings fell 5.9% in the West, 1.3% in the Northeast, 0.7% in the South and 0.5% in the Midwest.

Nationally, contract signings are now down 2.3% year-over-year.

August marked the eighth straight month that pending home sales were down on an annual basis. What’s more, pending home sales have now fallen for four of the past five months on a month-over-month basis.

And there seems to be no end in sight.

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“The greatest decline occurred in the West region where prices have shot up significantly, which clearly indicates that affordability is hindering buyers and those affordability issues come from lack of inventory, particularly in moderate price points,” says Lawrence Yun, chief economist, for NAR.

With many markets considered overvalued, home prices appear to be ripe for a correction in the near future.

“With prices having risen so quickly, many consumers were deciding to wait to list their homes hoping to see additional price and equity gains,” Yun explains. “However, with indications that buyers are beginning to pull out, price gains are going to decelerate and potential sellers are considering that now is a good time to list and bring more properties to the market.”

According to the third quarter Housing Opportunities and Market Experience (HOME) survey, a record high number of Americans believe now is a good time to sell.

“Just a couple of years ago about 55 percent of consumers indicated it was a good time to sell; that figure has climbed close to 77 percent today,” Yun says.

Further, recent data from realtor.com shows that certain markets – such as Columbus, Ohio, Seattle-Tacoma-Bellevue, Wash., San Diego-Carlsbad, Calif., Providence-Warwick, RI-Mass. and Nashville, Tenn. – are now starting to see increases in inventory.

But what about the impact from rising mortgage interest rates? Yun says although rising rates are a deterrent to potential buyers, it should not lead to a significant decline.

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“We have two opposing factors affecting the market: the negative impact of rising mortgage rates and the positive impact of continued job creation,” he says. “This should lead to future homes sales staying fairly neutral.

“As long as there is job growth, rising mortgage rates will hinder some buyers; but job creation means second or third incomes being added to households which gives consumers the financial confidence to go out and make a home purchase,” Yun adds.

Yun expects existing-home sales this year to decrease 1.6% to 5.46 million. Further, he forecasts that the national median existing-home price will increase 4.8%.

Looking ahead to next year, existing-sales are forecast to rise 2% and home prices around 3.5%.

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