The four-bedroom house that Ilia Nielsen-Dembe purchased in west Denver earlier this year wasn’t her top choice. The first-time buyer had to settle on a home in a neighborhood with a high crime rate after losing out on bids for five properties in more desirable areas.
“I definitely sacrificed in terms of location,” said Nielsen-Dembe, 33, who lives with her husband and two daughters in the house she bought in April for $184,500. “I had to cross streets that were not ideal in order to get a house.”
While the supply of U.S. homes for sale is at an almost two-year high and price gains are moderating, buyers such as Nielsen-Dembe wouldn’t know it. An inventory crunch for entry-level houses has only worsened during the past year as discounted foreclosures become scarce and cash-paying investors snap up affordable listings to convert to rentals. Properties at the lower end of the market are also the most likely to have underwater mortgages, keeping would-be sellers from moving.
“There is inventory coming on line, albeit slowly,” said Nela Richardson, chief economist for Redfin, a Seattle-based brokerage. “The problem is it’s not equally distributed. There is more turnover at the higher end. At the more affordable end of the spectrum, people are stuck.”
The number of U.S. homes for sale in the bottom third of the market --below $198,000 --fell 17% in June compared with a year earlier, according to a Redfin analysis of 31 large U.S. metropolitan areas. The supply was up 3% in the middle market and jumped 15% at the top, the data show.
The inventory of all existing homes for sale rose 6.5% in June from a year earlier to 2.3 million, an increase from a 13-year low of 1.8 million in January 2013, according to the National Association of Realtors. That’s a 5.5-month supply at the current sales pace, less than the six months that is considered equilibrium between buyers and sellers.
The rising inventory of more expensive properties is giving a boost to sales and easing the bidding wars of the past two years as historically low mortgage rates fueled competition for a short supply of homes. At the bottom of the market, first-time buyers, even those with the credit, savings and income to overcome tougher underwriting requirements, must face off against other bidders, ready to pounce.
In Denver, entry-level listings in June were down 51% from a year earlier, while the upper-end supply was up 4%, according to Redfin. Austin, Texas, inventory jumped 14% in the top third of the market and fell 34% at the bottom. In Atlanta, where Wall Street-backed investors descended to buy homes to turn into rentals, low-end supply declined 13%. Top-third listings rose 18%.
“It’s bad news for people looking for a starter home that all the choices are disappearing,” Lawrence Yun, chief economist at NAR, said. “People shouldn’t expect inventory to show up on the low end. It’s not available.”
Competition in the entry-level market intensified during the past few years as Blackstone Group LP and other Wall Street investors paid cash to absorb foreclosed homes from Florida to Arizona. Today, fewer properties are available to buy because many investors are holding them as long-term rentals. Foreclosures and short sales, in which the borrower sells for less than what’s owed, accounted for 12% of transactions in the second quarter, down from 17% a year earlier, data from NAR said in a report today.
Average list prices on the low-end jumped 15% in June from a year earlier, and increased 13% in the middle and 9% at the top, according to Redfin’s analysis of large metro areas.
“If you see prices increasing for reasons other than fundamentals, it’s not good for affordability,” Hui Shan, a housing analyst with New York-based Goldman Sachs Group Inc., said. “A lot of it has to do with investors coming into the market and buying properties. Those are not related to local residents’ incomes going up.”
Sharlene Hensrud, a Realtor with Re/Max Results in Plymouth, Minnesota, said buyers of cheaper homes have had to adjust expectations because the bargains have been picked over.
She recently took a couple on a tour of homes for about $140,000 and said they were quickly discouraged that a one-bedroom, one-bath house with no garage was all they could afford. A few years ago, a three-bedroom property would have been in their range, Hensrud said.