Shrinking inventory misleads future sellers… for now

California’s housing supply is shrinking! Is this a Wall Street Minsky Moment for California’s real estate market?

Data: Housing inventory has decreased by 49% in Los Angeles and 53% in San Diego this summer, compared to the same period one year ago. This lack of listings is causing bidding wars.

Result: Sellers have received high multiples of bids, 50 or more on a single property, lifting home sales volume and prices in the second quarter (Q2) of 2012. All this action puts sellers in the most competitive position they’ve held since the dead cat bounce of late 2009 and early 2010 during the tax credit episode, which stimulated a homebuying surge and resulted in momentum driven speculation.

Thus, a huge level of inventory displacement has taken place, but is it that moment of instant, long-term change?

There has been conversation that this shrinkage in the MLS inventory will contribute to a reset of the housing cycle, as rising home prices will result in increased home equityand reduced negative equity across the board. Thus, more homeowners will be able to conventionally sell their homes without them or the mortgage lender taking a loss.

All of this ostensibly adds up to a balanced housing market and a return to more stable days of real estate sales.

The current shrinking homes-for-sale inventory is a present disturbance which supply side thinkers – that is, most real estate licensees (but not all by any stretch) – profess has reset the market.

It hasn’t and it won’t, no more than the notion of build it and they will come has ever proven true (except in the movie environment of willful suspension of disbelief).

Rather, in order to bottom in sales volume and pricing there must be sufficient fuel to keep the market in the air, not grounded for failure to lift off. A run at the effort is practice, but does not count. Real estate Olympics, if you will.

What is better understood to move markets, be they labor or real estate, is demandfrom someone for the use of the stuff. For jobs it is motivated employers, private and public. For real estate, whether housing of any type or commercial properties, demand takes the form of end user-occupants, not flighty flipping speculators.

The level of inventory, or supply, merely affects pricing. Pricing (and mortgage rates) presently does not attract many buyer-occupants. Buyer demand is always the prerequisite, needed before the housing market can transition into a solid, upward-bound recovery in volume, then prices. Builders get it; real estate brokers and agents need to.

The housing market is ultimately driven by end user demand – of which there is presently very little, probably less than half the sales volume experienced in the recently passed Q2 2012. The current low-level mini-bubble in home prices is due to speculators ferociously outbidding one another to snatch up properties, prompting real estate owned (REO) and short sale sellers and lenders to sense increased action then demands higher prices as a result.

Speculators are so eager to acquire as much property they can they have begun trading amongst themselves for lack of an understanding of those consequences. Trading cards comes to mind. Hard-money lenders are funding many of them, but only at a mere 50% to 60% LTV.

Cash buyers are getting a cash-out loan at 70% of their purchase price from some community banks, avoiding all the troublesome questions about the source of downpayment funds.

As a result, speculators and lenders have artificially driven volume and prices up a bit, though only temporarily. In the process, they have created the illusion of increased demand where very little actually exists. The truth is in the numbers: there were roughly half as many buyer-occupants as sellers in the second quarter of 2012, the speculators merely taking the seller’s risk position of locating that buyer-occupant (or interim tenant for lack of an immediate flip).

However, speculators will soon realize their investments aren’t paying off as expected. At some point in the second half of 2012, this mini-bubble will deflate and we’ll be back to square one, a point which may have already passed. Stay tuned for Q4 2012.

Agents will then begin talking more frequently with actual homebuyers – seeking them out from the growing stock of tenants, an activity which will build, and reset, the market.

This current nostalgic, and hopefully temporary, foray back into that supply-side world of the seller’s market will prove short-lived indeed.

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