Why are fewer homes selling, but prices rising?
The number of homes on the market is distressing – being down to a 3.3 month supply is a record low. A 6 to 7 month supply is considered a normal, healthy market. We were approaching a 6 month supply in August, but that reversed later in the year. This drives prices up, and lowers the number of sales, as their are just not enough homes available to meet buyer demand.
Nobody knows why more people are not putting their home on the market. Some reasons may be:
- Not enough equity to sell and have a down payment to buy another. As prices rise this will cause an increase in sales. However, prices were higher in 2014 than 2013, yet there were fewer sales.
- Sellers can no longer qualify, or feel they can not qualify for a home purchase. They feel they can not buy, so they will not sell. Qualifying standards are becoming easier so this should cause an increase. One thing that will limit this increase is the restrictions in the Dodd, Frank Financial Reform law which requires lenders to verify borrower’s incomes using tax returns or W2’s. This makes stated income loans difficult to get. Many self employed people write off so much that they are not able to show enough income to qualify. Many of them feel stuck in their homes and can not move because they got their loans when stated income loans were common, and now could no longer qualify for a home loan. They can’t buy or refinance to a lower rate. They have accepted staying in the home they bought when these loans were available.
- In higher end markets people who have owned their homes for a long time have such high gains that they are not willing to sell because they would owe so much in taxes. They also feel stuck in their homes, and often decide not to move when they learn how much taxes they would owe. Prior to 1995 people could sell their personal residence and purchase another of equal or greater value and defer the gain, paying no taxes. This allowed homeowners to defer gains until they eventually sold and did not repurchase or died and the value stepped up. Back then the amount excluded from taxes was only $125,000 and only one time, but the repurchase deferment made no tax due when they sold because they bought another. When the law changed to the $250,000 per individual taxpayers and $500,000 per married joint filers the deferment was eliminated. It did not matter whether you bought another or not. People with larger gains must pay federal capital gains tax, the healthcare tax, and state income tax on the gain that exceeds the $250,000 or $500,000. It works out to at least one third of the taxable gain. This law really penalizes someone that has been a home a long time. People should consider selling once they have been in a home for 2 years and have made more than the $250,000 or $500,000 as any further gain will be taxable. Staying too long could cause people to become stuck in their home!
- Hedge funds and institutional investors have bought up a lot of housing. Many homes were purchased by these investors and rented when prices were lower, especially foreclosures. These homes don’t look like they will be sold anytime soon.
I would expect, and the experts have predicted more sales in 2015 than 2014, but not a large increase. We are about 14% below the average amount of sales since this data began being collected in 1988. Considering the amount of new housing and the growing population that just does not make sense. With such low inventory levels and low interest rates we will see a surge in prices. There simply is not enough homes for sale to meet buyer demand. I’d buy now as waiting will price you out of where you are looking and you will have to move to a less expensive area.